Navigating the Complexity of Changing Market Conditions and Fierce Competition in the Oil and Shipping Industries: A Case Study of the Maersk Conglomerate

Morten Normann Nielsen & Troels Henrik Hedegaard

Student thesis: Master thesis

Abstract

The perfect storm of declining freight rates and low oil prices has put unprecedented stress on the Maersk business model. The hedge against fluctuations in oil price that was previously facilitated by interests in both the oil- and shipping industry does no longer conform to current market conditions, in which increased competition and over-supply have eroded profits for both segments. The thesis evaluates the strategic options available to the company, through a combination of qualitative and quantitative analyses.
Initially, a financial analysis depicted a conglomerate with significant available capital in the form of cash and a low debt ratio. The focus on cost reductions and strategic divestments in recent years has provided a sound financial foundation with which the company is able to withstand downturns in the markets, while waiting for attractive investment opportunities to arise.
Two separate industry analyses examined the underlying industry-drivers, as well as the company’s position herein. An oversupply of capacity characterizes the shipping industry, which has led to loss-making operations and driven an industry-wide focus on costs. The current situation is severe and challenging, but the general outlook predicts growing world trade. The analysis revealed that several rivals have improved their performance in recent years and are now threatening Maersk Line as a market leader. Consequently, the firm is required to act in order to defend its position and remain profitable. The analysis of the oil industry underlined a market of deteriorating attractiveness, but with significant value remaining. The continuous decline in oil prices, that began in 2014, has eroded profits industry-wide and forced many less flexible players into financial distress. However, the combination of low break-even prices relative to competitors and valuable capabilities within field development and production gives Maersk Oil a potential competitive advantage with which value can be captured.
Following the industry specific analyses, the thesis adopted a different perspective in order to examine the performance of the conglomerate as a whole. A qualitative approach highlighted an ability to diversify and to reduce risk, the effectiveness of which for Maersk was evident during the financial crisis. Additionally, the success of the conglomerate as a whole seems to be partially derived from the aptitude for exploiting economies of scale and scope across business units. The lack of adequate capital allocation during prosperous times of the oil industry has resulted in an inability to maintain sufficient production levels and has arguably had a diminishing effect on shareholder value. In addition, Maersk has argued that the stock has historically been trading at a discount, although at a decreasing level as a result of divestitures carried out in recent years. The quantitative analysis, consisting of correlation and regression, indicated that the stock is heavily exposed to fluctuations in oil price, although the performances of the separate business units were less so. The analysis further suggested that a hedge against oil has likely existed in the examined period of the last five years. Additionally, the variable correlations implied that value has previously been captured in both industries through cost reductions, rather than increasing supply or manipulating prices.
Despite current struggles of the Group, the thesis concluded that there is still considerable value to be captured in both industries. Given the substantial barriers of exit, a divestment strategy seems less attractive, since assets would likely be sold at a large discount. Diversification would indeed be the most effective strategy to decrease exposure towards the volatility of oil and world growth. However, it would entail a shift into unrelated territory within which the company has no competitive advantage, and would therefore involve significant risk with little reward. Based on the analyses and an in-depth discussion, the best course of action was concluded to be an investment strategy, with particular focus on the oil industry. Maersk Line should make investments necessary in order to maintain its dominant position and economies of scale, which are the source of competitive advantage in the industry. Maersk Oil should capitalize on its capabilities by acquiring inexpensive pre-production phase oil fields upon which production facilities can be established.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2016
Number of pages200
SupervisorsKirsten Foss