Welcome to the A.P. Møller - Mærsk Interim Report Q3 2013 conference call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. You may experience a brief disconnection from the conference during the dial-in. Please note that this conference is being recorded. A replay will be made available on maersk.com. I will now turn the call over to your host, Group CEO, Nils Smedegaard Andersen. Sir, you may begin.
Thank you very much and a warm welcome here from Copenhagen to everybody listening in on this conference call dealing with the third quarter and you can say the accumulated nine months result of A.P. Møller - Mærsk this year. As you can imagine, we're very pleased with the results. It's a $1.2 billion profit. Probably the better side of it is that it's borne by good progress across the absolute majority of our businesses. It's a broadly based, we believe, good result.
If you go to page two in the presentation, just the forward-looking statements, and of course, all what I say and what Trond says here, who's with me today, says later is subject to a lot of uncertainties. Going to page three, the profit in the quarter was good. We reach a ROIC after $1.2 billion result, a ROIC of 9.5%. That takes us to a first nine months result of almost $3 billion, and a ROIC of 8.3%. Rather positive. As we alluded to at the Capital Markets Day, Maersk Line is continuing its effort to reduce costs.
We actually continued showing good results in this area. I'll come back to it later, but lower fuel prices helped, but it continues to be lower fuel consumption that actually carries the main or takes the main honor of that or whatever you call it. If we take Maersk Oil, we stabilized our share of production compared to quarter two, reflecting the fact that Gryphon now is up in full production and El Merk is gradually ramping up. We also handed in development plans for a large Angolan field, Chissonga, including actually the Cubal area, which was an earlier successful discovery of the year.
The extra work needed to include this has given a few months delay, but is surely worth it. Also, Flyndre Corridor was submitted to the UK authorities. APM Terminals had a very good quarter with ROIC reaching 14.2%. The operation in Santos commenced. We're still at reduced speed there because of delayed dredging, but being in operation, of course, is good progress. Maersk Drilling continued its good or very good operational uptime and delivered a very satisfactory result. We ordered an additional large jackup for the Norwegian sector, backed by a long-term contract by BP. We now have eight rigs under construction.
We continue our effort to invest in and build Maersk Drilling. That means that both APM Terminals and Maersk Drilling are on track to achieve their $1 billion NOPAT targets in 2018 and 2016, respectively. We continued our work with the divestment to optimize the portfolio with the divestment of the 31.3% stake in DFDS. As you may recall, we announced at the beginning of the year the Project Fit, which has been focused on slimming the balance sheet by selling a lot of smaller assets within the various business units and focusing on working capital. This is of course part of it, but Project Fit has shown very good results during the year.
Going to slide four. Here you see a graphic exhibit of the nine months results for the group. Profits are down slightly. This is of course due to the fact that we last year had an extraordinary income of $900 million from a tax settlement on Maersk Oil in Algeria, which we don't have this year. If we exclude one-offs, we have more than $1 billion progress in the underlying profit, which of course is. We're very pleased with. It's also which is also positive, even stronger reflected in the free cash, where so we have achieved a good cash conversion this year. As I said at the opening, this is a broadly based progress.
Going down below, you see the underlying profit by activity for the nine months. Maersk Line improving by $1 billion. Maersk Oil down as expected, but as I said before, now production stabilizing. We have APM Terminals underlying profit increasing very nicely. Maersk Drilling significantly, partly because of the really good operational performance this year, but also because last year we had some unexpected downtime. The other businesses here under Dansk Supermarked Group is doing very well. We have progress in that area as well. Taking you to slide number five, the Maersk Line results.
A very good third quarter profit of $554 million progress over last year, and a ROIC above 10%-1 0.9%. We're very pleased with that. The work to reduce unit costs continues. Compared to last year, we had a 13% reduction in unit cost down to $2,622 per FFE. That is significantly lower than last year at the same time, where it was around 3,000. Bunker cost is a big driver. It is down 17%, and it's more or less 50-50 between the lower consumption and lower bunker price.
Also network efficiency and utilization has been improved, reflecting a little bit the fact what we've said from the beginning, that the new vessels we take in will be compensated by taking out other capacity. We keep a very well-utilized network. Of course, if you compare from quarter two - quarter three, we've been helped by an increase in volume, helping us to further drive also on a quarterly basis the cost down. A nice free cash flow from Maersk Line in spite of the investments of $770 million. This is in line with our strategy. We say we should grow with own cash flow.
