To the A.P. Møller-Mærsk Interim Report Q1 2013 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If you have a question, please press star then one on your touch tone phone. Please note that this conference is being recorded. A replay will be made available on maersk.com. I'll now turn the call over to your host, Group CEO, Nils Smedegaard Andersen. Sir, you may begin.
Thank you very much. To all the participants, I'd like to welcome you to this Q1 results conference. Of course, it's coming relatively shortly after the annual conference, so I can't say we have an awful lot of news for you. I'll just say that we are pleased, and in the meantime, you can read the forward-looking statement on page two while I speak. We are pleased with the results progress. As you'll recall that the results last year was slightly high or was higher, but that was caused by extraordinary one-off items such as the tax gain in Algeria, as well as gains on sales of various smaller assets. We're very pleased with that.
The progress has been driven by Maersk Line, as you'll see when we go through the presentation. Maersk Line is of course facing some price aggressiveness at the Asia-Europe route at the moment. These are things that happen, but they have done a tremendous job on adjusting their network and reducing costs, so we're quite comfortable. They will get through this period in an acceptable way as well. Price wars will happen once in a while in the container business, especially as long as there's significant overcapacity. We're also pleased that the drilling business is reporting progress in earnings after the hiccups we had last year. This is not driven by new rigs in operation.
It's simply very good figures for uptime. All in all, a good start to the year, but of course, it is just a quarter, and we have a long year ahead of us. Taking you to page slide three, if you don't mind. Just reiterating that the profit for the first quarter was $790 million, and ROIC was 8%. We hardly had any extraordinary items in the quarter, so it is a purely operational result, which we consider satisfactory, given that we are still having overcapacity in the whole shipping side. As I said before, Maersk Line reduced its cost mainly through vessel network efficiencies.
There was a small rate increase compared to the year before, but we've also worked actively, being quite active on the capacity adjustment side. We reduced the capacity in Asia, Europe significantly, and we had at the end of the quarter 28 ships idled, corresponding to 6.5% of our fleet globally. We responded to the slowdown in the markets by taking capacity out, and that is of course what has enabled us to post a positive result and also a better result than what we've seen so far from the other players. Maersk Oil executed well on two or had two development plans approved. One was Balloch.
That actually went more or less straight into production, so it produced the first oil last year. It's a small field in the U.K. North Sea. We also got approval from Tyra Southeast. There's some on our intranet you can see some links to that field, which is a relatively large investment in the Danish North Sea. We finally had the Irminger field on stream after some delays, and we expect to ramp up production during the year. That's a small bit of good news. Our entitlement production declined compared to last year, quite in line with plans to 239 bbl of oil per day.
When we adjust for the increased or for the passing of ownership in the Danish North Sea from the DUC participants to Nordsøfonden, actually, the production stabilized, and we're pleased together with the 2P reserve increase. These are indications that we are heading in the way that we've been predicting, which means stabilizing production during 2013 and then gradually becoming a growth business again from 2014. We're pleased with that as well. APM Terminals and Maersk Drilling are both on track, and that's positive as well. The first results of Project Fit are being seen as the net debt declined by $1.1 billion during Q1. If you go to slide four, we have the group financial highlights.
Profit down from $1.2 billion to $800 million. As I said before, excluding the one-offs, it's actually up from $25 million to $765 million, driven by the good results in Maersk Line and a small decline in other businesses. Free cash flow was up to $926 million, up from $300 million last year. All in all, a positive picture. If we go to the bottom part of page four and look at the development in the different businesses. Maersk Line has an increase of $800 million in profit, which we think is a great result.
Also considering that not just comparing to last year, where, of course, first quarter was very, very poor. Generally in the container trade, first quarters have not been great quarters. We're very pleased with that. Maersk Oil had an increase in its result. This is mainly caused by changing or reduced depreciations. Of course, the decline in production does reduce the underlying result really, when we take that into account. APM Terminals, a small decline, I would say in line with last year. APM Terminals has been stable in the first quarter. Negatively affected by slow growth or declines in the European trade, and some internal or some loss of sales in the U.S.
The push into growth markets have not yet taken full effect. I'll come back to that later. We are, of course, still compared to the market, relatively strong in Europe. Maersk Drilling is up against last year at a nice growth, and not driven by new drilling rigs coming on stream. All others are down, and this is, for all relevant purposes, caused by currency effects. There's also, of course, a negative effect of Maersk FPSO and LNG, which is no longer in, so we took the sales gains last year, and this year we have less sales in that or less business, of course, in that area.
Let's go to the next slide five, which is dealing with Maersk Line. Really nothing negative to say in the first quarter. The unit costs are down by 7%, mainly driven by better network efficiencies and reduced capacity. And also a higher share of short sea business. The East-West trades are developing less well than the intra-Asian, intra-Europe business. Of course, here, both cost and rates are correspondingly lower as they're much shorter trips. Freight rate increased by 4.7% year-on-year. But there was decline by 2.7% compared to the last quarter in 2012. Volume decreased by 4% year-on-year, but was up on the last quarter last year.
