Good morning, and Welcome to A.P. Møller – Mærsk Q3 2016 Telephone Conference. My name is Søren Skou, CEO, and I'm joined by Trond Westlie, the CFO. We are happy to make this presentation and take questions afterwards. I will just start out with the group highlights and then talk about Maersk Line, and then we will move on to the rest of the businesses. Before I get to that, let me just emphasize that we are gonna be talking about forward-looking statements, and I encourage you to read the disclaimer on page two of the presentation. For the quarter, for the third quarter of 2016, the group delivered a profit of $438 million.
It was down 44% from 778 last year. Pretty much driven by lower container freight rates. We delivered a return on the invested capital of just under 5%. We see this as not a very satisfactory result given that our target is to deliver a double-digit return on the invested capital. We also note that this result, a 5% return, is delivered at a time with an oil price less than $50 at all-time low freight rates.
We are pleased and consider the cash flow, the free cash flow of $736 million as a strong result given the development in the business and note that all five of our business units delivered positive free cash flow in the quarter. This means that the group maintains its very strong financial position with an equity ratio of 56% and a liquidity reserve of just under $12 billion.
As we have communicated a number of times, we are going to have a capital markets day on the 13th of December, and at that time, we look forward to updating you on the strategic direction of the group and all of the questions you may have in that respect will be handled on the 13th of December. Now turning to Maersk Line. The main driver of the negative development in our group results is the underlying loss that we are reporting from Maersk Line of $122 million against last year's profit of $243 million. This is entirely driven by lower freight rates that were down 16% compared to the same quarter last year.
We do, however, note that freight rates were up 5.5% compared to the second quarter of this year, and this is the first time since the third quarter of 2014 that we actually saw positive development in the freight rates. Maersk Line delivered a very strong volume performance in the quarter of 11% growth, which means that Maersk Line is taking market share. We expect that the market may have grown 1%-2% or maybe even 3% in the quarter, but in any event, we are taking market share. Of course, a significant part of that strong volume growth is coming from the demise of Hanjin and where Hanjin you know went into receivership during the quarter.
Hanjin Shipping was the seventh largest carrier and a 3% global market share. There was a lot of business to go around suddenly, and Maersk Line captured, I believe, more than its fair share in the process, as we were probably seen as a safe place. I think also worth mentioning in our results for the quarter is that we, for the second quarter in a row, maintained costs below $2,000 so that we continue the strong performance on cost also in the third quarter with a cost performance of 14% down year-on-year.
Now I would like to turn over to Trond Westlie, who will take you through Maersk Oil and the coming businesses.
Good morning from me as well, ladies and gentlemen. Being on my last leg in A.P. Møller – Mærsk , I'll go through the remainder of the presentation. Going then to Maersk Oil, it's a good quarter. It's good returns, it's good operating performance, and good progress in cost efficiency. In addition to that, good progress in projects. An overall very good third quarter for Maersk Oil. Delivering an underlying profit of $146 at an average oil price of Brent of $46. That shows that we basically are working on our cost program and are efficient on that. That is also why we say that we see now that we have a break-even level below $40 a barrel.
Producing, or having entitlement production of 295,000 barrels a day. You can see the allocation of those 295,000 if you go to the bottom of the page and look at the different countries. Be aware though that at least in the North Sea, it's the third quarter, and as a result of that, there are some maintenance project that has been going on during the quarter that affects the production levels. All in all, very good progress on the OpEx efficiencies and 21% reduction compared to last year.
We raised our ambition of the cost reduction to be between 25%-30% by the end of 2016 when we compare the baseline to 2014. Looking at the projects, Johan Sverdrup, Statoil have announced a new breakeven level of $25 a barrel in phase one in the project, which we of course are very satisfied with and are giving our contribution where we can. In Culzean, the rig Highlander is in place and have spudded and basically have started drilling, so good progress in Culzean. We also see a smaller project called Flyndre being on track and seeing first oil in the beginning of 2017.
In addition to that, we have decided to exit Buckskin in the Gulf of Mexico, and we're also continuing on our pre-development in Kenya. Overall, very good progress. We are also continuing on our efforts to adjust the business and the organization, both to the low oil price environment and of course, the exit of Qatar that's coming up in the midst of 2017. Third quarter with a return on 13.5% is a good quarter for Maersk Oil. Going to the terminals, we see that terminals is delivering an underlying profit of $126 million, down from $175 million last year, but still remaining on a return level of 6.6%.