We have nothing new to report on the P3 alliance. Of course, we read the press and follow the debate there. We continue to be of the opinion that this does not affect the markets in any negative way, as it's a capacity sharing agreement, which allows us to reduce cost, and give our customers a better network, as well as reducing the global CO2 footprint. We think this is a real win-win situation for us and the shipping markets. If we go a little bit back to the cost reduction, go a little bit deeper here, and this is following up on what we presented at the Capital Markets Day.
We continue the trend downwards compared to the first or the second quarter and other $81 per FFE down to the before mentioned $26.22. Here, in addition to absolute cost reductions, we also of course are helped very nicely by the increased volume. That is good. The total cost were reduced by $237 million, of which was caused by lower bunker cost, $116 million lower bunker consumption, and $154 million the lower bunker price, which of course benefits the whole industry.
The bunker consumption reduction comes from increased efficiency, but it also comes from us closing a couple of services down and becoming more effective there, upgrading the size of vessels that we operate on the remaining routes. We saw an increase in terminal expenses by 6%, but that is lower than the volume increase, so also that was very satisfactory. Going to page seven, the Maersk Oil results. Here we have one of the larger business units, the one that declines its result compared to last year, a profit of $189 million compared to $243 million last year.
This is impacted by lower entitlement cost or production, higher exploration cost, and is more or less as foreseen. The production declined compared to last year by 5%, but we actually did see a beginning of stabilization and a very small increase compared to Q2. As we said, just an increase of 3,000 barrels a day, which is less than we had hoped for, partly because the increased bunker price compared to our expectations means that our share in Qatar gets a little bit lower. I think you have heard that debate many times before. We've seen a return of Gryphon in the U.K. to full production, and we continue to ramp up El Merk in Algeria.
That is the explanations why we managed to get this increase. There's actually a little bit to go still. El Merk is still not on full capacity, so we expect a positive impact from this going into the fourth quarter and the start of next year. In terms of longer term development, we finally, as I said before, handling the plans for Chissonga. They have been agreed with Sonangol and are now in the Ministry of Energy. We hope this will be resolved quickly so we can get into the ordering phase. The Flyndre Corridor development project was also submitted. Here we are comfortable that we will receive the approval according to our time schedule.
The exploration cost continue to be on a high level. We drilled six exploration or appraisal wells in Q3. The Cubal successful discovery well in Angola. A new successful appraisal well at Johan Sverdrup. We drilled at Etipo another appraisal well also finding oil, which is being assessed at the moment. We had three other wells in Brazil, Kurdistan, and Norway, which did not encounter commercial hydrocarbons. Going to slide eight, APM Terminals results. We have a good result. We're very pleased with it. An EBIT or an OPAT of $203 million, which gives a ROIC of 14.2%.
The progress is driven by a growth in volumes of around 4%. Also, improved productivity. Of course, it is a help and will in particular be a help going forward that now the Santos terminal is up again or is up and running as expected. We did a few smaller transactions during the year, which are still awaiting; one is awaiting regulatory approval. That is the sale of a 24% share of the terminal in Zeebrugge. We divested the trucking company we owned in the U.S. during Q3. We signed an agreement via our joint venture, Global Ports, to acquire National Container Company, NCC, in Russia.
This transaction is subject to and awaiting regulatory approvals. A very strong result in APM Terminals. As I said before, we feel very confident that we're on the right track towards the $1 billion in this business. If you go to the next page, I'm not going to go through it in a lot of detail. It really says everything. We do have some major investments ongoing at the moment. The ramp up of activity in Latin America, which is now with Santos on the way, taking a step forward. The expansion in Callao in Peru is very exciting.
We have the very early stage almost pre-construction phase projects in Lázaro Cárdenas in Mexico and in Moín in Costa Rica. Very exciting. We have the Izmir project which we're starting up on, and we're still awaiting all necessary approvals and plans for the expansion in Abidjan. A lot of exciting things going on in addition to the acquisitions in Russia, which I just talked about, and significant expansions apart from Callao in three places in Africa, in Nigeria as well as Liberia. Very active on the portfolio side and we're very encouraged by the development here. Going to Maersk Drilling on page 10.