We had a reduction in our market share compared to Q1 last year. We feel that we are more or less in line with the average for the year. Things are looking good in Maersk Line for the first quarter. As I said before, we are now in a period where a part of our business is affected by the price war in Asia-Europe. We have relatively good contract coverage, but of course, the spot part of our business is negatively impacted. We're not leading the price war at all. We are reluctant following price reductions of others. We are, of course, not prepared to give up market share on a permanent basis. We will adjust.
If we take the most recent developments, and that's on page six, for Maersk Line, then we have reduced the number of slots in the Asia-Europe significantly as a consequence of the declining market. Our ships are actually sailing with relatively good capacity utilization, which is helping us to adjust our cost and a major explanation behind the good figures on cost and product profitability in the first quarter. Of course, we have taken a number of initiatives to improve rates. The most important for the first quarter was the increase of our general rate increase for the reefer business.
We have been relatively successful in introducing that on the North-South trades, but have to accept that we have had limited acceptance on the East-West trades. All in all, combined with volume loss we've had as a consequence of being a price leader in this segment, we have not had any positive impact or negative impact in the Q1, which we would have liked to see. Given that the cost for reefers continue to be high, also energy consumption during transportation, and as well as high investments, we will continue to push for higher reefer rates. We think these are long overdue in the business.
We will take delivery in the quarter. The first vessel in the Triple-E series will come in this quarter we're in now. There's no change to our plans to introduce the five vessels we're receiving this year with a lot of respect for market balance. If there's one thing the Asia-Europe trade does not need at the moment, it's more capacity, and we will take care that we are not the ones that are pushing additional capacity into the market to any significant extent. We placed no newbuilding orders in the first quarter. We have no plans to place any this year in the container business. We, by the way, didn't order any vessels either in 2012.
We are expecting slow growth, not just this year, where we lower our forecast for container volume growth to 2%-4%, but also going forward. Even if the economy improves, we do not see any return to the historic growth rates that we saw leading up to the financial crisis in 2007. Yeah, I think that was what I wanted to say on this slide. As you all know, we have a number of carriers are now announcing rate increases to take effect by first of July. We're doing that as well, and of course, this is urgently needed for the industry.
As we can see our competitors that have come out with relatively poor results for the first quarter, or very poor results from the first quarter this year. Rate increases are definitely needed. Going to slide number seven, the Maersk Oil slide. The profit of $346 million was negatively impacted by lower production share, slightly lower oil prices than the same quarter last year. Of course, the first quarter oil prices were still very acceptable, and actually a little higher than the rates or the prices we see today. Going back and remembering the comparison, of course, the significant one-off effects last year from the tax settlement, et cetera, is need to be taken into account.
I've already commented on the share of production. It's a 6% decline to 239,000 bbl per day. No further comments on that. I've already also mentioned the increase in 4P on 2P reserves by 4%. This is, of course, a small figure, but it is sort of what we see, the first careful indication that we are moving towards becoming a growth company for Maersk Oil. This is definitely not any win we can take or that makes us take anything for granted, but it does indicate that we will be able to return to growth during 2014. We're very happy with that. The El Merk field went o n stream.
I've commented on that as well. Commented on Balloch. Nothing really important on this slide, apart from what I'll touch upon on the next slide as well, is that we've Elly‑Luke project offshore Denmark, which you saw in the Capital Markets Day being rather prominently exposed as a big gas find. We've taken that out as given that with the current gas prices and the Danish taxation, this is not a commercial project at the moment. Even if we maintain our objective to reach the 400,000 bbl of oil production per day in 2020, of course, it has to happen on commercially good terms. We only invest when we expect good returns.
The last point on this page is that we expect a CapEx to be in the level of $2.5 billion this year. This is slightly lower than what we sort of guided very generally at the Capital Markets Day. Going into the key projects, we have El Merk, Dunga on production as well as Balloch, which never really entered into any sophisticated charts because it went more or less straight from find to appraisal to production, but it went on stream in the first quarter or the second quarter here. We got approval for the Qatar FDP 2012, and that is moving ahead. We are planning drilling and contracting drilling at the moment.
This is quite exciting. Really no comments to the rest. This will be in line with what you've seen before. Much for that. I will have a few comments on the Maersk Oil portfolio on page nine, where we list in line with what we showed at the Capital Markets Day, the status of our different projects. We have drilled some prospects. The number of prospects is going down actually from 120, if I'm not mistaken, to 110. Some has been merged, some has been taken out.
But there's a slight reduction here. If we go across the project maturation process, I would say the most important moves are that Johan Sverdrup has moved into the select phase. This is operated by Statoil, so I have no comments here really. We expect them to come out and publish more details on this as we go into 2014. Chissonga is moving closer to definition and approval phase, so we expect to come up with some news on this during or actually have an approved project around the end of the year.
