Good morning, everybody, and welcome to this call talking about the third quarter results of A.P. Møller - Mærsk. We are, as you can imagine, quite pleased with the result. We have a result for the quarter of around $1.3 billion. We think that given the strong cash flow and so on, that we are pretty well positioned for a world that becomes ever more competitive. Thank you for joining us this morning. I'm here with Trond, as usual, ready to go through the presentation and take the questions you may have, and hopefully we'll give you some good answers.
If we start on page two, there isn't much left of the year, so o f course the uncertainty is slowly going down. Still, I would like to remind you that what we say about the future is based on our expectations and of course these things may change as we've just experienced in the last quarter with the drop in the oil price. If you join me at page three, this is just to give you a very brief overview of the 9-month development. We believe that the figures are good. Of course, the profit jumped from $2.8 billion-$5 billion.
Dollars is including the two extraordinaries, which are the sale of Dansk Supermarked, the profit from that, and also the impairment we made on the Brazilian oil fields, as well as another few pluses and minuses. The profit, if we exclude one-offs both for 2013 and 2014, the first nine months show an improvement of $727 million, which is close to 25%. We're very pleased with that. The underlying profit by activity, and here we have taken out the extraordinaries or the exceptionals. You see Maersk Line up with approximately 25% as well, $370 million in the first three quarters.
Maersk Oil improving in spite of the recent pressure on oil prices, but improving on the back of improved production. Actually on average pretty okay prices and a reduction in exploration cost. APM Terminals will also this year, hopefully, have a good year. Maersk Drilling is down accumulated for the year, just as foreseen, given the cost of running in new rigs and also a number of yard stays which happen to be five-year yard stays and quite costly. Then we have services or APM Shipping Services, as it's called now, basically stable compared to last year.
And here we still have some strategic work to do, and we also have a turnaround that needs to be achieved next year in Damco. Going to page four, we go into the highlights of the quarter, which I think is probably more interesting for most of you since you have followed us also at the half year. A profit up from $1.2 billion-$1.5 billion is, I think, a result we can be satisfied with. But, going through the profit, excluding one-offs, you have a better picture of the underlying business. There's a 2% improvement in the profits excluding one-offs compared to the same quarter last year.
That's actually quite good since last year's third quarter was very strong. And also having in mind that Maersk Drilling for the full year is expected to be below last year. If you take this figure and you take into account that we have had some currency effects to exclude the financial cost, then the underlying profit on the five businesses actually improved approximately 10% on average. Which was driven by general progress.
You can see that, in the bottom part of the graph, with progress everywhere, or not everywhere, but in the three largest business units and the planned decline in Maersk Drilling and basically a stable situation in APM Shipping Services. The main driver of the progress was Maersk Line, up by $120 million compared to last year. Also, I would like to underline that Maersk Oil, in spite of the oil price drop, managed to improve its result on the back of a 4% increase in production and savings on the exploration cost. The Maersk APM Terminals figure, we'll come to it later, but the underlying figure is actually up approximately 8%.
The actual, the stated number is showing a bigger increase because of the sale of Virginia. And with that, I think maybe just worth mentioning that the cash flow remains stable on a high level, $1.4 billion of free cash flow means that we continue to reduce our debt. And going to page five, digging a bit deeper into the Maersk Line results. Revenue up 4%, it's actually not so often we see that, but volumes have been up and also rates have not declined, but actually increased a little bit compared to last year.
You can say the profit is up 24%, and we now have this quarter a ROIC of 13.5%, comfortably beating our 8.5% target and even being above 10%, so we're pleased with that. And the progress and result is partly a result of the volume increase of 3.7% I just mentioned, but we also continue our efforts to reduce cost. We reduce cost by 0.9% on a unit cost level, and at the same time, the rates are slightly up compared to last year, so that gives a good earnings result.
Here, the free cash flow generation is above $500, even after funding the capacity growth, which at the moment is, of course, the phasing in of the Triple-E vessels. Our fleet capacity increased by 6.3%, and that is again the phasing in of the 3 Triple-E vessels, but it's still our ambition to grow our fleet in line with the market growth. So that should average out at somewhere around 3%-5% or 4%-5%, as we've said previously, there's no change in that.
Also, on the margin difference, it's worth pointing out that we now, for the eighth consecutive quarter, is beating our target of having at least 5% margin advantage to the average of the industry. We're of course very pleased with that. We got our VSA agreement with Maersk or with MSC, got it accepted, approved by the U.S. Federal Maritime Commission. That means that we are ready to start up by the beginning of January, and we will start taking orders for this service by sometime during December. And going to the next page, just digging into the Maersk Line cost reduction, we have mentioned a figure of $25 before, compared to last year.