Another good quarter, a very strong accumulated nine months results. We're very pleased with this. We think they've done an excellent job out there in uptime. They deserve a lot of credit for that. With 98%, I think you are to be considered best in class in the industry. It also shows that the Australia investing in high quality ultra-modern rigs pays off. This is very good. The contract coverage is strong. We have a solid order book, 100% coverage for the remaining of 2013, perhaps much surprising but 90% in 2014 is good.
And 61% and 45% in 2015 and 2016, I think also is a backlog that is better than most players in the industry have. Some minor new contracts were announced. Or not minor. The first one is minor. The large ultra harsh environment jackup that we ordered was ordered on the back of a long-term contract with BP in Norway. Very exciting. It undermines our plans for solid and conservative growth in this business unit. We are now and that just gives me reason to caution expectations for the fourth quarter this year as well as 2014.
We are now preparing to take on a number of deliveries next year. That means that we will have quite significant ramp-up costs both in the last quarter of this year, but also during 2014, before we actually start getting real income from the rigs. That combined with the number of yard stays that we have planned for next year means that the expectations for 2014 needs to be cautious. That is part of our efforts to reach the $1 billion and carry on the expansion. This is all as expected. We have the newbuilding program on budget in terms of investment costs.
We do have some delivery delays, and the first rig will be delayed due to problems with getting equipment from the suppliers. We're hopeful that the delay will be limited, and the later coming rigs will be more timely. The last slide from me before I hand it over to Trond for now is the services and other shipping, our new fifth leg. Good progress in that business unit, in particular, when you compare to last year where we had some impairments. Maersk Supply Service, these are underlying profits, by the way, so there's no impairment effects here.
Maersk Supply Service up accumulated from $120 million - $180 million. The quarter was quite strong with $76 million profit against a little less than $50 million last year. This is higher utilization and lower operating expenses, which is driving that. Maersk Supply Service does not have as strong an order book as Maersk Drilling, but this is in line with our strategy and the contract coverage for 50% for 2014, excluding options, we believe is a very good start on the year. Maersk Tankers has delivered a good profit under the circumstances. The tanker business continues to be very difficult.
Hanne and her team have done a good job in focusing, cutting costs, and making the business unit more effective and refocusing the business. We're now cautiously starting to invest in a fleet renewal in the product tanker area. Our plans to stay focused in this area remains unchanged. Svitzer, Damco, a poor result during the third quarter. This is increased overhead cost. It's a little bit difficult in this business because it's so labor-intensive to separate restructuring costs and overhead costs. We are restructuring the business. We're introducing a global IT system. We're introducing new global management procedures. This means that we're keeping the turnover, but the costs are increasing somewhat compared to last year.
Of course, this is not a good result. We expect these relatively poor earnings to continue for a while, maybe with slight improvement. We do not expect to be back with the full systems running and the reorganization done before we reach the second half of 2014. Svitzer is doing well, a stable business. They reduced their invested capital somewhat during the quarter or during the year, but continued and reached a good return. The profit is just marginally above last year. With those words, over to Trond to take you through the figures.
Thank you, Nils, and good morning from me to you all as well. We'll go then to page 12 in the presentation on the performance slide. This is the breakdown of the return on invested capital. As you can see, the group have invested capital of $53.4 billion. It's a slight increase of $300 million since second quarter. We're having a return this quarter, annualized return this quarter of 9.5%, which we are very satisfied with. The good thing about this quarter is, as Nils have mentioned, that most of our businesses is actually delivering more than 10%. You see that all our major four is delivering, and most of the other is actually coming along, like Supply.
Svitzer is close, and Supermarket is almost there as well. All in all, what drives this down the average is, of course, Tankers and Damco, even though the invested capital is not big, together with the other, and the other is comprised of Danske Bank together with some of our smaller elements that is actually having slightly low returns in this third quarter. All in all, very good third quarter, and we are trending the right way when we look at the capital efficiency and the returns going forward. Going to the investments and debts. The gross CapEx for this quarter is $1.7 billion, net of $1.4 billion.
Most of that difference is the sale of the DFDS shares, which is on your upper left on the on the far right too on the other side. The remaining part is distributed among the usual suspects, meaning that we are growing the businesses in the four majors, in Maersk Line, Oil, Terminals, and Drilling. Maersk Line having deliveries of the Triple E's. Maersk Oil, most of the CapEx coming into Denmark, U.K., and some pre-investment cost in Angola. Then Maersk Drilling is getting closer to delivery of the first jack-up vessels coming in late this year. When we look at the development of the net interest-bearing debt, we have had a very good cash conversion during the year.