These are the main changes to this, and I think it's a good reference for you to have when you look at our execution capabilities going forward. We feel that there's a lot of good projects and prospects in the pipeline, so we feel really confident that we will be able to enter the growth phase from 2014. If I go to the reserves and resources, these are the second time we publish them. They have been audited by Ryder Scott, so they are, I would say pretty hardcore, very hardcore reserve and resource figures. We're pleased with the development in the proved and probable reserves of +4%.
We would of course have liked to see a better development in the reserves and resources, but this is partly affected by the Elly‑Luke change. This is also a figure that is, of course, will be moving up and down following successful exploration and moving resources into reserves. I'm sure we'll see good development in that going forward. I think that was the comments on this page. If you have any questions, we'll be happy to answer them, of course. Moving on to APM Terminals, where we had a pretty quiet quarter. Here the headline NOPAT is down.
The reason for that is basically that we sold the U.S. chassis business last year, and we also sold a share of a Chinese terminal. So when we adjust for that, the underlying decline is $5 million, and we're not worried about that. The decline in the European business in overall volumes and imports into Europe has been significant, and we expect APM Terminals to return to a positive development in the coming quarters. We also expect to go on stream with the Santos Terminal. It's been completed. We are awaiting dredging that has been promised from the authorities, and which is delayed. We're also waiting for an approval from the authorities, which we are certain will come, but which is also delayed.
We do expect start-up on a reduced level during Q2 this year. Of course, it's rather frustrating with the delays we faced in Brazil. I do understand, however, that we're not the first company in the world being in this situation. Frustrated as we are, we look forward to finally getting it opened. In addition to that, we signed a strategic partnership agreement with Turkish-based Petkim. We'll now start c onstruction and start operating in Turkey as well, another step in coming and strengthening our position in growth markets. Going to slide number 12, Maersk Drilling. Here all figures are positive.
The 19% growth in profit of the first quarter is driven by better uptime, and there's no effect from new rigs, as I said before. We're really very pleased with that and have complimented the management of drilling on that. I think it's a great result. We have very solid contract coverage going forward, and also on the new rigs that are in construction, of which we expect to take delivery of the first one in late this year and the next two in the first half next year. They're progressing well or as we understand it, on plan. That's all very positive. We have contracts for five of them and discussions are ongoing on the last two.
Maersk Drilling really a very positive development in the first quarter. Going to the opportunistic core businesses, where the picture is a little bit more diverse. Maersk Supply Service has been positively affected by better rates than last year, which we also expected actually. We always felt that 2012 was a bit of an outlier with very low spot rates, because there was an unusually large inflow of vessels into the North Sea. Good positive development. I would say here probably a return to normal. Maersk Tankers have improved their cost efficiency of operations and some rates are also slightly better than last year.
Here there's an improvement in the result, which we're of course pleased with. We're still not pleased with the result. The tanker business continues to be very difficult. Damco, a small decline. There's no doubt that this market is under pressure also from less Asia-Europe volume than usually, which is traditionally a very strong forwarding business. Damco is on a good track, and we have a good confidence that they will improve their figures as we move through the year. Svitzer, we have a slight decline in result as well, hardly worth mentioning, but it's basically caused by less salvage business than we had last year in the first quarter.
Moving to strategic investments and others, and whereafter I will be pleased to leave the word to Trond Westlie, who will take you through the figures. Just before that, Dansk Supermarked good progress. Dansk Supermarked is in what I would call a revitalization plan. That is of course needed as the retail sales in the markets where we operate are generally not very bullish. The consumers, in particular in Denmark, are still justifiably probably very careful with what they spend. Progress in the earnings, and we're pleased with that. Danske Bank is also progressing well, which is of course also good for our results.
Other businesses and unallocated are down, and that is, as I said before, an FPSO result of having divested the FPSO business. There's, when we come to this consolidation of all figures, also an effect from the exchange rates. With those words, I'll leave it over to Trond to sum up and on the figures and give us a view for that.
Good morning from me as well, ladies and gentlemen. I'll go through the consolidated financial information on page 15. If we start on the top on the first quarter of 2013, the revenue is slightly higher than $14 billion. It's coming down $280 million from last year. The main drivers on that is of course the oil price and the entitlement production as well as the sold businesses from last year. Another element is due to the decline in volume year-over-year in Maersk Line as well as the slightly increased rates. The Maersk Line is on the level of revenue from last year.
That leaves us at the $14.047 billion. The EBITDA goes up to $2.9 billion. Of course, it is the big improvement in the Maersk Line, but also the element that many other business units are steadily growing their earnings as a result of growing the business. We see an underlying positive trend. Depreciation is slightly down with $140 million. Mostly comes out of the oil and gas element in first quarter as a result of fully depreciated assets in the oil and gas element that will basically come back to the normal level next quarters. Leaves us at an EBIT of $1.941 billion.