And this is of course helped by growth. But if you go to the bottom line, you'll see where the cost increase of the 2.8% come from. It is below the volume growth, but still there is a cost increase. The most important part here is the terminal business or the terminal rates that have gone up, not rates, but terminal costs have gone up in line with volume. Also, inland services have increased, which is quite natural with increased volumes. Vessel costs have increased, but actually less than you would expect given the increased volumes. And then we've had a reduction in bunker consumption.
Here we don't actually have yet any effect of bunker price of any significance. It's a 0.8% decrease in the bunker price. The main part of the saving comes from reduced bunker consumption per FFE. So, more of the same, and I'm sure it doesn't give you a lot of surprises, but I would like to point out that actually the average bunker consumption per FFE has been reduced again with 6% compared to last year, which is quite an achievement in our opinion.
Going to Maersk Oil, I've said most of it already under the opening, but a very nice increase in profit by 18% to $222 million, by 4% higher production, and lower exploration costs, as the main reasons for that. The average oil price declined in the quarter, but on an annual level, it still remains more or less in line, if I'm not mistaken, with last year. The reduction of exploration cost is amounted to $46 million. This is partly by design. We continue to evaluate our exploration efforts very carefully.
But it is also reflecting, of course, a concern that with the present oil prices and present prices of oil assets, that a high level of exploration, as we have had in Maersk Oil in the past years, may not be the best way to build our reserve base. We've had a number of exploration wells throughout the quarter. Three of them have been without commercial discoveries in Kurdistan, in Denmark, and in the U.K. We had a well, Marconi, drilled in second quarter. Also, the Bøxkin-3 appraisal well has been finalized, and t hey both have positive oil indications, and we are evaluating the commerciality.
On the good side, Golden Eagle produced its first oil in October, which was ahead of plan, which I believe in this industry is not something you see every day. Going to page eight, APM Terminals results. The highlights here at profit of $345 million, driven by the disposal of Virginia mainly. We've also taken various impairments and other things. The net profit excluding one-off is $211 million, which is up 8.2% compared to the same quarter last year. Which, given the pressure we have seen on global trade now, is a very respectable progress which we're pleased with. There also, the ROIC continues to improve.
Nothing really to complain about here. Business as usual, gradually growing the business. Maersk Drilling also in line, very much in line with what you've heard around the half year and what we said at the beginning of the year. We had an increased profit in Maersk Drilling, but also here it was driven by extraordinary income from the sales of Venezuela. The underlying profit was down from $160 to $106, fully in line with expectations. We are getting the last rigs delivered during this quarter. The last drill ship will probably be coming in either at the end of the year or beginning of next year according to plan.
We're of course working hard to find long-term utilization for it. The drill ship three is on a short-term contract, drilling off Malaysia, and we hope there'll be utilization for this rig afterwards as well. Nothing much more to say to this, but drilling is progressing according to plan. We expect to see the benefits next year. APM Shipping Services results are slightly down compared to last year. This is not out of line with what we've said the whole time. It is very obvious that there's quite a bit of work to be done in this segment.
First and foremost, the turnaround of Damco needs to be completed. We are phasing in the new system, so we are getting close to having 80% of the customers on that platform. We've also managed to reduce the number of offices down to almost where we plan it to be, which is a significant reduction from around 300 to around 50, and I'm talking about back office centers here. Maersk Supply Service is a business that we want to see grow. We are investing in fleet renewal here. We've ordered during the year 4 subsea construction vessels in line with our strategy to upgrade the capabilities in Maersk Supply.
We've also recently placed orders for six next generation anchor handlers that I'm sure will also lift our capabilities significantly. That's quite exciting. Svitzer is profit-wise down a little bit due to difficult conditions in Australia. Maersk Tankers report a profit improvement compared to last year. That is positive in itself because we have a small underlying profit. But most of the increase actually, or most of the profit came from an operation we made around mid-year, where we bought four time-charter VLCCs from the owners and resold them, getting rid of some loss-making contracts, which gave us a profit of $71 million.
There's still a lot of work to be done in APM Shipping Services, but we're confident that we will see the results of that when we go into next year. In particular, improving results from Damco, which will continue to be difficult for the remainder of the year. With those words, I would hand over to Trond, who will present page eleven.
Well, good morning from me as well, ladies and gentlemen. Going to slide number 11, we're gonna look at the return on invested capital. The group, the end of September had invested capital of approximately $51 billion. The reported return in the quarter were 12.7%, which we're very satisfied with. That is of course affected by also the sales gains included in the quarter. As you can see, Maersk Line is delivering 13.5%, which is very good. As you saw on slide 5, you see a progress on the returns the last three years consecutively comparing quarter by quarter. All in all, I do think that Maersk Line drive very good progress these days.
