Maersk/conglomerates: driller killer
Spinning off oil rigs business will allow the group to sail more smoothly
Some businesses are diversified. Others are focused. Most sit somewhere between the two. AP Moller-Maersk, an ocean-going Danish conglomerate, will migrate towards the obsessive end of the spectrum by spinning off an oil rigs business next year. Is it right to do so?
There is thematic consistency in teaming a shipping line with a drilling contractor and an oil company. All rely on the seafaring skills that won foreign dominions for the Vikings and a business empire for the Moller family.
Diversification reduces the volatility of earnings and of share prices. Brokers and fund managers espouse focus partly because they earn fees for assembling balanced portfolios.
However, a controlling family trust is behind the break-up of Maersk rather than financial fly-by-nights. It will be left with roughly the same exposure to three main industries. So will minority shareholders who hold on.
In March, the company sold Maersk Oil to Total of France for $7.5bn in cash and shares. Owning an energy business was meant to hedge against the fuel costs of the shipping division. The disposal signalled that the owners valued this less than corporate clarity.
The drilling business, which makes holes in the seabed for oil companies, looks as if it would amplify volatility rather than the reverse. Trade buyers have spurned it. True, profits should surge when the oil price is strong. But earnings are prone to collapse when the oil price is weak. Seadrill, another rigs business, has only just relisted its shares after a spell in Chapter 11 bankruptcy.
UBS ascribed an enterprise value of about $4.8bn to Maersk Drilling earlier this year. That suggests an equity worth about $3.6bn. This would be stingy in comparison with implied earnings of about $600m for 2018, but generous measured against a 2017 loss of $1.5bn. Maersk will sail more smoothly without this shifting ballast.