The finance cost is $251 million this quarter. It has a negative currency impact of approximately $50 million. That leaves the underlying sort of finance cost on the same level as last year because then we had a currency positive element of approximately $40. That basically leaves us as a steady rate of around $200 million a quarter. Taxes is going up but that is due to the Algerian tax ruling in 2012. The underlying tax rate is basically on a more normal course as a result of non-one-off items in the first quarter.
Leaving us at the profit for the period of $790 million. As Niels also mentioned, if you exclude the one-offs and look at the underlying results, we have a result this quarter of $760-ish million. The number for first quarter 2012 was basically a break-even number. It is a very good progress compared to 2012. On the net interest-bearing debt, I'll come back to that in the next slides. Earnings per share is $163, and the return on invested capital this quarter is 8%. If you then go to slide 16 on cash flow and debt. The starting point of 2012 is now $14.5 billion. When we presented the year-end results to you.
The net debt was $15.7 billion. As a result of the introduction of the joint venture rules in IFRS, the $15.7 billion has been changed down to $14.5 billion as a result of the change in the accounting methods. Going from $14.5 billion, you see that we have reduced the net interest-bearing debt by $1.1 billion in the quarter. You see the sort of cash flow at the bottom. The main elements here is, of course, the earnings, as well as the change in paid CapEx during the quarter. That leaves us at the $13.4 billion at net debt. Going to page 17 on the outlook.
The outlook is the same as in February, both for the group and the business units. We still believe, expect the result for 2013 to be below 2012 result. Having said that, the operational result is expecting to be in line with 2012 when we exclude the impairment losses, divestment gains, and gain from tax settlement in Algeria. The only element of change in this outlook is the view that we have on the total market growth in the container industry. We have now decreased our view that the global demand for seaborne container is expected to increase by 2%-4%, and the number previously were 3%-5%. That's the only change in our outlook statement, so I will leave the rest of the reading on the details in the outlook statement to you. With that, we will go over to the Q&A.
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 then one on your touch tone 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 speaker phone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then one on your touch tone phone. Robert Gillam from McKinley is online with a question.
Good morning, everybody. I've just got one question on Maersk Oil and then two on Maersk Line, if I may. Just starting off with Maersk Oil, could you just remind us what the current contract coverage is there at the moment and also maybe give us some guide as to what the average duration of those contracts is? Then just the second question on Maersk Line. Is there any reason to expect that the revenue benefits from higher reefer pricing could accelerate as 2013 progresses? Thank you.
Starting with Gryphon, there's no impact in the first quarter of any significance. In terms of the contract coverage for Maersk Line, it's generally, as a rule of thumb, higher than our competitors, around 50%. In general, Asia/Europe, you'd have, you can have basically anything from a quarter to a half year to a year. A big part will be yearly contracts. I didn't quite understand the issue with reefers, the reefer price increase, whether it would prolong the price war. I don't think that will have any impact on that. We've had issues in getting the reefer increases through in the East-West trades, which includes Asia/Europe. The pricing environment there, of course, is aggressive. When that sort of normalizes, we assume that there'll also be possibilities for better reefer rates.
The question though, it was actually more concerning the run rates of the benefits from higher reefer pricing. Like, would you expect, for example, that the benefits from higher reefer pricing will be greater in Q2 or Q3, compared with Q1?
We expect a gradual increase in the impact. Really, yo u can say if there's no positive impact during the forthcoming quarters, what we will see the impact will be on less CapEx spend for new containers.
Okay. That's very helpful. Thank you.
Dan Togo from Handelsbanken is online with a question.
Thank you and good morning. Your guidance in Maersk Line, you mentioned yourself that rate recovery or rate restoration is needed. How much do you factor into your guidance in Maersk Line? Is your guidance dependent on rates coming up in Asia/Europe in particular for the remaining part of 2013?
Dan, we can't, we haven't specified it further. I mean, we are early in the year. Everything in the line of business is very uncertain this time of year. We do expect and we do probably need some rate restoration to come in order to meet our guidance, but it's nothing that I can really comment on.
Okay. Then a question on reefer. You mentioned yourself that the GRI had more impact north, south and east, west, but could you give a split on your volumes? How much is east, west, and how much is north, south?
Could you just repeat that, sorry?
Could you give a split on your reefer volumes? How much is north, south, and how much is east, west?
Not really, but of course, reefers are more than dry exposed to north, south, as we have big reefer areas in like South Africa and Latin America, being very important, but I can't give you a split.
Okay. On your reserves, could you mention, or at least, give some indications, which projects are close to having large effects on your 2P reserves here in 2013 and 2014? Basically, what could we expect for the 2P reserves going forward? You mentioned yourself to lift the 2P by some 4%, which is, as I say, modest. What could we expect going forward? Which projects could significantly affect 2P reserves?
Well, without discussing timing, but of course, when you have big projects like Chissonga and Ivar Aasen moving towards approvals, these are things that will affect the reserves.