If you can also be aware that fourth quarter is likely, as you can see on the previous years, to go lower than third quarter. Maersk Oil, it is of course affected by the invested capital as a result of the write-down we did in the second quarter of $1.7 billion. And that leaves Maersk Oil at the return of 17.5%. Terminals, a return of 22.5% affected by the sales of Virginia, but underlying in the same trend as they previously had. Maersk Drilling, slightly down to 10.7, also affected by the sales of Venezuela, but an underlying sort of trending in the same context as they did in first and second quarter. All in all, we're doing fine.
APM Shipping Services also doing well, considering also a difficult result for Damco, still doing 8.7%. Other businesses improved slightly as a result of the improved results from Danske Bank. The return in the quarter is 9.6%. If we then go to the right of the slide to see that the change in invested capital sort of driving our allocation process to the company or the business units of focus. That means that Maersk Drilling has increased their invested capital, almost doubling it since we started sort of recording this and showing this. APM Terminals increasing by 35%.
If you go down to the bottom, you see that Maersk Oil is of course decreasing as a result of the write-down of $1.7 billion, and also that the progress hasn't come as far as we had expected in 2002 when it comes to the progress or the timing of the progress on some of the bigger projects like Chissonga, Johan Sverdrup, and Dunga. All in all, and also you see that Maersk Tankers coming down with 56%. That is sort of a planned action as a result that we've been selling off segments. Of course, Dansk Supermarked is fully out as a result of the sale. If you then go to page 12 on our financial framework. On the top left, we started the year with a net debt of $11.6 billion.
As of third quarter, we're down to $8.1 billion. As you can see, the variance of the different elements going there and also the impact far to the right of the Dansk Supermarked sale as we have collectively presented it at $2.8 billion. If you then see on the top right, you see that the sales proceeds from this year's divestments, including Dansk Supermarked, VLCCs, and Virginia as the three main items gets us to $4.1 billion. On the bottom left, to the far right, you see the gross investments or the gross capital, the gross investments in capital expenditures is at the level of $6.8 billion for the first nine months.
All in all, good progress on the focus points on both cash conversion as well as optimizing the portfolio and trying to get the growth going with the investments. Going to page 13, this is the overview of the consolidated financial information. I'm gonna go quickly through the third quarter 2014 numbers. Revenue leaving us at $12.169 billion, basically in line, slightly up from last year. The earnings before interest, tax, depreciation, and amortization at $3.2 billion, slightly up from last year as well. Depreciation, basically in line with previous year at $1.108 billion. Gain on sales of non-current assets at $454 million, up from a loss last year of $30 million.
All in all, earnings before interest and tax increasing with basically $600 million, up to $2.688 billion. Financial cost net this quarter is $188 million, slightly affected by some currency effects as a result of appreciation of the US dollar, specifically of approximately $60 million. But also some other pluses and minuses considering last year, but that is sort of the major effect for this quarter. Leaves us at a profit before tax of $2.5 billion sharp. Tax increasing from last year to $1 billion. Most of that is driven by the capital gains tax of Virginia sale of approximately $150 million. That is sort of driving the increase in that.
Underlying tax effective tax on oil is still mid-70% as we previously had said, and that leaves us the $1 billion. The profit for a period is reported in this quarter is $1.495 billion. To the bottom of the page, seeing that the net interest bearing debt is $8.053 billion. Earnings per share this quarter is $67 a share, and return on invested capital, as I previously mentioned, 12.7%. To the guidance for 2014, we still expect the result for 2014 significantly above 2013, which were a result of $3.8 billion.
As Nils mentioned earlier, underlying results still expected to be around $4.5 when excluding discontinued operation impairments and divestment gains. When it comes to gross cash flow, we have slightly reduced that and are expecting now to be around $9 billion from previously $10 billion. Maersk Line, we have increased the expectations for 2014 to be above $2 billion, specification from previously significantly above 2013, which were $1.5 billion. That is based on good third quarter performance. The global demand for the year, we now expect the growth rate to be about 3%-5% from previously 4%-5%. Maersk Oil still expects an underlying result in line with 2013 of $1 billion.
If we include the impairments of $1.7 billion in Brazil that we did in second quarter, we expect the full year loss to remain around zero loss of $700 million. That is based on an average oil price for the year of $102 per barrel. On the entitlement production, we still expect the entitlement production to be above 240,000 barrels a day. APM Terminals still expects the underlying result to be above last year of $708 million. When it comes to Maersk Drilling, still expect the underlying result to be below 2,013, and that is due to the planned yard stay and high costs of the startups.
APM Shipping Services expect to be around 2013 with slightly lower than $300 million. As always, we are, the guidance is subject to considerable uncertainty. You see some of the sensitivities at the bottom of the page. With that, I'll leave the closing remarks to Nils.