If we exclude the projects under development, the return is 9.5% for the quarter, still down from 13.8% last year. We are of course experiencing some commercial challenges, specifically in the areas of Latin America, Northwest Europe and Africa. Having said that, for the oil-related or dominated countries we're in, we're seeing a bit of a mixed picture. Nigeria showing small positive improvements. Russia saw some stabilization, while Angola continues to be severely impacted by the lower oil price. All in all, focusing on cost efficiency around the world in the different terminals, and having seen the efficiency of that as a result, we've been approximately reducing the staff by about 1,000 by the end of Q3.
Integration of our acquisition of Grup Marítim TCB is progressing, and Grup Marítim TCB is delivering a small profit according to plan in the third quarter. Overall, a generally good operational performance, but a slightly more mixed bag in terminals. Going then to drilling. A very good operational and financial quarter, but of course delivering $340 million in underlying profit. I'm sorry about that. Seems like somebody is coming up to my microphone. It was not me coughing this time. Going then back to the drilling side. Delivering underlying profit of $340 million, affected by the cancellation or early termination of Maersk Valiant. That isolated incident has an effect of $210 million this quarter.
As we earlier said, the full year effects will be above $100 million. We are now saying around $150 million. The reason for not providing for the costs for Valiant in the third quarter is that we do not have any obligations towards the customer. As a result of that, we have to take the cost as they come along. The net effect of Valiant will be around $150 million for the second half. On the cost side, we're improving 12% reduced to third quarter 2015, and also that we see that it is a reduction of total 18% since the launch of the cost reduction program. Operationally continuing to do well.
Uptime was 99% for the jack-ups and 98% for the floaters. Going forward, we see that we have 8 rigs idle at this point in time. There will be 2 more coming out of contract in the fourth quarter. We're gonna have 10 idle rigs at year-end. In 2017, it's only 2 rigs coming out of contracts. As of now, we see that the contract coverage is 55% for 2017 and 45% for 2018. As I mentioned in Maersk Oil, Maersk Highlander have come in place and is operational and working well. That acquisition has been effective so far. The focus point for Maersk Drilling going forward is of course the upcoming contracts and revenue-generating activities that's gonna drive a lot of the effects.
In addition to that, we're working very much on reducing the stacking costs, and also measuring where and when to stack the rigs. All in all, delivering return on invested capital on 7.2%, even considering the cancellation effect, still good return in Maersk Drilling in the third quarter. Going to Shipping Services. We see that we delivering $25 million of underlying profit, good operational cash flow. The effect declined from last year from $150 million to $25 million is coming from Maersk Tankers and Supply Service, as you can see at the bottom left of the page. The effect from Tankers is caused by rates declining across all segments, and only partially offset from other commercial effects and cost savings.
Generally, the market pressure is coming from a bit of inventory changes but also margin pressure in the downstream market that put additional pressure on the rates. On Supply Service, it's the general market condition. As a result of that, Maersk Supply Service have decided to reduce its fleet up to 20 vessels, either by scrapping or selling them off with clauses that they cannot come into the market, the supply market again. Cost efficiencies are on their way, have been on their way for a period, and close to 400 redundancies will be made in connection with the reduction of the fleet. Svitzer and Damco delivering stable earnings. Svitzer slightly pressured by the market, as well as some operational investments in entering into some places in the Americas.
On Damco, it's basically showing that they turned the corner and delivering well on the third quarter results. Coming to the operational cash flow generation, I'll focus on just to show you that historically, on the bottom left, we're showing that we're self-funded on capital expenditures. Focus point the first half was that it was low cash conversion. The reason for that was both some working capital elements as well as some provision payments that went out, mostly the provision payments that affected it. This quarter, we coming back to the same level of operational cash flow with short of $1.7 billion in operational cash flow. We're doing fairly well on the conversion rates.
Going then to the bottom right, commitments, investment commitments in 2017 are basically fixed as we are in November of 2016. As a result of that, we also see that the commitments for 2018-2021 is fairly limited. So o ur flexibility on the CapEx coming out of 2017 is fairly high. Going then to the development in the quarter on the financial position, starting the second quarter net interest-bearing debt end of second quarter on the top right was $11.7, and we ended the third quarter with $11.4.
I'm not gonna go through the different details on this, just to focus on the other point of 0.5, and that is a non-cash effect due to the element of the major part of that is the non-cash effect of having a lease extended, being defined as a financial lease. Basically, just short of $400 million is basically taken into debt. Stable high equity ratio, as Søren mentioned in the beginning, of 55.5%, and the liquidity reserve at the end of the quarter of $11.8 billion. Going to the consolidated aggregated numbers, delivering revenue of $9.2 billion, decline of 9.2% last year. The major driver on that is the rates in Maersk Line. The second biggest is the oil price.