So far, we see good operational cash flow as a result. The development is that we have lowered our debt with $2.4 billion, which is good. That is not only due to the lower CapEx payment of the $4 billion, but it's also definitely also to the cash conversions on the operations. All in all, good progress. All in all, we see that also the year coming in on good numbers, even though we have some significant deliveries in the third quarter, that's gonna up this number to a more than average of the year. Going to page 14 on the consolidated financial information.
Focusing on the third quarter of 2013, we're delivering $14.5 billion in revenue, slightly down from third quarter last year. The drivers of that is a decline in Maersk Line, Maersk Oil specifically, but countered by both Drilling and Terminals, as well as Tankers contributing to the other way. If we look at the depreciation for the third quarter is $1.148 billion, down from the $1.4 billion last year. Most of that is, the reason is the impairment that we had during third quarter in 2012. The underlying element is basically on average. There are some movements between the business unit, but not any significant.
That leaves us at an earnings before interest and tax of $2.178 billion. Financial cost this quarter is slightly on the low side of $106 million. The reason for that is some capitalization of interest to some of our ongoing development projects. The underlying cost effect in the quarter is basically on the same level as previously. The taxes this quarter is estimated at short of $900 million, coming up to a percentage of 42%.
We see that the driver in this percentage is the usual Maersk Oil, which this quarter comes up to a tax rate of 80%, which is in accordance with what we have said the trend is that we're moving in average towards the 80% level. We do expect Maersk Oil's effective tax rate to be slightly lower than the 80% during the year, but as a result of the effects of nondeductible costs in developing countries or countries where we don't have a revenue base yet, the reason is that we're coming high on that tax percentage. The cash flow from operating activities in third quarter is good, almost $2.9 billion. Also slightly low CapEx during the quarter on $1.4 billion.
The earnings per share in dollars is $258 converted to Danish kroner. The earnings per share in the quarter is DKK 1,456. Just so a few comments on the accumulated nine months numbers of 2013. We see that the earnings before interest and tax is now short of $5.9 billion, and the profit for a period is $2.841 billion. As I said, cash flow conversion has been good, so it's almost $7.5 billion the first nine months with a CapEx of just above $4 billion. The return on invested capital for the nine months is also good with 8.3%. Going over to our outlook for the rest of the year.
We have slightly revised our expected.
Once again, if you have a question, please press star then one on your touch-tone phone. Lars Heindorff from ABG is on the line with a question.
Yes. Good morning, gentlemen. Sorry. Congratulations with the numbers here this morning and the upgrade. Question regarding the liner business and the cost. You spent a bit of time talking about the development in the bunker cost here this morning. I'm curious to find out if you can continue to lower your bunker consumption on a year-on-year basis. You haven't really touched upon other cost items, as far as I can see. They have increased slightly year-on-year in the third quarter. I wonder if you have any expectations for that part, going into the fourth quarter and also going forward.
Thank you for that question. The answer is that we do work very hard to continue the reduction in bunker consumption. Of course, there's a limit to how much we can do via slow steaming. But we'll now have an upgrade in the average size of our vessels, so we're taking out inefficient vessels, older vessels as we gradually introduce the Triple-Es into Asia, Europe. That will give us some help. We're doing a lot of retrofitting and trying to sail more smartly as well. The answer is yes, we will continue to push on this. We have been very, very successful in the past.
We've also been helped by low gradually dropping oil prices. Whether we achieve the same results going forward is probably not realistic, but we'll continue to push forward. In addition to that, we are sailing with very good fleet utilization. We take care that we also lay up vessels that we don't need and return vessels that we don't need.
Just Lars, to specify on the cost side on slide six, I think we are fairly transparent. We see a lowering on the bunker side, but we also see a lowering on the intermodal cost. We see an increase on terminal costs, and that's the cost element that actually goes up year-on-year on third quarter numbers.
Okay. Regarding your CapEx spends, I was a bit surprised to see that CapEx this quarter has been as low as it has. Apparently it seems that you are sort of getting more sort of I don't know how to put it, sort of at least your return requirements are implemented throughout the organization, which means that you are more sort of clever about how to spend your money going forward.