Just to sum up our presentation, our strategy remains the same. It is the ambition to create a real premium conglomerate demonstrating continuously to our investors and people observing us that we are able to create value through profitable growth, through building businesses that can truly win in the marketplace, and being leaders in their industries. We believe that the group result in Q3 confirms that we are on the right track. We have what we deem a satisfactory performance, delivering $1.3 billion underlying profit.
We continued our portfolio optimization with getting out of onerous tanker contracts and selling the terminal investment in Virginia where we were basically just a landlord in Virginia. We've also taken the first step to address our capital structure, returning through a share buyback. So far, very small, but $150 million out of our $1 billion buyback program. It is important for me also to underline that we are aware that we have a very strong balance sheet. It gives us very good opportunities to continue even in difficult global economic situations with slow growth, continue a responsible and good investment program that places us even better in the markets.
Of course, also continue focusing on the needs and opportunities of our customers in the marketplace. In spite of the fact that we believe that the world is getting a little bit more challenging over the coming quarters, we believe that we are very, very well-positioned to act and deliver also under those circumstances. Our underlying business is probably performing a little bit better than we expected. On that background, we will maintain the guidance of $4.5 billion in profit for the year. Thank you very much for listening in to this rather long elaboration from Trond and me. Now we're ready for questions.
Yes. Thank you. We will now begin the question and answer session. The session will last 40 minutes. If you have a question, please press star and then one on your touchtone phone. If you wish to be removed from the queue, please press the hash key or the pound sign. There will be a delay before the first question is announced. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, I remind you, if you have a question, please press star and then one on your touchtone phone. Our first question is coming from Lars Heindorff from ABG Sundal Collier. Please begin, sir.
Yes. Good morning, gentlemen. A few question from my part. I think I'll take them one at a time. Firstly, regarding Maersk Oil. OPEX per barrel increased to around $33 per barrel in the quarter, as has been increasing slowly and steadily in the past couple of years. How should we think about the OPEX level going forward? Will it continue to increase because of the runoff in some of these mature fields, or will there be any positive impact from some of the new startups?
In general, we have to be realistic. In the immediate coming quarters, I think we will continue to see gradually increasing costs. I do believe that there's scope for general cost reductions in the oil industry. Jack, which is the next one, will be an ultra-deep water field.
There will be, I think, a tendency for a while to see increasing oil production cost.
Okay, thank you. Regarding the exploration cost, if you use the run rate that you've reported in the third quarter, this is just a full year spent around $760 million. Is this the level that we should expect going forward? Or maybe further to that, are there any contractual obligations that make it difficult for you to adjust your exploration level up and down from quarter to quarter?
There are not that many contractual obligations, but when we look at the exploration costs we have this year, there's actually quite a lot of them are related to fields that we know quite well. It gets more in the direction, you can say, of appraisal and pre-production costs. These are things that we will do in order to prepare the fields for production. You can say probably a little bit less wildcatting than you've seen in the past.
Okay.
Wildcatting is not the right word, but.
Thirdly regarding Brazil, there's a statement in the quarterly report on page 11 about a rejection by the Brazilian authorities of the sale of the Polvo field. Can you give us more insight to that and what that will mean?
It will mean nothing because the sales price is very, very low. We're hardly talking about double-digit millions, so it's just a very low sale price. There can be, if we are not approved, there can be some later cost for closing down the fields or the field. We'll have to look at that. I would say it doesn't really have an impact. We just mention it for completeness. The reason why we decided to divest Polvo was to concentrate our activities on things that are a little bit more relevant.
Okay. Last, regarding Maersk Line, you mentioned in connection with the Capital Markets Day that you have some CapEx plans going forward, and that you need sort of to grow your capacity in line with the market. Have you come any closer to a decision about the timing and the size of that future CapEx spend at Maersk Line?
Well, we did say at the Capital Markets Day that it could be up to some $3 billion a year to grow the market including, of course, IT systems and container investments and so on. I think that figure more or less stays.
Okay. All right. Thank you very much.
It will be financed out of our own cash flow, by the way.
Next question is coming from Jan-Christoph Herbst from MainFirst Bank. Please go ahead.
Good morning and congratulations to the strong results. Can you shed some more light on the future CapEx plans now when oil prices are so low? When we learned that M&A, which acquisitions, will go up the next time. Are you have anything special in mind, and will it be more on terminals or more on the oil side?
Well, we are just basically voicing that we have the capacity to do more. Everything we do, if we go for the oil business, everything we do will of course have to stack up under the new lower low oil price levels that we've seen. It's hard to say when sellers and buyers have come to the same conclusion on how things should be priced. We are not in a hurry. We have no urgency to do anything. We will be very very mindful of not investing in things that require unrealistic assumptions on oil prices.