As a result of oil price not having come down that much from the third quarter 2015, it really is the Maersk Line driver. EBITDA of short of $1.9 billion, and that gives us a profit for the period of $438 million and an underlying profit of $426 million. Earnings per share this quarter is $21. As mentioned, a return on invested capital of 5%. Overall, I must categorize this as even though we don't like the returns of 5%, considering the oil price, considering the challenging oil service market and the loss of Maersk Line this quarter, I must say that I have to define 4.9% return as a very acceptable number.
With that, we go to the guidance for 2016. We only have two months left of the year, so we're trying to specify what we mean by significant below last year for the group, and we have said that we expect an underlying result below $1 billion. We have also specified what we mean by significantly below last year for Maersk Line, and that is that we now expect to come into negative underlying result for 2016, having taken into consideration that the result year to date for Maersk Line is a loss of $230 million. Maersk Oil still expect a positive underlying result.
Breakeven is, we have now changed to below $40 a barrel, from previously $40-$45, and we still expect our entitlement production between 320-330,000 barrels a day. Terminals still expect an underlying result significantly below 2015, and Drilling now expects an underlying result in line with last year due to the fact of the cancellation effect. We also like to specify that as a result of that, and taking the cost of Valiant in the fourth quarter, we are now changing the earnings pattern in Drilling and coming to a breakeven result level going forward, and that's what we also expect in Q4. For Shipping Services, we reiterate the expectation of an underlying result significantly below 2015.
Basically as a result of low rates in Supply and weaker rates in Maersk Tankers. As always, there are a few factors that dominates the sensitivity in these guidelines, and that is of course the container freight rate and the oil price. So I urge you to look at the sensitivities for the rest of 2016 on the bottom right. With that, I leave the floor and closing remarks to Søren.
Thank you, Trond. Before we take questions, I would just like to kind of summarize the third quarter of 2016. I think, if we look at the lowlights first, clearly rates in Maersk Line 16% below last year, and the reported loss in Maersk Line as a result of the low freight rates. We also are not entirely happy with the low like for like volume growth in APMT, causing a significant part of the reduction in the results. Of course, a very negative development year-on-year in Maersk Tankers and Maersk Supply. In terms of highlights, I would like to first of all focus on Maersk Oil. It's profitable company now.
For the second quarter of the year it has double-digit return, a breakeven that is reduced to $40 and continued ambitions to drive costs even further down to the 25%-30% level compared to last year by the end of this year. Also highlight is the volume and cost performance in Maersk Line and the increasing rates on a quarter-over-quarter basis. Finally, I would also of course mention the strong cost performance in Maersk Drilling as a highlight. We are now ready to take your questions. Thank you.
Thank you. We will now begin the question and answer session. The session will end no later than 10:40. If you have a question, please press zero then one on your telephone keypad, and you'll enter a queue. After you are announced, please ask your question and not more than three questions from each speaker. There will be a small delay before the first question is announced. We have a question from Casper Blom from ABG Sundal Collier. Please go ahead. Your line is open.
Thank you very much. My questions will focus primarily on Maersk Line. You have 11% volume growth in the quarter. Could you try and break down a little bit this volume growth? I mean, how much of that is related to maybe picking up volumes from Hanjin? And maybe also how much of the volume growth is sticky, i.e. what can we sort of expect when looking into the fourth quarter and maybe also into 2017? Also on the volumes, you mentioned in your results update that part of it is explained by growth on the backhauls.
Maybe if you can give a little bit more flavor to what it is, what kind of cargo it is that you are picking up there and the profitability on that. Then finally, sort of on the back of Hanjin's bankruptcy or whatever state they are now in, have you seen any change in the behavior of your clients? I mean, is there any type of sort of flight to safety, or is it still price that sets the agenda in the container shipping? Thank you.
Yes. Thank you. First of all, 11% volume growth, clearly part of that is what you call flight to safety. We grew significantly on the Pacific, about 14% year-on-year, and that is, you know, because of Hanjin having a 3% global market share, but a 6% or 7% market share in the Pacific where they were strongest.
I'm sure that part of the volume growth that we got out of that was because many clients, you know, saw us as a safe bet in a very difficult situation. We do believe, however, that the volume growth that we have seen and, you know, the market share gains that we have achieved, they are sustainable. It doesn't mean that our market share cannot vary from quarter to quarter, but we are well-positioned. We have grown share every quarter this year and that's a testament, not just to Hanjin's demise, but also to our own sales performance and the product and services that we deliver in the marketplace.