I don't know if you can give us any sort of ideas about are there any particular areas where you would normally have spent money on CapEx that you are not spending now? Also how that would look going forward. I'm particularly thinking about the terminal business where you have hinted early on that return requirements in the business in general are coming slightly down.
First of all, we are not reducing our return requirements in the terminal business, but we could imagine that we would have increased problems in getting the very high share of new projects that we've had in the past because of more competition from people with lower return requirements. We took the step back in 2007, 2008 to increase our return requirements in the terminal businesses and actually across the board. So far we've not seen any reason to lower it. We have a good investment pipeline and we're not seeing that we're losing share of projects as such.
For the time being, we maintain our higher level. Of course, we also have a very close eye on the fact that we need to produce a result in excess of WACC to satisfy our many investors and to be able to build up long term. We have tightened up, but it happened already five years ago. This is, I think this is what we're seeing slowly being reflected in the numbers. You can say the lower investment level in 2000 or in the third quarter, this is, we've had some delays in drilling rigs, construction, and that is probably more coincidental than anything.
Okay. If you look aside the oil and gas CapEx, I mean, you spent slightly less than $3 billion here for the first nine months, sort of a run rate around slightly below $1 billion a quarter. Is that sort of the level we should expect going forward?
Well, as I said in my intro, we do see that the fourth quarter CapEx is gonna be higher than the average level the first three. And that you can see on our guidance, is we're guiding around $7 billion in CapEx for the year, and we have spent $4 billion so far.
In addition to that, the figure we show is of course net CapEx. Small divestments and things like that will be taken out.
Yes, of course.
We actually have a good pipeline of hopefully high yielding projects for next year. We'll continue with reasonably high CapEx spending.
All right. Thank you very much.
Wing- Chun Mar from J.P. Morgan is on the line with a question.
Hi, good morning, everyone. Just want to think about the P3 in terms of the impact on your unit cost. Once P3 starts operation, how much of a unit cost savings do you think that could achieve? And also, how confident are you in getting the approval on P3? If you don't get it before Q2 next year, can you start operating under the P3 agreements anyway? Thank you.
Thank you for the question. If I start with the first part of it. We are of course confident to get the approval in the second quarter. At least very hopeful. We don't see any real arguments against the P3. As I said before, this is good for the customers, it's good for CO2 emissions, and it's good for general costs. We believe this is a win-win situation, and we hope that it will be approved. In terms of cost reduction, there will be significant cost reduction coming out of this. It will help us, it will help the other two carriers.
This is just a part of the cost reduction path we are on, and we will continue to reduce irrespective of P3 or not.
Just to follow up on that, so you said that the cost reduction could be quite significant, but do you think it would be something that is comparable to what you have been able to achieve so far in this year?
Well, if you compare our cost reductions over the year to last year, same quarter on quarter, I think it's $330 per FFE. This effect will not be matched by the P3 alliance. We'll continue to reduce cost, but P3 is just one thing that we need to do.
Okay, understood. Thank you very much.
Stig Frederiksen from Carnegie is on the line with a question.
Yes. Good morning. A couple of questions. First of all, on the bunker fuel price. You managed to take it further down in Q3 versus Q2, I think about $9 per ton. We haven't seen that from any of your peers. Any good explanation for that development?
No. I think the issue with the bunker and the timing of the bunker depends, of course, on when you buy and not on when you burn. So
Yeah.
What we have been burning in Q3 is actually mainly what we've been buying in Q2. That can be one reason. We don't hedge. When bunker prices go down as they did from quarter one to quarter two, we have an improvement. There's a lot of, I think, a lot of moving parts in the bunker consumption or bunker pricing comparison.
Another question regarding, you mentioned the intra both Europe and Asia business has been growing quite strongly, at least in Q2. Have you seen the same trend in Q3? I assume that has also impacted your rates in Q3, that you're still growing quite strong in these two regions.
Yes. I mean, intra Asia is a strongly growing region, and we're doing also well, very well in the intra Europe region. Yes, and that does give a negative impact, of course, on the rates because it's short haul business. It's not a huge effect.
Okay, thanks. The final question, Trond. You're guiding for a cash flow from operations of $9 billion, and you did around $7.5 billion in the first nine months. That is significantly down from Q3, where you did $2.8 billion or $2.9 billion. Are there any other things on the working capital, any things we should bear in mind when we look at your Q4 cash flow?