Okay. One final question on Chissonga. We've seen some delays there, and we've also seen others that are active in Angola having significant cost overruns on their projects there. The delays we are seeing from your side on Chissonga, is that affecting the costs down there so far, or are you still on track, so to say, budget-wise in Chissonga?
Well, we don't know yet. We are only in the phase where we define how the whole project is going to look and discuss that with Sonangol. We're not in the contracting phase yet, so we can't say what the prices are going to be. I mean, we are aware that there's a lot of bottlenecks in the whole offshore construction industry at the moment, and prices are high. Prices are also historically high for drilling activity, which is a main part of these projects. Chissonga is not going to be a low cost budget of course, unfortunately.
And then just one fi-
This is nothing new.
Okay, thank you. Just one final question. You lose some market share in containers here in the first quarter, and you mentioned yourself that container market growth would be around 2%-4%. How do you see your market share from now on in the remaining part, 2013? Will you continue to be behind the market, or how do you see that develop?
Well, in general, we've said that we don't want to see a decline in our market share. We don't try to manage that on a month-by-month basis, of course, but our best guidance on the market share for the year will be that it'll be in line with last year. Don't forget that we had a very high market share going into last year.
Thank you.
Christopher Combe from JP Morgan is online with a question.
Good morning, everybody. The first question's on liner. If we look thus far in the second quarter, to the extent that the CCFI is indicative, it's down about 7% versus the average in Q1. How indicative is that of what you're experiencing? Also related to that question, you mentioned you're reluctantly following others who are slashing pricing. How far would you go, and are you reassured at all by the depleted balance sheets from your competitors and how that might reduce appetite for a 2011-type price war?
The way we see our situation is that we have. We're not. I'm obviously not going to comment on rates for second quarter. We see that we have a slight advantage of better contract coverage, and we also, in general, our prices are slightly better than spot. That's a comment to the first. We are not reassured, you know, in that sense by depleted balance sheets and so on, because the shipping industry continues to amaze. Having said that, we are profitable in the first quarter. Our competitors that have published, I believe have all lost money. We also made money last year where the industry on average didn't make any money.
We take comfort from the fact that we have a higher margin and better returns on assets than our competition on average. Therefore, we believe that when we have a tough time, our competition have a very bad time. Of course, there is a limit to how long any sensible businessman will want to sustain rates that are not profit making. But having said that, I also believe that people have been a little bit surprised by the decline in Asia-Europe volumes, and looking at their own declines, they thought they were losing market share and then reacted to that by cutting prices. That's the only explanation we can see.
The way we've done it is we've expected some decline and then we've taken out capacity, and which means that we've actually had pretty good capacity utilization, and then we've taken the gains on the cost side. Some of our competitors are doing differently than that, and they're paying the price.
Okay, that's clear. With respect to the first quarter, how much upside can you quantify or give some sense did you see from legacy rates rolling off and being able to fix at higher levels? You expect more of that going forward into the second quarter?
Yes. I think you can say that we're through that upside potential with legacy rates. Now, the spot rates are generally below our agreed rates. So there's no more upside, unfortunately. We did have low contracting rates going into 2011 or 2012, and that's why we see a lift in the average price. In spite of a larger share going on short sea where prices are lower.
Thanks. For the very last one, unit cost savings. I think one of the slides mentions that there's a limited scope for further gains. Is that to say you're comfortable with the current absolute level of unit costs?
Well, we.
Is that true for the rest of the year?
I will tell you that the day I retire. This is our job to continue to bring them down. There is, of course, more scope to do that. It's our job to find it. We have actually been positively surprised, all of us, by the steep level or reduction we've seen, so. These things will sort of come in steps. We're not having a lot of plans to see short-term actions on this. We're very pleased with the quick and effective implementation.
Okay. One very last one on reserves. Can you quantify the impact of the Elly‑Luke effect on the reserves?
I can't quantify it on reserves, but just say that it was, if you recall, the Capital Markets Day was pretty significant red, which means gas. Gas development that we've decided not to do simply because of economics. It will have a negative effect, not on reserves probably, but mainly on resources.
Okay. Thank you.
Stig Frederiksen from Carnegie is online with a question.
Yes, hello. Just one question regarding Chissonga. Remind me, you have now finalized all exploration and appraisals at Chissonga. I'm sure you're not gonna give me any numbers on Chissonga. What are your feeling about Chissonga compared to when you started out all the projections about Chissonga?
Well, Chissonga went through a phase where it grew very nicely because we had a lot of successful appraisal wells. The last one gave a little bit less than we expected. It's a big find. It's a big field, but we would have wished it would be slightly larger. I'm not talking about twice the size or anything like that, but it could have been somewhat larger. We are still doing exploration in the area.