In terms of backhaul, we grew in many backhaul markets significantly, mostly in North America, but certainly also in both Europe and what we call West Central Asia, so out of India and in the Middle East. Clearly, the freight rates of those volumes are significantly below the freight rates in the headhauls and t hat is impacting our average freight rates negatively. We, of course, do still see an economic benefit and backhaul volumes are part of the reason for why our cost performance is as strong as it is.
Okay. Maybe just a little follow-up then on the Hanjin. Do you think, I mean, has the situation normalized now? Are we back to a normal, or is it still having an impact on the rate environment, what we saw from Hanjin?
Hanjin, the demise of Hanjin, will have had a significant impact on the freight rates in the markets where Hanjin was as a significant player, most importantly in the Pacific market. I do think it will have, you know, some effects also in the coming months. We have seen freight rates, spot freight rates, go up significantly since the March of 2016, although it was from a very low base. We have also seen, you know, contract rates increase. Part of that is the fact that Hanjin is no longer here.
Hanjin did have a 3% global market share, so we are talking about one year of demand growth that was added to the market in the middle of the peak in the third quarter. It has had a positive effect, and it will have for a while.
Thank you very much.
Our next question comes from the line of Christopher Combe from JP Morgan. Please go ahead. Your line is open.
Good morning. I have a bit of a follow-up. Can you elaborate a bit on what the headhaul market growth looks like in the quarter and how you would have compared? Second, how long are you willing to sustain these types of returns, absolute returns in order to attain your market share targets? Lastly, if we look at scrapping and idle rates, scrapping appears to be on track to break records this year. Idling is at very high levels. A lot of that is Hanjin tonnage. What are your expectations with respect to those two factors looking to the fourth quarter into next year?
We don't provide detailed information about growth in headhaul versus backhaul, but I can say as a general guidance that we have had solid growth also in headhaul and in volume terms, of course, because of the trade imbalance, it's in absolute terms, most of the growth is in headhaul. In terms of the development in idle and scrapping, as you point out, we have about 6 or 7% of the global fleet idle today. With the demise of Hanjin, the idle fleet has jumped to, I think, almost 1.5 million TEU.
You know, I expect that we will see continued high levels of both scrapping and idling as long as the carriers are in the current position. Many carriers are significantly loss-making, and so many carriers are also you know, having a significantly negative cash flows. If you're making huge cash flows, then frankly, you know, even a free charter is not cheap enough. I do expect the industry to continue to, in a way, push part of the capacity over capacity problem onto the leasing companies or tonnage providers and also continue to scrap vessels.
We've seen, as you point out, significant scrapping this year, and the average age of scrapping is now, I believe, down to 20 years of ship age. We've seen ships being scrapped at even lower ages than that. I would expect that to continue until results improve in the industry. I think there was a question also concerning how long we can sustain returns to get our market share. You know, we believe that prices are set by supply and demand in the industry.
You know, the fact that we have grown a lot is because of the factors that I discussed before about Hanjin and our own sales performance. You know, at a time where CMA completes its acquisition of NOL. You have the two Chinese carriers that's emerged this year, and we have Hanjin going into restructuring.
There are a lot of customers that are considering their carrier choices, and we have been benefiting from that because we've had a stable situation with the 2M network in the East-West trades, and probably also, but this is speculation on my part, but probably also because it's recognized that we have a very strong capital structure and funding situation compared to most if not all of our competitors.
That's clear. Thank you.
Our next question comes from the line of Marcus Bellander from Carnegie. Please go ahead. Your line is open.
Thank you. One question regarding Maersk Line. Obviously very strong volume growth, both year-on-year and quarter-on-quarter, and utilization seems to be at healthy levels. As you also mentioned, rates are up quarter-on-quarter. You talk about good cost performance and say that backhaul volumes are added at favorable economic conditions, yet profits are deteriorating further in Maersk Line. I mean, something's not adding up there. Why are profits falling further?
We are seeing an improvement in profits compared to the second quarter.
Yes, that only seems to be because of a positive tax effect. If I look at EBIT in Maersk Line, it's deteriorating.
Yeah. The element of that is, of course, that the bunker costs go up in this quarter, and as a result of that, bunker is actually increasing slightly more than the increase in rates. The element, the short-term effects, but the trend line is, of course, as Søren says, but the short-term cost element is the bunker effect this quarter.
Okay. Yeah, maybe I'll get back to you on that. Yeah, I'll get back to you on that. Thank you.
Our next question comes from the line of Neil Glynn from Credit Suisse. Please go ahead. Your line is open.
