Valuation of Maersk Drilling: The Drilling Company of 1972

Lasse Eik Schanche & Erik Emmerhoff Steffensen

Student thesis: Master thesis

Abstract

Compare the drop in oil price in a year with the drop in Maersk Drilling’s stock price in the same period Maersk Drilling demerged from A.P Moller-Maersk and entered the market on a stand-alone basis about one year ago. Since the listing on Copenhagen Stock Exchange, Maersk Drilling has seen the stock price fall from the opening price of 570 DKK to 166,4 DKK at the cut-off date of 14thof April 2020. Thus, this thesis aimed to elaborate Maersk Drilling’s underlying fundamentals and to see whether the intrinsic value derived from a valuation could contest the market consensus. The thesis is structured in line with Penman’s (2013) five steps to a fundamental valuation. The first step is to obtain an extensive understanding of the industry, and to provide the reader with the history and current environment of the industry. Next, analyzing strategic information is done by applying a modified version of the Supply and Demand model and Porter’s five forces to examine the macro-economic factors and the competitive advantages and forces that constantly affects the offshore drilling rig industry. The third step comprises analyzing financial information and reveals the underlying trends and profitability of the previous years and what could be expected in the future. While the sections offers sub-conclusions, the SWOT-matrix briefly summarizes the findings before moving on to the fourth step; forecasting. The forecasting is based on the findings from the previous sections and without guesstimating offers a way of deriving an intrinsic value in the last step. The fifth and last step is the valuation where the cost of capital is applied to the Residual Operating Income Model, finally ending in a fundamental value. To criticize the findings, the remainder of the thesis offers a relative valuation, complemented by a sensitivity-and scenario analysis, before discussing the repercussions and limitations to the applied model. The valuation based on residual operating income offers a value of 628,7 DKK, implying an upside of 278%. While controversial in a struggling industry, the analysis indicates an industry currently suffering in a down cycle. The industry is considerably competitive and none of the companies seem able to exploit any strategic advantages. With low financial leverage and strong back log Maersk Drilling stands out as one of the industries financial survivors and as such, is expected to continue its operations in the foreseeable future until the cycle inevitably turns.

EducationsMSc in Accounting, Strategy and Control, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2020
Number of pages128
SupervisorsPeter Nordgaard Hansen