Maersk to Build More, Ship Less

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As indicative of changes happening within the global economy, the world’s biggest shipping company, A.P. Møller-Maersk, which is the top holding of the Guggenheim Shipping ETF (NYSEMKT: SEA), shifting its focus to its oil rig, drilling and port units. Maersk Line, the company’s shipping subsidiary, has been struggling due to rising oil prices, the general economic slowdown that has caused a slump in international trade and the oversupply of vessels in the industry. With more than 600 vessels, including its own as well as those chartered and on order book, and with a cargo capacity of 2.598 million teu (twenty foot unit equivalents), Maersk has 15.5% of the global seaborne shipping capacity.

This should come as no shock to anyone that has followed the collapse of the Baltic Dry Index, BDI, in the past year. Last December the oversupply of ship projects commissioned during the credit-fueled boom of 2005-08 finally hit the market all at once causing a 70% collapse in the BDI which tracks average cargo rates.  The BDI is usually seen as a leading indicator of global economic activity and normally a 70% drop in the BDI would be met with panic selling, but this price drop clearly came from the supply not the demand side of the equation.  For most of 2012 after falling from the 2000 region, the BD has fluctuated between 600 and 1100 and this is what Maersk is reacting to.

Rates stabilized in the 2nd quarter enough for Maersk to post a quarterly profit of $933 million after four consecutive losses. Maersk line posted a profit of $498 million, up from the loss of $289 million in the same quarter last year due to a 5.7% YoY increase in freight rates. But the company’s current decision indicates that profitability from shipping will remain challenging. Moreover, while it has posted a significant YoY improvement in its quarterly results, the total amount of cargo carried in the two periods remained the same at 4.2 million teu.  Following the shift, which involves investing more capital in oil and port terminal business and less in Maersk Lines until 2017, the three oil and gas divisions become as big as Maersk Lines.

In the long run, Maersk is hoping that China will make a transition from an exporting hub to a large and powerful consumer based economy which will cause a rise in imports within the coming 10 years. Maersk will likely invest heavily in China. Currently, more than 11% of its 108,000 strong workforce is based in China. In the short run however, the company has lowered its 2012 container demand growth rate from 4% to 3% due to the European debt crisis. Similarly, Maersk’s French rival CMA CGM has finalized an agreement with its banks to restructure its debts due to volatility in the industry while it will continue to sell or leaseback nearly 100 out of its 394 vessels and implement rigorous cost cutting. The company posted a nine-month profit of $310 million and despite the expected fall in income in the fourth quarter, CMA CGM expects to post a full year net profit.

 

Maersk*

Teekay LNG

Golar LNG

YTD Stock

8.37%

11.37%

-10.30%

P/E

9.72

19.21

39.29

EPS

N/A

1.92

1.01

Yield

2.57

7.31

3.45

ROA

5.23%

3.80%

7.30%

ROE

10.03%

11.36%

20.33%

*AP Moeller - Maersk A/S (CPH:MAERSK-A)

Meanwhile, the smaller LNG shipping firms, Golar LNG Ltd (NASDAQ: GLNG) and Teekay LNG Partners (NYSE: TGP) have been growing nicely, reflecting the increasing demand for LNG shipments to Asia where the prices paid are multiples of what the gas costs coming out of the ground in the U.S. and Canada. Golar LNG is now working with the Singapore based oil rig developer Keppel Corp to develop the world’s first floating LNG vessel. On the other hand Teekay LNG has all of its vessels operating under long-term charter agreements at fixed rates which will ensure that income will not be affected by volatility in the market. Teekay is also a high yield stock and has been going neck to neck with the SPDR S&P 500 ETF (NYSEMKT: SPY) which has been up 11.11% since the beginning of the current year. SEA on the other hand, represents the shipping industry and has been up by only 1.5% since January with a net outflow of ~$10.5 million in the corresponding period.

We are a fan of nearly everything associated with the natural gas sector at these prices and the huge arbitrage that exists between the cost of production in North America and the prices that SE and Pacific Asia are willing to pay which their economies are already attenuated for, while the U.S. and Canada continue to adjust to $100 per barrel oil.


PeterPham8 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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