Good morning. If I could ask three questions, please. The first one with respect to Maersk Line, charter vessels were down from 347 at the second quarter to 325. Just interested in terms of whether we can expect charter capacity to continue to fall or whether we're at a more stable level now. The second question with respect to Damco. Contract negotiations with Damco customers, has the strategy changed at all as a function of announced plans with Maersk Line at this point, or is that all to come in the future? Then the third question regarding Maersk Line and Damco and indeed terminals' plans to work more closely together. It seems volume clearly is crucial to the achievement of synergy plans.
Is it fair to say your appetite to discount to gain share is higher than it would have been under the previous strategy, and one would expect you might be likely to sacrifice some freight rate weakness for targeted volumes for the foreseeable future as you execute?
Neil, I have to say it was very difficult to hear your question. Please follow up if we're not answering correctly. First of all, in terms of charter capacity, I think the key metric for us in Maersk Line is to review the development in the total capacity and ensure that we don't grow our total deployed capacity more than our volumes and preferably, as we have done this quarter, you know, less growth in our capacity than our growth in volume so that we continue to improve the utilization of our network as we have done this quarter.
The network utilization is pretty much close to record high right now. On your question about, you know, how we will work more closely together between Damco, APMT and Maersk Line, this is one of the things where I would like to say that, you know, that's what we're gonna address at the Capital Markets Day in December, where we hope to, you know, flesh out and provide more details on how we see the up to 2% per point of return on invested capital improvement is gonna be where that's gonna come from. You had one more question, I think, about Damco, which frankly we could not quite hear.
Yeah. I think you're probably also gonna have to postpone it to Capital Markets Day given your comment. It's about a higher appetite for discounting, the volume is clearly an even more crucial element of your plan to achieve synergies going forward. Just interested in terms of whether it is fair to say that you have more tolerance for lower freight rates given a likely prioritization of volume under the new strategy.
We'll be happy to address it in December, but we have zero tolerance for lower freight rates. Let's just make that clear.
Okay, great. Thank you.
Our next question comes from the line of Dan Togo from Handelsbanken Capital Markets. Please go ahead. Your line is open.
Yes, good morning. A couple of questions from me as well. First, Maersk Oil breakeven now below $4 per barrel. How much further can you drive that down, and what would it take, so to speak, to take it to, like, $35? Also, does this lower level and the oil price around $50, does this now support actually more CapEx in your region and environment? Another one on oil. When you leave Qatar in the course of 2017, will that trigger any costs for you?
Yes. Thanks, Dan. I mean, we as we say in our presentation, we believe that we'll have taken costs down by 25%-30% by the end of the year. As we also said in the presentation, we believe this is a continuing effort. We are, as we speak, making our plans for 2017 and the years to come. You know, obviously we will have as an ambition to continue to drive costs out also in the oil business. I'm not able to give any, you know, guidance on whether 35% is within reach or not.
As I've said on oil price and costs then, you know, a number of times before, if you go back 11, 12 years when the oil price increased to $50, we were making a lot of money because the cost was much lower than $50. Now it's become a huge problem that the oil price decreased to $50. The difference is that the cost structure and the government take that was built up in the meantime and given time, and we have had some time now, you know, you can do something about that. I think costs will come down and probably also in some markets, the government take will come down.
So I don't really see necessarily that you know the break-even price stops at $40, but we cannot get it any closer than that. Obviously, if the company is making money and is profitable and having returns in line with or above its cost of capital, at some point, this will mean more investments in the business.
On Qatar?
Oh, yeah, on Qatar, we don't have any costs as such to factor in for next year when we depart Qatar.
Just one question, if I may, on Maersk Line. Clearly the market currently is oversupplied in terms of capacity. In the current demand environment, growing to at best maybe 3% per annum, how oversupplied is demand, in your view? What more, I mean, how much more scrapping, how much more idling do we need to bring the market to some sort of balance?
Yeah. That's a tough question because, you know, at the end of the day, there are many moving parts here. We see a lot of consolidation as you have noticed. You know, the three Japanese carriers have decided to merge, but only with effect from 2018 but t hey will be, you know, together with the new THE Alliance designing a new network for next year. You know, a big driver of that will be how much will the Ocean Alliance, how much will the THE Alliance grow next year in terms of what they deploy in their networks.
You know, if they have a conservative approach, it will be very good for the market, but not very good for the time charter owners, because a lot of ships will be redelivered and vice versa. I think it's very difficult to predict what will happen. At this moment, you know, we have had some positive momentum because the ships are full, driven by Hanjin, and freight rates have come up off their lows in March and April. At least for the fourth quarter, we see a continued positive development in freight rates.