Okay. Also related to low oil prices, and do we have to fear any large impairments in Maersk Oil or Maersk Drilling as you saw them from Transocean, for example? Will the planned capital allocation, which was stated at the capital market stage or around 50% for combined Maersk Oil, Maersk Drilling, and terminals, consist, or will you change something there?
We have over the last couple of years been holding back on investments in the drilling area because we did actually expect the oil price to come down somewhat. Doesn't mean that we will not do an investment if there's a special project or specialized rig that can achieve a long-term contract with an oil company. We will not go out and order on speculation for the ultra-deepwater market, because even though we think that there will be need for the modern tonnage that's in the market now, we don't believe there's any need for additional new builds.
In terms of the impairment, of course, if we felt that there was a need for impairment, we would have done it. We think that our assets are valued correctly.
Okay, thank you very much.
Next question is coming from Christopher Combe from JP Morgan. Please go ahead. Christopher Combe, you are live now. Please go ahead. Okay, we will go to the next question. It's coming from Amy Butcher from Morgan Stanley. Please go ahead.
Hi there. Good morning, everyone. Two questions from my side. The first is in relation to the cash flow for the quarter. I see at the group level, you've reported a little over $2.7 billion of operating cash flow similar to this time last year. I can't see exactly in the divisions where that support comes from, that Maersk Line, Maersk Drilling, Maersk Oil are all down in operating cash flow terms year-on-year. Where exactly in the divisional businesses did the operating cash flow growth remain broadly stable to reach that group level? If you could just help us reconcile where that came from.
My second question, just to come back on the oil price and the assumptions going forward. I assume that your guidance, at least in the oil division and perhaps in relation to drilling too, is taking the prevailing Brent rate into account when you're keeping the guidance where it is. How should we think about 15 in terms of if we're entering January at an $80 type level, what is your views on the production levels related to the sharing arrangements that you have? Can that stay around 240, or should we expect some level of growth? Thanks.
Thank you. I will just start by answering how we view next year. Of course, we still see Maersk Oil as a business we would like to grow. Lower oil price will impact the volumes we get out of the Qatari production sharing agreement positively, but it does not necessarily come immediately, so there may be some factors and things and time lags in that will impact it. Fundamentally, it should be positive.
If we look at the oil price expectation for next year, we haven't given out anything yet, but I can tell you that a deviation of approximately $10 on the oil price will be giving an impact of more or less $200 million on a full year basis in Maersk Oil. We have not decided what that means for next year or how we'll handle that next year, but of course we will work on the cost side and operational cost, overhead cost, and we will also have a close look at exploration and investment costs. We have some mitigation opportunities, and we'll work on it.
Of course, if the oil price is $80 instead of $100, it means you can say a $400 million negative impact.
Okay.
When it comes to your question on the operating cash flow, it's basically the same standard specification as you see on the cash flow statements, going back and forth. The only, when you actually add up the business unit, what you're missing of significance was that we have a timing difference on some indirect tax payments in the group. As a group adjustment, as we had on the positive element in the second quarter, we have a negative element in the third quarter. That's approximately $250 million, as you see, going back and forth in those two quarters. That's sort of the major element.
The other is, of course, minor elements, back and forth, both, in eliminations as well as it is in sort of other business unit elements. That's the major effect.
Okay, thanks. Could I ask one quick follow-up then on the divisional businesses, Maersk Line and perhaps the oil and drilling segments?
Where the operating cash flow is quite notably down year-over-year versus, let's call it broadly stable, EBITDAs, can we assume that the difference is related to perhaps working capital flows in each of those divisions? Or is there some other factor we should be aware of?
No, there shouldn't be any specific elements. I do think that when it comes to year-over-year adjustments, there are some effects. As you know, there are some working capital, but the total working capital effect in the third quarter for all of the business units is basically $200 million. It's not that significant. There are, of course, other elements in there and also some currency effects in the working capital as such.
Okay, great. Thank you very much.
Next question is coming from Finn Bjarke Petersen from Danske Bank. Please go ahead, sir.
Yes, good morning. Two questions to make. The first one is, how do you see the dynamics in the container market from the low oil price affecting you going forward? The second question is on the APM Terminals, on the impairment and foreign exchange losses that you're making on the joint ventures. Could you elaborate a little bit on these items as well?
Just to, I'll start off with the oil price impact on Maersk Line. Of course, we are using a lot of money on bunkers in Maersk Line every month. Also here, the 20% or the $20 drop we've seen in the last months, it will definitely help us going forward. There's not much of an impact in the third quarter, but we believe there will be a positive impact in the fourth quarter. Fundamentally, though, we believe that given the competitive nature of the container business, that when you look a little bit further out than two or three months, then the tendency is that the carriers compete this away, and it end up as price reductions. Sorry for being realistic on this point.