You'll see that some of the drilling projects that we have in our pipeline is drilling or will be drilled very close to Chissonga, and then you can say, what is Chissonga and what are adjacent fields and what are other fields. We still have hopes that we will be using the facilities there for bigger volumes than Chissonga in itself. Chissonga will be a very nice standalone business development of significant size. Probably a little less or a little smaller than we hoped at the Capital Markets Day.
Last question. Maersk Drilling seems to be doing a great business now on the cost side, and then by that, the earning side. Remind me, when it comes to open contracts on the new deliveries, you earlier mentioned, I think you had two open contracts yet.
Yeah.
Are they still open or have you closed all the new buildings?
They're still open. These are the two last drill ships we get delivered. Of course, we have more than a year to find work for them. The market is quite buoyant. We have no doubts that we'll be able to close contracts for them before they are delivered.
Thank you very much.
No doubt, maybe pushing it, but we are confident.
Joel Spungen from Merrill Lynch is online with a question.
Yeah. Good morning. Just two questions. First one is on market share. I think you said that you within Maersk Line would look to sort of defend your market share. I mean, looking at the first quarter results, you've obviously sacrificed market share. In return, you seem to have sort of been able to drive up your average returns and so on. I'm just wondering why the desire to defend market share at this lev el? I mean, if the lesson of Q1 is that you can sacrifice some low-quality business, why not continue to do that? That's my first question. My second is just on rate increases in Asia, Europe. I think there's one planned for the beginning of April.
Can you tell us what confidence you have that this rate increase might be more successful than others we've seen in the past few months?
I'll start with market share. Yes, you have a point that you could of course give up market share gradually, and you, if you always gave up the worst, the poorest performing market share, then you would end up with a very profitable business. I think the real world plays out a little bit different. We see an advantage in having a significant market share where we play. That's not what was behind our decision to reduce capacity at the beginning of the year. What we saw was an expectation of declining volumes, and we adapted our network to that.
I think we probably read the market slightly better than some of our competitors, which helped us very well on the bottom line. We actually didn't give up any market share, because we just had better capacity utilization than the average. Our market share is not down compared to the second half of 2012. We didn't feel we sacrificed any market share. We just felt we adapted capacity the way everybody should do. The rate increases, yes, the rate increases that you mentioned at the beginning of April, did not come to fruition. I think this is just a matter of when the industry realizes that they have to increase rates in order to save results and balance sheets and survival. I can't tell you exactly when that comes, but our bet is that it will be on July first, where a number of carriers have announced significant price increases.
Yeah. Thank you very much for that. Just one quick follow-up, actually. Just in terms of the new Triple-E class ships you've got coming on, you mentioned about how you would have to manage that additional capacity. Can you tell us, you know, how you would go about doing that?
Yes. There are various ways. We have still a number of subscale vessels operating on Asia-Europe. So we will take them out, and some we'll put somewhere else, some we'll scrap, and some we'll return to the owners.
Okay, thank you.
Dan Pedersen from Nordea is online with a question.
Yes, good morning.
Dan Pedersen from Nordea is online with a question.
Yeah, it's Dan Pedersen here. Two questions. First, on the reefer. How much reefer volume have you sacrificed for getting rates through on the North-South traffic?
Well, it's hard to say because this is something that changes on a week-by-week basis, and we did sacrifice quite a bit in the beginning. I think things are gradually normalizing, so we'll see better reefer sales figures.
Have you, have-
This is as close as I'll get it.
Okay. What about the reefer rate increases on North-South? Could you say anything about the success rate there?
Well, just what I said before, we've not been very successful. That means, doesn't mean that we haven't had increases, but we also had declines in volume. We didn't find that, I mean, it definitely has not benefited the first quarter.
Do you see any time in the horizon when you will succeed in this trade?
Well, like we do in our normal container rate strategy, we will continue to push for this. We believe that the reefer rates have been stable for seven years until we came with our rate increase, and we feel that that's absolutely not justified when you look at the investments and the costs that are tied up in this business. Just a general statement that we would like to see higher reefer rates, and we'll pursue the opportunities we get to improve our profitability in that business.
A final question on the backhaul rates, Europe, Asia. How are they developing, and what about volumes on this trade?
Well, we've decided not to go into breakdown on different trades. If you look at it over a longer period, the backhaul rates have been moving quite positively. That doesn't mean that they are attractive, but they have, at least they've come up from where they were at a given point in time. We'll continue to work on that. It's again a matter of whether you take cargo or you don't take cargo, at what prices. It's very operational, and I think not for me to comment on right here.
Thank you very much.
Gianmarco Bonacina from EQUITA is online with a question.
Yeah. Gianmarco Bonacina from EQUITA. Few questions. The first one, about reefer rates. If you can tell us, basically, if you look today, versus the first of January, what has been, in dollars per box, the change on average on your rate? The second question is, basically, if I look at your contingent resources, I think you mentioned the decline there was, mainly because of Elly‑Luke project that was discontinued. How shall we expect this to move, in 2013? Basically, what is, let's say, your drilling program look like? Shall we expect, most likely, an improvement, during 2013, in terms of the 2C resources?