Okay. Thank you.
Our next question comes from the line of Lars Heindorff from SEB. Please go ahead. Your line is open.
Thank you. Morning, gentlemen. A couple questions from my part. Firstly, regarding Maersk Line, you've been adding more capacity to the market here in the third quarter. As far as I can see, your capacity has been growing by 3.5% in a market that you state is growing by 2%. I just want to hear a little bit more about your capacity strategy going forward. Will you continue to add more capacity to the market than the market has actually grown by?
First of all, of course, this quarter we are adding 3.8% capacity to our network. Year- on- year, we are growing 11% volume year- on- year. For Maersk Line isolated, I think that's a very, you know, positive development. We are adding a lot less capacity than we are growing. Secondly, in our announcement on the 22nd of September, we did say that we have as an ambition in Maersk Line to grow market share organically on a consistent basis. It doesn't mean that we have to grow market share every quarter and that you cannot see some variation. On a year-to-year basis, it is our aim to grow market share organically.
That will, you know, likely mean that we're gonna have to add at least as much capacity, maybe a little more, than the market is growing, you know, going forward, considering that our network utilization is now really, really high. It's hard to squeeze a lot more onto the network without adding capacity in line with growth.
Okay. Then regarding Maersk Oil, obviously lower breakeven, which is good. Can you quantify how much of that which is caused by currency movement? Obviously, you must have quite a bit of operating cost in British pound, which have depreciated against the U.S. dollar, which is the selling currency.
That is correct. A portion of our operating activities is of course in British pound, and the effect on the U.K. is affected by that. To quantify that, we also have to consider that a lot of our earnings comes also from all the other countries at this price level. Basically we are making money and are taxable in all the countries we are in actually right now. All in all, I cannot quantify the numbers because it's more generic than that, Lars.
Okay. All right. Understood. Well, okay, that's the first one. Regarding drilling, you mentioned earlier on that all the drilling that you have been stacking are warm stacked. Are you considering cold stacking them? If you do so, what kind of cost impact will that have?
Well, all right now we are working on how warm is warm stacked. The element is we are being much more efficient on how to warm stack and also geographically how to place the rigs. The challenge on the cold stacking is that we don't believe any operator have basically cold stacked a rig and basically made it hot again. As a result of that, the uncertainty on investment level and what it takes to actually go from cold to warm is still an ongoing project, and we haven't really got the answer to that. When we are evaluating this, we are evaluating the options, the net present value, when we believe contract is gonna come back, and we have evaluating a lot of elements going into this.
We are continuously evaluating it, but we also have to evaluate the risk of taking a cold stacked rig up to a hot rig again, and how much investment that will take. That's sort of the uncertainty level as of now, since nobody has really done that successfully yet.
Okay. All right. Last one, lastly, regarding CapEx. So far, as far as I can see, you have been spending roughly $3.5 billion on CapEx this year. You're still guiding for $6 billion, which suggests a considerable step up in CapEx spend here in the fourth quarter. I'm just curious to find out, and are there any specific projects which is the reason for that that is coming here in the fourth quarter, and which is the reason why you still maintain your $6 billion guidance in CapEx?
Well, we are guiding on around $6 billion and not on $6 billion. We don't see any reason to change that even though $2.5 billion is a high number in the fourth quarter, I can say, I can agree to that.
Okay. All right. Thank you very much, guys.
Our next question comes from the line of Johan Eliason from Kepler Cheuvreux. Please go ahead. Your line is open.
Yes, hello. Just some details here. I understood you said something about Maersk Drilling targeting breakeven going forward and also Q4. Is that to be understood that for 2017, you're targeting breakeven results for drilling?
The element is, we haven't guided on the 2017 numbers, but as a result of having 8 rigs idle at the end of third quarter, having the cost of Maersk Valiant in the fourth quarter, and having 2 new rigs coming in or coming out of contracts in the fourth quarter, we are saying that it will be a step down of the earnings level, and further guidance will be given on the Capital Markets Day or on the fourth quarter results.
Okay, good. On this oil lower oil price breakeven level, is I think you said last quarter that the breakeven level was basically similar also excluding the Qatar business? Is the new lower breakeven level also sort of valid for the non-Qatar business?
The element is that this is of course an average with Qatar. We have not, to my knowledge, specified what the breakeven level is with and/or without Qatar. On next year, we're still gonna have Qatar for six months, so at least it's gonna be an averaging out but I do think it's clear for most that the breakeven level in Qatar is a bit lower in general than the others.