Next question is coming from Neil Glynn from Credit Suisse. Please go ahead.
Oh, good morning. First, a question following on from working capital. Obviously, we had an outflow in the third quarter, and we've got an outflow for the nine months to September. Should we expect a recovery of that outflow in the fourth quarter, or is that likely to remain a negative figure for the full year? Second, a question on Maersk Line. If we compare the third quarter to prior quarters this year, I recognize clearly the second quarter was strong and there was guidance that the run rate or the volume growth rate would moderate. It seems that utilization has gone backward in the third quarter, given your 6% fleet capacity increase. Is that disappointing? Is it an issue going forward, given the Triple-Es continue to deliver?
How do you improve that commercial performance in light of lower fuel prices?
I didn't understand your first question, but the second question on the capacity utilization for Maersk Line, it's correct that the fleet growth has been slightly ahead of the volume growth. Of course, it's impossible to manage this down to less than a couple of percentages up or down every quarter. I wouldn't take any trend from it. Our ambition is to grow in line with the market. Of course, there will be quarters where we grow a little less, and there will be quarters where we grow a little more, depending on the speed of delivery and how fast we can reduce our time charter portfolio.
Understood. Just to come back on the first question, we had a negative working capital number flowing through the cash flow statement for the nine months. Just looking to understand, will that be a negative number for the full year, or should inflows in the fourth quarter produce a better result?
Well, the usual sentiment of the working capital pattern is, of course, that third quarter is of course an area where both Damco and Maersk Line have a lot of revenue. As a result of that, working capital goes generally up and slightly downwards at the end of the year. Effectively, I expect the working capital to come further down at the end of the year.
Okay, thank you.
Next question is coming from Diede van den Bergh from ABN AMRO. Please go ahead.
Yes, thank you. A couple of questions on APM Terminals. Can you maybe indicate what the throughput growth has been, let's say, underlying, excluding the divestments, and the same for revenue growth? A second question related to your slide 51, showing strong EBITDA margin improvement in your joint ventures and associates. Can you maybe explain why that's the case, why it suddenly jumps from 40% to 48%?
-growth. It is actually stated on the bottom. Throughput is up from 9.3 to 9.7, and I think that is more or less the organic throughput. Then the page 51, I'll just have to get. Just a minute. I'll have to come back to you, Henrik. No, on the question on page 51, I can't give you the details on that. If you call in to Henrik Lund and his department, they'll be able to help you on that.
Okay. Very good. Thanks.
The next question is coming from Dan Togo from Handelsbanken. Please go ahead.
Morning, thank you. You mentioned that you did expect or foresee a drop in the oil price, and we've seen that now. Where the spot price is now, has that in any way, and this movement we've seen, has that in any way affected your long-term view on the oil price and the way you, so to say, will direct your investments going forward on the oil side? That's the question number one.
We actually had an expectation that the oil price would go down to the band $80-$90. It's come down faster than we expected, and we're a little bit surprised about the speed it's gone down. We've already taken some precautions, notably not cutting back on our ordering ambitions in Maersk Drilling. Also working very hard on cost of our investment projects, so that we make them stable and profitable also at the present oil prices.
fundamentally, it hasn't really changed your long-term fundamental view on the oil price, as I understand it?
Our fundamental, our long-term expectation for the oil price is. Well, long term, what is long term? For the next couple of years, we'll be in this band, maybe around $90. Then at a point in time, we expect it to start growing with inflation.
Okay. On terminals, on the tax rate, could you please take me through that? Because you mentioned in the report that the reason for the high tax rate is that some tax incentives expire, local tax incentive schemes expire. But you also have a significant capital gain of $150 million, and if you exclude that, you actually have quite low tax. How do you foresee this going forward, and what will be the run rate on the tax rate in terminals going forward?
The element is of course that in Q3, the major effect of terminals is the capital gains tax. The other things that has happened is that, we as a result of investing in different countries, we do get some tax holidays for a period of time. One of those has elapsed during second quarter, so that the average rate will come up slightly, but not more than, I believe, four-ish percentage points, I believe, from basically historic levels. It's not gonna be any significant jump up. Of course when these holidays go out, we are gonna sort of be affected by them.
Okay. Finally, just on 2M, I know you have elaborated on this extensively, but what can go wrong now? I mean, you've had the FMC approval. What can go wrong as you see it, until you expect to kick off early in 2015?
