How long will the cash last?

Malcolm Latarche
Malcolm Latarche

23 August 2017


AP Moller Maersk’s sale of its oil and gas business for $7.45Bn to Total earlier this week has been well reported. It will not actually receive the money as cash though. The biggest part, $4.95bn will be in the form of Total shares, and Total will assume $2.5bn of short term debt to fund the remainder of the deal. In addition, Total is assuming all decommissioning obligations that would have cost Maersk around $2.9bn at some point. However it comes it is a lot of money and could put Maersk in a very favourable position especially as further cash can be expected from selling of its other three energy related businesses. Maersk’s new policy is declared as focussing on its liner and terminal businesses which is a case of going back to its roots. It cannot be said that diversification has been bad for Maersk, the oil and gas and tanker sections were not recent moves dating back as they do to beginnings in 1962 and 1928 respectively. However, being active in two spheres where things are in troubled waters may not be a good idea and sacrificing one to save the other is a fair strategy. Spending the proceeds of the deal will not be difficult. Maersk is already committed to shelling out $4bn on acquiring Hamburg Sűd and has promised a payment to shareholders following the sale of the Oil and Gas division. That obviously will not happen until the Total deal receives regulatory approval from the Danish Minister of Energy among others which is expected in time for a Q2 2018 wrap up. The balance could be used for a number of things, not least equipping all its vessels with ballast water treatment systems for a start. Scrubbers apparently are not on Maersk’s shopping list as it has said it prefers to use alternative fuels when the 2020 cap comes in. Some could be spent on new vessels. The company has made conflicting announcements in this area by saying on one hand it did not see more ultra large boxships as its priority and on the other that it intends to maintain market share. It could do the latter by way of its plan to offer trade financing announced only days before the Total deal. It has been doing this on a small scale and apparently at rates below the banks that have been withdrawing from the practice. Enticing customers to ship on your vessels not by reducing your own fright rates but by earning less than banks on short term credit arrangements could be a very profitable strategy assuming there are no major bad debts. Maersk is also looking for a bank to join in as partners and having lots of collateral is a big attraction. The very worst that could happen is for the money to be eaten up on losses in Maersk’s liner business. Losses have seen off many competitors and being the last man standing is never a bad position to be in.