Then on APM Terminals, I think you said in the strategy update that you will be less aggressive on organic growth, but you will pursue the projects you have in place. I saw something about you being involved in a tendering for a new port in Panama. How does this add up?
Basically, all we can say is that what we said at the announcement on the 22nd of September in terms of APMT's reduced focus on planting new flags, so to speak, still holds true. Our plan is to focus APMT on, you know, delivering a better result on the existing portfolio, implementing the container terminals that are currently under construction in a good way, and that is the focus of APMT.
Okay. Just finally on coming back to Maersk Line and the capacity development. I think you said last quarter that now in the second half you need to grow capacity in line with volumes, but obviously the volumes were quite much stronger. Now you are, as one pointed out, cutting the number of chartered units. Is this ahead of next year will obviously be a big delivery year for you. When do you see the capacity starting to increase from the new ships coming?
We have plenty of flexibility in our charter book, and we do not plan to grow our deployed capacity, you know, significantly above market growth in 2017. So when we get delivery of new ships and it's spread out over the year, you know, we will adjust the total deployed capacity by returning charter ships so that we don't you know, have a growth that is significantly above the market growth.
In terms of capacity, I would like to highlight the graph that we have on page four in the document, which is really showing the container growth in capacity over the last few years since 2013. What it does show globally is that there was a big expansion of capacity, you know, more than 6%-8% throughout 2015 and t hat's really what I think triggered a very competitive rate environment b ut the growth in capacity has come down. This quarter also, the global growth is relatively modest.
We expect, you know, at least as far as Maersk Line is concerned, to continue to, you know, have a very disciplined approach to deploying new capacity.
If you look at the market, it looks like 2017 will be a big year with new capacity coming into the market. Should we then expect a similar pattern to repeat itself on the freight rates in the beginning or in 2017 with rates significantly down again?
I cannot speculate on what the competition is doing. You know, there are two choices. You can deploy a lot more capacity than what is needed, or you can return ships to charter owners. You can idle ships, or you can scrap ships and you know, we'll have to see what will happen in 2017 of course. We don't know what the demand side will be either, and that will also have an impact.
Good. Thank you very much.
Our next question comes from the line of Jørgen Bruaset from Nordea Markets. Please go ahead. Your line is open.
Thank you very much. Just two short questions from my side. Could you just give some color on your BAF contracts and the kind of rationale for maintaining a three-month BAF, which seems to me to have a negative impact when we see the increasing oil price. Do you still regard it as beneficial of having a three-month BAF contract, or should we expect to see that being adjusted going forward? Just a short clarification on your slides. I'm just looking at the EBIT margin gap to your peers. Could you confirm that that's around 8% for Q3 2016? If that's Q2 in your slides. Thank you.
In terms of the EBIT margin gap, we can, the numbers that we are showing are the numbers for the second quarter of 2016. Only the three Japanese carriers, to my knowledge, have reported for the third quarter yet. We will only, as usual, be able to report the EBIT margin gap, you know, with one quarter delay. You had a question about BAF contracts. I'm not exactly sure I caught it right. There was a lot of noise on the line.
But if the question was about whether we see the BAF contracts being an effective mechanism for passing on increases or decreases for that matter in the oil price, then yes, we do believe actually that the BAF contracts for the contract portfolio that we have allow us to, you know, with the time delay, pass on or get effects of changes in the fuel price.
Just to clarify on the BAF contract. Would you say it's more beneficial to have the three-month BAF rather than to have a one-month contract, like most of your peers? How should I interpret that?
Okay so I heard the question as being the difference between three-month contracts and one-month contracts. We don't have any BAF clauses in one-month contracts. Because there it's basically, you know, whatever the market is at that time.
Our next question comes from the line of Thijs Berkelder from ABN AMRO. Please go ahead. Your line is open.
Yeah, good morning. A couple of questions. Can you maybe give an indication on whether you see contract cautiousness with clients due to Brexit and maybe already due to Donald Trump? Secondly, can you maybe give a bit of indication on whether APM Terminals suffered Hanjin Shipping-related costs? Thirdly, there was quite some press news on Maersk Disposals and Decommissioning taking place on beaches, I think, in India. Can you maybe explain your policy going forward there?
On contracts, we have quite a significant part of a contract portfolio rejigging here in connection with the year-end or early or 1st of January. You know, that contract season has just started, and we haven't actually closed any contracts that I'm aware of at this point. So it's really too early to say anything about that. In terms of APMT, Hanjin was a customer of APMT, but there's been a marginal impact on APMT from Hanjin. It was pretty clear for a long time that Hanjin was in financial trouble, and we have, of course, managed the exposure, you know, as best we could in that respect.