The last question, basically, if I look at the unallocated and the other result, which basically deteriorated to, I think, almost $300 million negative from $100 million last year. You mentioned that you have no more the earnings from FPSO, but I think the contribution was quite small. And you mentioned also FX losses. So I think probably you have some big FX losses in the first quarter. If that's true, can you maybe quantify how much they were? And also just understand on a quarterly basis what could be the, let's say, best estimate for this profit center, which is actually quite big because, yeah, it was almost $300 million loss in the first quarter. If we can analyze this or shall we expect less negative contribution? Thank you.
On the last, I will ask Trond to answer, but before he takes a word, just two quick comments. We've decided not to publish anything on individual trades or price developments in a detailed manner this quarter. Therefore, I can't help you on the reefer business. It wouldn't be very helpful either because this has really been quite a lot of hard work to get this reefer increase through during the first quarter, and the picture is moving all the time. On the oil reserves, we don't make any forecasts for 2013 either. I'm afraid I'm not very informative on the two issues, but I'm sure Trond can help you on the last one.
On the last one, as I told you, it's a certain different elements that comes into that number. The element is that it is an assemblage of elements. If we take the finance cost, which is the biggest mover in this, it is increasing from last year with $100 million or short, basically short of $100 million. As a result of that, as I said in my run through the P&L, it was a currency gain short of $40 million last year in Q1 2012, and this year we have a short of $50 million. That is the biggest change in this number.
The other thing is, of course, that there are other elements going in other businesses, smaller businesses going up and down, that we have. We have a portfolio of smaller businesses that is not allocated to the business units. There are pluses and minuses, but none of them major. The biggest element is, of course, the currency effects going from a + $40 million to a - $50 million.
Okay. Basically, the answer is that, in theory, this could, over the coming quarters, have a lower, run rate in terms of losses?
Well, oh, definitely. As I said, we're run rate on our finance cost is about $200 million or $200 million + a quarter.
Okay.
The element shouldn't change as much. That has you-
Okay.
You have seen in the last few years.
Yeah. Okay. Sorry, just another follow-up on the reefer rate. I think in any case, it's fair to assume that you will have a positive impact, everything else being equal in the second quarter from the reefer rate increase because basically, in the first quarter, you didn't have any because it took a while to implement it. Also, maybe if you don't want to quantify the increase, is it possible to have a rough estimate of a percentage? Let's say you've been able to implement, I don't know, more than 50% or less than 50% of your target increase. Thank you.
Well, I really can't get any closer, so I'll leave it to you, to your assumptions. What, when I said it had taken some while to get a picture, it doesn't necessarily mean that the increases are or the prices are going up gradually. I think it's more that we get into discussion to customers on how we can do in general. I would not support any of your assumptions at this point in time.
Okay. Thank you.
Lars Heindorff from ABG is online with a question.
Yes. Morning, gentlemen. A question regarding Maersk Line and the cost development there. If you look into the first quarter and leaving aside your bunker development and also depreciation, the rest of the cost is actually down sequentially by 5%. I'm trying to get a better feeling of just how you come about that decline and also to what extent that the loop change that you made, both the closure of the TP7 and the closure of the A9 and now the startup of the all water to the U.S. East Coast, how that will affect costs going into the second quarter as well.
Yeah. I think, as we said before, we realized the cost savings faster than we expected. It's all sorts of cost saving. It's network has been adjusted, where the main result has been reduction in bunker consumption. But of course, that also means that we need less vessels and so on and so forth. We did last year, as you may recall, also a major reduction in our headcount at headquarters. So we've been really around all cost drivers in the company. So we'll continue to push, but we sort of had a little bit of a catch-up effect in the first quarter this year, I would say.
Okay. Regarding the oil and gas division, U.K., you haven't talked much about that. Production U.K. here in the first quarter down very, very significantly versus the fourth quarter last year. I know that Gryphon probably is gonna come back in. Looking aside Gryphon, is this the run rate we should expect going forward in U.K.?
If I'm not mistaken, we had Janice out for quite a while during the first quarter, so I wouldn't think so. We do expect Gryphon to ramp up during the second quarter. The run rate in the U.K. should improve.
Okay, lastly, regarding also the depreciation in the oil and gas division, down quite significantly. Can you explain, I guess this maybe has something to do with Qatar, I don't know. What kind of impact Qatar have on the reserve numbers? Is it P or is it C?
Just to give you the numbers on the depreciation, Qatar is one of the elements in the reduction in the depreciation, but it's also others in other countries like Denmark and U.K. The $150 million is an element that basically comes into the first quarter, and it is actually ramping up again in the next quarters. It's coming back. It's almost a one-off items relative to actually having sort of a period of a quarter that runs that. When it comes to Qatar and the effect on the reserves and resources, it actually affects both the numbers.
Okay.