Not any significant elements. We do see the normal pattern throughout the year. We still see some effectiveness coming out of Project Fit in the fourth quarter. I do think that we are gonna normalize the cash conversion in the fourth quarter, so not any specific elements.
Okay. Thank you, man. Thank you, man. Thank you.
Douglas Hayes from Morgan Stanley is on the line with a question.
Yeah. Good morning. Two quick questions, please. The first, on the tanker investment that you guys, that we've seen in the press. You mentioned that it is for fleet renewal. Can you just give a little bit more insight into your decision process behind that? Because, with tankers, you know, continuing to have pressured results, where is the funding coming for these investments?
Yeah. This is a very simple answer. We have an MR fleet, which is aging. You'll have seen if you look at the invested capital, that tankers have reduced its invested capital quite significantly. This is just a necessary fleet renewal. We have about approximately 60 product tankers, and these are the segments we're going to renew. With this decision, we sort of renew about 6% of it. It's not a major decision. We're talking of investment below $200 million. I guess the funding is not a major issue, but Trond would like to add something.
Just to add. We do have an operational positive cash flow from the tanker business for more than $150 million. It's not like even though they're struggling with their EBIT numbers, the operational cash flow relative to actually having the ability of actually start the rejuvenation are there. It's not like we're cash flow negative from our operational efforts.
Okay, great.
You guys have been pretty clear that the results in container shipping are gonna be down in Q4 versus what we saw in Q3. Given the updated return targets, are you happy with that sort of seasonality in the returns, where during the peak season you can earn above the cost of capital, and during the down seasons you earn below so that net you do have the 8.5% return?
Yeah.
Are you striving to get the 8.5% across all quarters?
Well, I mean, the 8.5% is reflecting that we believe the next two-three years will be a relatively unfavorable period due to the supply/demand balance. It is also reflecting our intent to keep returns as stable as we can in the container business. We're a market leader. We have a better cost structure, apparently, than most of our competitors. We have a higher EBIT margin than most of our competitors. We believe this, given if we aim for an 8.5% return, that'll allow us to make a decent profit. At the same time, making sure that we don't have any incentive for overinvestment in the industry and hopefully cuts down on volatility somewhat. Having said that, we
Part of our strategy is that we have a very, very strong balance sheet, very high equity, and we are not worried about intra-year or even cross-year volatility in the business if it gives an overall acceptable average return. We don't wanna have a situation where we pressure our most client people to go for short-term above-normal profits because we're afraid that will lead to too much volatility in the industry.
Okay. Very clear. Thank you very much.
Finn Bjarke Petersen from Nordea is on the line with a question.
Yes, hello. A question about Maersk Line and the cost. In the third quarter, you're saying that you had $160 million lower bunker consumption. Is that something that we can annualize? Is that the level that we should look for going forward? Or how do you see that number develop?
Well
That's one question.
I think it's a little bit similar to the questions we had before. It's we will continue to focus on driving costs down, but giving any specific number for bunker consumption is very difficult. There will be some technological advantages in our fleets where we get the Triple-Es in. We retrofit a number of vessels with optimizing the effect we get from the lower speed. We improve the way we or we take out some of the worst vessels consumption-wise. Giving any specific targets or objectives for this is really very hard.
Just to add in, there is also a utilization effect because we have come into a very good third quarter when it comes to ramp up of the volumes, and we will have seasonality effects into that cost per box into fourth and third quarter, first quarter. Even though the overall nominal consumption is not gonna have that effect, the per box effect will, of course, be a part of the utilization.
Okay. That was my second question, actually. That was the utilization. You mentioned yourself, you have a high utilization, you know, chance of it to trend. If we go into next year, would you be able to meet the demand with the current capacity? Or should we aim for more capacity, is that the cost base will, in nominal terms, increase in that case?
Well, we will predict next year, when we're into it and well into it. As you know, in the container business, it's really difficult to predict. At the moment, with our expectation on new vessels or plans for new vessels coming in, and also of returning vessels to the owners in case they're not efficient for the future, we are confident that we'll be able to meet demand. It is not our intention to go out and seek lower capacity utilization, for sure not, but also not a higher market share.
Okay. We could look for a total cost base that is more or less unchanged. Is that the answer?
No, that's not the answer. We're not guiding on it now.
Okay. Thank you very much.