In terms of the group's policy on scrapping, we have received a significant amount of media interest in the last few weeks, in particular in Denmark. It's really three cases. One is about our policy for, you know, working with the shipyards in Alang, India, to upgrade the facilities and to provide better conditions for the workers there and for the environment. We will continue to work on that agenda.
We believe that as a big, large carrier, it's much better to actually engage and try to do something about the poor conditions, where, you know, 75% of all ships are being scrapped at, than it is to just stay away and, you know, leave tens of thousands of workers to fend for themselves and, you know, deprive them of their livelihoods. Our policy is to scrap in India, if we can do that, at shipyards that are certified in accordance to the Hong Kong Convention for Sustainable Scrapping. We have additional requirements to the shipyards that we put on top of that.
That convention is, as I said, an IMO convention that is not even ratified yet and not enforced. We are scrapping in accordance with the requirements that are significantly higher than what the law tells us to do at this point in time. We had a couple of other cases. One is an FPSO that we have operated in a joint venture with the Brazilian company, Odebrecht, in the North Sea for a long time. That FPSO was sold to a buyer with the intent to continue to trade the FPSO.
The sales contract included clauses to the effect that if the ship were to be scrapped, then it should be in accordance with the Hong Kong Convention. Unfortunately, the buyer did not live up to that obligation, and we suddenly saw the ship on a beach in Bangladesh, much to our dismay. But frankly, I think we can say, you know, we got cheated. We have learned from that, and we'll have to do a better job on the legal contracts going forward.
The last case is a case where ships that we have had on charter but no longer on charter are being scrapped by its owner on a beach, also I believe in Bangladesh or India. You know, we of course not very happy about that, but we have not breached any of our internal policies. We do not, as of yet, at least take responsibility for what other people do with the ships that they own. All that being said, you know, we are very sad about these stories, and we wish we could have done more to avoid them altogether.
That's clear. Thanks.
Our next question comes from the line of Finn Bjarke Petersen from Danske Bank. Please go ahead. Your line is open.
Yes, good morning. It's one question regarding Maersk Line. You're saying that your utilization is almost at all-time high. You said spot rates are up significantly and after Hanjin you have seen contract rates going up as well. My question is how should we think about these higher rates finally find their way into the P&L? Could you give us a little bit of flavor of how the dynamic works here?
Well, you know, there are many, many things at play here. Obviously, when we grow, first of all, the portfolio of business that we have, backhaul versus front haul, you know, growth in backhaul does lower the average rate. Secondly, the way we recognize revenue has an impact here.
There's a delay factor, both when prices increase and when they decrease, because we recognize revenue as the voyage happens, you know, along the voyage. Finally, of course, our average rates are impacted by the trade mix that we have and has been negatively impacted by the fact that a lot of the growth has been in, you know, in the U.S. trades, for instance, where the average rates are lower than they are in the north-south trades, where the market has been quite poor in the last year. It's very difficult to help you here because there are many different moving parts.
All I can say is that, I'm sure all of you follow the, you know, Shanghai Containerized Freight Index. You know, spot rates have gone up from a very low base, almost doubled since March 2016, and the contract rates have gone up 14% since April. If that development continues, it will impact our results positively.
The effect on the contract is correct that Asia-Europe one-year contracts is negotiated during this quarter here. We have then on the Pacific. It's in the first quarter or the beginning of the second quarter. How does those contracts negotiation stand at the moment? Could you give any flavor of where you expect rates to fit in? How much of your volumes in Asia-Europe, and how much of your volume on Pacific is on one-year contracts?
So you're correct. Most of the Europe contracts get renegotiated around the turn of the year and the Pacific contracts for 1st of May. As I said earlier, you know, we're just starting on the Asia-Europe contracts now, and we haven't actually closed any. It's very hard to predict how it will develop. The only thing I can say as a simple fact is that we are currently in a situation where the spot rates in Asia and Europe are significantly higher than they were at the same time last year. We have a more positive situation at the start of the contracting season.
I'm not making any predictions about what will happen later in the months or so on, but we are in a better position than we were a year ago. If this continues for the rest of this quarter, then we're also gonna see contract rates that are significantly higher than last year.
My second question here was the percentage of one-year contracts on your Asia-Europe traffic.
I don't think we have any. We are not expecting any change in that, and we are around the 50/50 mark.
Any flavor of what you see for you on the Pacific?
No, that's way too early. I mean, that's simply too early.
Okay. Thank you very much.
All right. In that case, thank you. I would like to thank all of you for joining and listening in, and we look forward to seeing you, hopefully most of you in person at the Capital Mark-