Well, basically, we don't expect anything to go wrong. Of course, both the European Union and China and the U.S. will reserve their rights to observe what we're doing. If they believe that we act against laws or what they like to see, there can be some measures taken. We have no plans of doing anything but capacity sharing. That is approved in the U.S. and it's reported or explained both in China and the European Union. We will start taking orders in December, and the network will go live in January.
In that sense, no news is good news for 2M. Is that the case?
Yes. I think in, like, in all terminals or in all alliances, of course, we have to watch out and make sure we behave in line with regulation, which is what we intend to do. Then we don't foresee any problems.
Thanks a lot.
Next question is from Gianmarco Bonacina from Equita. Please go ahead.
Yes, one question about the profitability of the big oil project in Angola, U.K. and Norway. You mentioned before that you're expecting the midterm.
Oil price to be $90 and then maybe to grow it a bit more. Can you give us some sensitivity, in terms of return on capital? Assuming that the oil price will be $80, the return on capital on this project will still be above 10%. Basically, at what level of oil price, these big projects will not be able to have, a return on capital which is above 10%? Thank you.
I can't give you an exact answer to that. When you look at the projects that we have both in the U.S. Gulf of Mexico and the North Sea, they're all below the $80. Our forecast, by the way, is $80-$90. It's not $90. We do expect those projects to be profitable and giving a return at least of 10%, all of them. The only field where we feel that we have major investment, where we have a challenge, is the Angolan Chissonga field.
We'll be working with governments and with suppliers to see whether a good project, a sustainable, solid project can be established also at an oil price of $80. That's our prerequisite for investing there. So much more I can't say at this point in time.
Thank you.
Next question is from Mikkel Malberg from Nordea. Please go ahead.
Yes. Mikkel Malberg from Nordea. Gentlemen, one question to Maersk Line. Regarding the volume growth, I can see the volume growth you realized here in Q3 was a bit lower than average for the industry and the data points. Could you elaborate a bit on the mix you're seeing or the decision you're taking regarding reefer or other things that have caused this lower volume growth?
We're happy with the volume growth. It's more or less in line with the market. In the first half, our share grew a little bit because we grew stronger than the market. We're not micromanaging this down to the 1% during a quarter. We are happy with the development. You can say that we're not taking any specific decisions on reefers or other things that is impacting this share. Over the year accumulated, I think we are basically spot on in line with the market.
Thank you.
Next question is coming from Christopher Combe from JP Morgan. Please go ahead.
Thank you. Managed to get back online. Two questions, please. First, on drilling, you mentioned before that the lower price wouldn't put you off necessarily from investing in specialized areas. Can you give us an update on the 20K projects and when we could expect to hear some additional news?
Yes. When I refer to the specialized, we believe, by the way, that the offshore drilling in most of the areas will continue to be interesting. We don't have a worry about that. We do have a concern on the ultra-deep water market in the short term. In the midterm, there is around 100 rigs that are old, and that will probably be competed out. Even having done that, we don't believe there's a need for additional rigs. The 20K rig project is a special project because many of the larger oil companies have very significant resources in fields that have these characteristic of high pressure, in some cases also high temperature.
That's why designing and building this rig on the back of a long-term contract we believe can still be interesting. What we've decided not to do is basically not to go for, you can say, ultra-deep water rigs without long-term contracts. Probably even with a long-term contract, we wouldn't build at the moment because we think the market is oversupplied for the medium term.
That's clear. The last question is on the rate environments. Can you comment a bit on the success you've seen with the most recent GRIs? At which stage I think you made reference to retaining bunker cost savings for maybe a quarter or two before they're passed on in rates. Do you think we're gonna see any of that distortion in the fourth quarter already? Lastly, how does this impact your ability to recover the low sulfur costs that you've highlighted recently?
Well, like we will have to assume that falling oil prices or bunker prices will be transferred to the customers, maybe with some modest delays. Also, the low sulfur costs will have to be paid by the customers. I don't think there is any way around that. The container business or container industry as a whole is very, very low on profitability. I really don't see how it'll be possible to shoulder significant bunker price increases because of low sulfur requirements by most of our competitors, and we certainly don't intend to do it.
On the recent GRIs, can you provide any color how that's going?
Well, you know, I can tell you that they're all extremely successful and so on. You know, the picture is that we announce a number of GRIs during the year. Everybody outside tries furiously to incorporate those rate increases. Thereafter, the gradual deterioration in rates in detailed calculations. I think it's very difficult to do that. We will assume that it's possible to increase the rates in the fourth quarter. It will have a minor impact in any case, because the first November rate increase will not have effect on the books until December.
I wouldn't spend too much time doing those calculations.
Great. Thank you.
Next question is from Marcus Bellander from Carnegie. Please go ahead.