Gianmarco Bonacina from Equita is on the line with a question. Gianmarco, are you on the line?
Yes, sorry. Couple of questions. The first one is about the oil production. Basically, if I do the calculation right, you are guiding for a production in the fourth quarter of about 245,000 barrels of oil per day.
The 15,000 increase is mainly due to the shutdown which had a negative impact in the third quarter. Going in 2014, would you say it's fair to say that you can have from this 24,000 additional growth coming mainly from Algeria and maybe a little bit from the U.K. The other question is just a follow-up on the tax rate. You mentioned the 80% tax rate in Maersk Oil in the Q3 because of some costs which are not tax-deductible, but I didn't understand the indication for the next two, three years. Do you expect the 80% tax rate to remain for a couple of years?
Already next year, this should be a little bit lower and more in line with the 73% which you reported until recently. Thank you.
Thank you. You almost answered your question yourself. We do expect an increase in production next year, but it's not going to be linear in any way. It's going to be. We'll have differing production rates from quarter to quarter because of maintenance and other close downs. Potentially also production disturbances as can happen when you operate offshore. But we do expect improved production. Then of course, we will have a positive effect from El Merk, hopefully next year. Then we also expect the Jack field in the U.S. and the Golden Eagle field in the U.K. to start production late in the year.
Maybe not an effect in 2014, but at least preparing for a further positive development in 2015. That's more or less where we are, and Trond will comment on the tax rate.
Yes. As we have stated earlier, our average tax rate in the countries that we are having revenue base is approximately 60%. As a result of growing costs in the new countries like, well, basically also Brazil, U.S., Angola, and also the Iraqi Kurdistan, we are having costs that we are not having a tax asset applied to it. As a result of that, we are coming towards the 80% level. We are not guiding on. As I also said, the effective tax rate for in oil and gas during the year is gonna not be up at the 80%. It's gonna be short.
We expect it to be short of the 80% level in average, but it is gonna be high on the 70% level. Going forward, that means also that until we are getting revenue streams in the countries that I mentioned, U.K., U.S., Brazil, Angola, and Kurdistan, that will, of course, we will maintain the high tax rate until that time. It will go on for a period, but I'm not guiding on how long now.
Okay. In any case, say, in the mid to long term, by, let's say, the end of the decade when you will have all the production in these new countries, the operating tax rate should be actually closer to 60% than to 70%.
It will come down, as I said.
Okay.
In our operating countries where we have revenue stream, the average tax rate is about 60%.
Okay. Thank you.
Dan Togo Jensen from Handelsbanken is on the line with a question.
Thank you. A couple of questions from me as well. On your oil side in Angola, you are now filed for the development of Chissonga. Could you give some indication of when you are prepared to provide more data on Chissonga and also some flavor on Cubal? How big is that compared to the whole project, just a ballpark number?
Well, Cubal is a nice find. We still need to do an exploration well, one additional appraisal well to establish more precisely what is in there, but we already believe now that it's commercial as a tie in to Chissonga. When we go out in the ordering phase, we'll come up with more details, but we need the approval from the government first.
How long is that process?
Well, that is difficult to say. We are aware of companies that have had significant delays in Angola. I'm not going to volunteer an exact timing now. We hope if everything goes smoothly, that we may be able to produce very late in 2017. We'll have to see.
On the guidance, could you provide some flavor also there? Or is it fair to say that the $200 million lift in your net profit guidance for 2013 is primarily relating to a more solid performance in Maersk Line, which is more than compensating for a slightly weaker performance in oil? Is that fair to say?
Well, no, because we actually expected a result in line with what we're getting in Maersk Oil. We had maybe we could have dreamed of a few thousand barrels more. That is partly due to the higher oil price, which automatically gives us a lower share of production in Qatar. But that is being compensated by the better price in the rest of the businesses. Oil is actually in line, but we have seen progress in excess of what we expected in the third quarter in Maersk Line. Also, if you look at the smaller businesses, they actually come in quite a lot better than last year. It's broad progress throughout the organization, and that is that.
We still foresee, as I said before, the lower freight rate on average in the fourth quarter. As the first November rate increase will not have effect until December, that will have a negative impact. Plus the fact that we now start investing quite a lot in the start-up of new rigs, which will impact the Maersk Drilling result for the fourth quarter. Third quarter is the reason, and it's great, but the rest of the year stays on plan.