Maybe adding to that, the Qatar volumes after 2017 are not included neither in reserves or resources.
No, no. I know you said that, but the new field development plan, have you seen any impact from that in the first quarter, or is that yet to come?
That is yet to come. That is ramping up, as I said, but that is also part of the elements of the depreciation effect that didn't occur during the first quarter.
Okay, thank you very much.
Thomas Adolff from Credit Suisse is online with a question.
Hi, morning. Thanks for taking my question, all on Maersk Oil. Firstly, just on production. When you say Gryphon to start from 2Q, can you say whether it's already started up and how quick the ramp up will be? Just going back to Qatar again, assuming a world of constant oil prices, despite the new program you have, should we actually expect a rather constant entitlement share from Qatar over the medium term of roughly 100 kbd until 2016 before the license expires? Secondly, just on drilling, I was wondering if you can give us an update on your drilling plan in Angola, more specifically in the Kwanza Basin, since in your release today, there doesn't seem to be any mention of that.
I guess my question is more whether you have secured any rig slots or whether this is the reason it's being pushed back, and how many wells you expect to drill over 2013 in the Kwanza Basin. Just to stay with exploration in Brazil, you know, in your OGX venture, is it fair to assume that the Tullow discovery is the only hope you have there since everything else has been dry? I have a follow-up question on cash flow as well. Thank you.
Okay. That's a lot of questions. In the Kwanza Basin, we still have plans to drill. We are in the rig tendering phase at the moment, and I can't actually say. I know we've gotten offers, but I can't say exactly where we are on that. I believe there will be drilling in the second half, or at least early next year in the Kwanza Basin. In terms of Gryphon, it only starts now to produce, and we do actually expect a relatively quick ramp up. We've had a very tough winter, so that has delayed it somewhat, but we hope we'll be able to ramp up, so we are fully in production when the summer is over.
On Qatar?
On Qatar, yes, we believe that 100,000 is a reasonable level to expect going forward.
Yeah. Thank you. Then just finally on cash flow from Maersk Oil, I think there was a question asked by Rob on this. Just wanted to know whether the cash tax booked during the quarter was actually lower than the P&L within Maersk Oil, or whether there were any other funnies that we should be aware of?
Well, there are some funnies in the tax payments relative to the cash flow. Yes, there are elements. I mean, a lot of the tax payments are not sort of regularly paid every month. As a result of that, you will see deviations going back and forth in the for Maersk Oil.
Okay, perfect. Thank you very much.
Today's last question comes from William Foggan from Berenberg Bank.
Hi. Good morning, everyone. Just a couple of questions to finish up for me. First of all, I just wanted to get some clarification on what sort of tax rate we can expect generally going forward within the oil division, given the change in the DUC contract and compensated by the tax rate. Is that, should we expect a lower overall tax rate going forward? Secondly, on Maersk Line, given the delivery of the 8,000 TEU ships starting later this year, just on your overall composition of your ship size, I expect you would be reducing capacity from slightly smaller ships generally going forward. Any guidance you could give on the type of improvement on your overall efficiency in terms of oil consumption from the change in your overall fleet post receiving the 18,000 TEU vessels later on. Thank you.
Well, when it comes to the tax rate, there is sort of changes throughout the quarters. Our guidance relative to the annual tax rate on oil is the usual. We ended up last year with an effective tax rate of approximately 71% or 72%. We're still seeing that towards the 80% general estimated tax rate for the year in oil and gas. The reason for having it this quarter is really relative to the mix of where we produce and where we spend, where we haven't come into a tax position yet, where we don't recognize the sort of deferred tax asset, as a result of seeing too far out on some of the, in some of the areas. That's the reason why the tax rate is high this quarter.
Okay. Thank you.
On the bunker saving from the 18,000 TEUs, I think, when we ordered the vessels, we said they would use half as much bunker oil as the average on the Europe-Asia trade at the time. Our average was a little better than the market, but I would assume that you can calculate how many containers they will carry out of the total, and then assume that it'll probably be to the tune of a third. You'll save on those containers carried on the Triple-E's around a third of the bunker compared to where we are today.
Okay. Thank you very much.
With that, as it was our last question, I would like to thank all of you for listening in. As I said at the opening, of course, it's limited what we can tell you, two months after having published the annual accounts. We felt there was some news here that we were happy to share with you and, of course, also some areas where we'll need to work in order to progress towards our objectives. Still a lot of work, hard work in the pipeline for the year. I hope when we meet next time that we have more visibility into the whole rate situation. But we do expect a lot of volatility in this area going forward until we get to a more balanced capacity situation.
Looking back over the last years, I think it's just quite comforting to see that crisis or no crisis, we've managed to lift our equity quite nicely, paid out nice dividends, giving good returns to our shareholders. The share price has not developed so well, but we think we really believe that in spite of being cyclical and in a tough period, that we've delivered relatively stable and okay results. We'll try to do that also this year. Thank you for listening in, and have a great day.