Hi. Two questions, if I may. First, when talking about Maersk Oil, you said that something along the lines of that high exploration costs may not be the best way to build your resource base. Could I ask you to elaborate a little bit on that?
Yes. I mean, first, I would say over the last five years, we've run with an exploration cost that has been above what you would expect a company of our size to run. We have been partly successful. In the latter years, we've had some less successful periods. Therefore, we had decided anyway to take a close look at that. Now with the oil price of around $80, most likely a number of exploration projects will become less interesting. While once the sellers realize that an $80 oil price is a realistic price level, maybe it will be possible to buy an oil field instead of going into an increased exploration level.
This is on a very, you can say, a high level, and I can't provide you with any details until we are into next year. That doesn't mean that we will do an acquisition or anything in that period, just to make that very clear.
Thank you. The second question, regarding your target of 5 percentage points outperformance when it comes to margins in Maersk Line. How come you're not raising that target? You're clearly way above it.
We're clearly way above it, but we also want to be very clear in the fact that if we had to go lower in order to defend our position, then we will do that. We think 5% is a good and ambitious level to have as a strategy. That we, during periods where the industry is under a lot of pressure, can do better than that is of course very pleasing. We don't dare to take the assumption that this will be a permanent situation. Five percent, we believe is defendable.
Today's last question is coming from Joel Spungin from Merrill Lynch. Please go ahead. Joel, are you online? Please go ahead with your question.
Hi there. It's Joel Spungin here from Merrill Lynch. That was quite an extraordinary pronunciation of my name. Just a couple of questions. The first one, just with regards to the comments you made earlier about the impact of lower bunker fuel prices being competed away. I was just wondering when you quote the numbers in your press release about the sensitivity to bunker fuel price, do you make an assumption about that competitive effect within that guidance? Or is that just a purely mathematical interpretation, i.e., in reality, the impact of lower bunker fuels is effectively zero? That's my first question.
Second question was just to clarify, in terms of the lower CapEx from $10 billion-$9 billion, you know, what is it that you're not spending there? To what extent did you consider just, you know, increasing the share buyback, given that, you know, your CapEx is coming lower than you were previously expecting? My final point was just on Damco, which obviously has had another very poor quarter. I mean, I was just looking at the last four quarters, it's lost over $200 million at the operating level, which for a freight forwarding business strikes me as an incredibly weak performance.
I'm just wondering what's going on there, because one would not naturally assume a business like that, you know, would see those kind of losses, especially given that it was generally not very profitable, but relatively profitable for quite a long period before that. If you could just sort of clarify what's going on there, it would help. Thank you.
Well, to take the first one first on the sensitivities, that's pure math. It's everything else equal, and the effect. Very simple. When it comes to your second question on the CapEx, yes, we are lowering the gross CapEx expectations by $1 billion. We have basically said around the $10 billion. It's a few projects, some of it in oil that is sort of a timeline. Of course, some other places as well as we have like many others, is some challenge finding growth. To some extent on the growth agenda, but some of the projects sliding slightly to the right. That's the most elements of the decline.
Just sort of elaborating a bit on Damco, of course, there is a number one, of course, in operations related to this transformation, which we call One Damco. There are also a number of things that are related to account cleanups as we get the balance sheets more under control. We unfortunately have had to take some write-downs and some impairments on that. On top of that, I concur with you that this is not a good performance. We are also not happy with our performance. Costs have been too high in the business.
We also had not too much focus on the transformation, but too little focus on the market. We need to get it over with. I think we're getting nearer to the end. We'll be reporting ourselves back to compete actively in the market on a better cost structure, but first and foremost, on a much more healthy platform.
Thank you. If I could just follow up quickly. On the CapEx, you mentioned it was sort of sliding slightly. Should we therefore assume that actually, you know, that this a lot of this CapEx has rolled into 2015? If I could just come back in terms of your thinking, in terms of the share buyback, whether you considered, you know, using any of the excess capital to increase the share buyback? I know it's quite early in the process still. On Damco, are you optimistic that you can get it to profitability in 2015?
If I start with the Damco and then Trond will cover the other question. I think we will in the second half of 2015 see a profitable Damco.
When it comes to the CapEx, yeah, as I said, some of it is sliding to the right, not all of it, but we'll come back to the CapEx guidance for 2015 in February when we do the first guidance on February or 2015 when we get there. When it comes to the share buyback program, that is the program we have decided on. It's running according to plan. We are getting closer to the first period, as we have said, of the $400 million within the three months here. We expect to continue the program shortly after finishing the first one, but we will come back with announcement in that regard.
Super. Thank you very much.
That completes our question and answer and presentation for today. Thank you very much for listening in. Thank you for following the company, and we look forward to talking to hopefully all of you when we come to the full year result publication in February. I wish all of you a good day. Thank you.