A question on the tanker side. You are now increasing your CapEx year, investing in new vessels. With a return on invested capital of just 2.5% here in the quarter and coming from negative. They are, so to say, not really adding value as it is right now. How will you finance these investments? Is this business unit required to, so to say, self-finance the new investment, hence selling off assets in order to make these investments? That's one thing. How do you view the market for 2014 ahead for product tankers? It seems like the industry is over-ordering, or at least there is a risk here for that.
Yeah. I think it's difficult to predict the future also in tanker markets. There has been quite a lot of ordering in the product tanker area. We're not planning to increase our exposure to tankers to product tankers. We're renewing the fleet. When we find it necessary, we're also reducing the number of time charters. In that sense, we're actually not increasing our commitment. As Trond said before, tankers do provide a positive cash flow, so this is self-financing. I mean, it is, we're talking 4 MR tankers, so this is really peanuts.
In addition to that, the last 12 months, we have reduced the invested capital by $1 billion.
Right.
Tankers are definitely providing a lot of the capital to the rejuvenation of the remaining product tanker fleets by themselves.
Okay. Just one final question on Maersk Line. You're right now entering negotiations on annual contracts for 2014 in the Asia-Europe trades. How should we view these contracts compared to what you got last year for 2013? We have also seen restoration of rates as of November 1. Might be looking at a better balance in 2014. How should we view these annual contracts and the outcome of that with a slightly positive bias, or how can you give some flavor on that?
Dan, this is a really difficult question to answer.
I know.
We're not guiding for 2014, as you know. If you look at the industry, it is making probably around 0% EBIT. Or at least very low, very, very small, if any, profit on average. That to me indicates that the rates throughout this year have not been sufficient to merit continued investment in the sector. That is a general sort of observation. We all know that this market is hard to predict. From a long-term perspective, the profitability in the container business is at a very low level. I mean, this is not sustainable long term.
Whether this materializes as better rates in 2014 or later, I can't tell you. As it looks at the moment, I think our peers will look for better rates. Of course, so will we. Having in mind that we're not going for huge jumps or high volatility.
Thanks a lot.
Today's last question comes from Joel Spungin, Merrill Lynch.
Yeah, good morning. Just a couple questions on Maersk Line. Actually very straightforward. First of all, I was just wondering if you could elaborate a bit on the volume growth actually, which was I think stronger than most people were looking for, and particularly the strength of the Asia-Europe volumes that you highlight. That was my first question. The second question on the cost savings. Again, on the intermodal costs, you've done another good job in the third quarter reducing those. Are we reaching a point where you can't push those costs down sort of any further, i.e., that you've done everything you can do there.
You know, I think just finally on the drilling business, could you just say in terms of the delays you highlight with the new vessels coming online, you sort of give us a bit more clarity in terms of sort of whether this is just a couple of months or whether it's any longer than that?
As to the drilling delays, as we see it at the moment, this is just a matter of a month. So nothing really to worry about. But it is frustrating, and it means that our start-up cost will increase because we need to keep the crews longer on pay. We have to have well-trained crews when we send out the rigs, and then they have more waiting time and more training time. Trond would like to add something.
No, it's just to say that it's not the yards, this time. It's actually the product providers. That is actually, the ones that is, causing, much of the delays.
To volume on Asia-Europe, this has actually surprised us positively as well. We believe it first of all compares to a very weak season. I mean, this is supposed to be the peak season. Last year we had almost no peak season. This year has been better, so that's one thing. Then we believe that there's a bit of moving stocks around. This is not reflecting a certain upswing in the European economy as we see it, but of course, the situation is more, we are more optimistic and everybody are more positive than they were a year ago, which has given a better peak. The business to the U.S. is below last year. Here you can say the opposite is true.
Better GDP figures, but not really giving the lift in volumes that we expected. It just underlines how difficult it is to forecast how the trade movements are. In terms of cost, as you asked again, also you asked for, I can't really say much more than I've said before. We will continue to push down cost, but it's really hard to predict how far we can go. I think.
Okay, thank you very much.
Yeah.
Sorry.
I think that concluded the Q&A session for today. Thank you for many good questions. We tried to answer them as well as we could. We'll be much smarter when we meet in three months, so hope you'll be on again. Thank you for listening patiently into a pretty long presentation on the quarter. Have a good day. Thank you very much.