Total S.A. to Acquire Maersk Olie og Gas A/S Conference Call

Aug 21, 2017 AM CEST

FP.PA - Total SA
Total S.A. to Acquire Maersk Olie og Gas A/S Conference Call
Aug 21, 2017 / 08:00AM GMT

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Corporate Participants
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* Claus V. Hemmingsen
A.P. Møller - Mærsk A/S - Group Vice CEO, Member of Executive Board and CEO for Energy Division
* Jakob Stausholm
A.P. Møller - Mærsk A/S - Group CFO & Member of Executive Board
* Soren Skou
A.P. Møller - Mærsk A/S - Group CEO, Executive Board Member, CEO of Transport & Logistics Div & CEO of Maersk Liner Business

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Conference Call Participants
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* Dominic Edridge
UBS Investment Bank, Research Division - Executive Director and Analyst
* Joel Spungin
* Johan Eliason
Kepler Cheuvreux, Research Division - Analyst
* Lars Heindorff
SEB, Research Division - Analyst
* Neil Glynn
Crédit Suisse AG, Research Division - Head of the European Transport Team and Global Transport Sector Coordinator
* Patrick Creuset
Goldman Sachs Group Inc., Research Division - Equity Analyst
* Thijs Berkelder
ABN AMRO Bank N.V., Research Division - Equity Research Analyst

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Presentation
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Soren Skou, A.P. Møller - Mærsk A/S - Group CEO, Executive Board Member, CEO of Transport & Logistics Div & CEO of Maersk Liner Business [1]
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Good morning, and welcome to this call concerning our sale of Maersk Oil and Gas. This is Soren Skou speaking, and I'm joined by our Vice CEO and Head of the Energy Division, Claus Hemmingsen; as well as our CFO, Jakob Stausholm.

As always, I would like to start by inviting you to look at the comments about forward-looking statements.

As you all know, this morning, we announced that we have signed an agreement to sell Maersk Oil to Total for $7.45 billion. We are selling the company with financial effect from 30th of June 2017, although we expect to close only in the first quarter next year.

It is a combination -- we're getting a consideration which is a combination of shares and debt or cash push -- debt push-down in Maersk Oil, which is then repaid. The net effect of that is that we are getting $4.95 billion in shares, equal to about 3.76% of Total, and we are getting $2.5 billion of cash out of the transaction. In addition, I can say that Total will be paying us a 3% interest on the $7.45 billion until the closing of the transaction.

Total acquiring all of Maersk Oil, including the entire organization, the global portfolio and all -- and also assuming all decommissioning obligations currently on our balance sheet worth $2.9 billion. The transaction will be subject to regulatory approval, and as I said, we expect to close in the first quarter.

This means that we will, for accounting purposes, classify Maersk Oil as held-for-sale and discontinued operations and will be excluded in our guidance going forward. There will be a transaction gain after tax of around $2.8 billion from this sale.

We believe that this is attractive value and that -- and with this price, we are getting full value for Maersk Oil as the quality company that we believe it is. We have, in this -- getting to this result, considered all of our options, including IPO, but have concluded that a sale to Total is our best option considering the value, considering the deal certainty, the speed and the risk profile of this transaction.

As we said and have said repeatedly, both in our announcement of 22nd of September last year and also at our Capital Markets Day, we aim to have credit metrics in line with the investment grade rating. And therefore, we will use the tax proceed, the $2.5 billion from this transaction, to reduce debt in A.P. Møller - Maersk. In addition, we're saying today that we -- subject to meeting our investment grade objective, we plan to return a material portion of the value of the shares received in Total to our shareholders during 2018-2019 time frame in the form yet to be decided, but of course, we are considering both extraordinary dividend, share buyback and/or distribution of the shares themselves in some kind of combination. More to be said on that later.

With this sale, 11 months after we announced our intention to focus our business on container shipping, on ports and logistics and announced the intention to separate out individually our 4 energy-related businesses, Maersk Oil, Maersk Drilling, Maersk Supply Service and Maersk Tankers, we believe we are making a material step forward, making progress towards achieving this strategic plan. And we are seeing this actually not as the first transaction in this direction, but as the second, as we also announced on the 1st of December, as you all know, the acquisition of Hamburg Süd, so we are investing in the future core business.

Now Claus Hemmingsen and his team have worked really hard on getting to the first solution and continue to work on the next. And I would like to hand over to Claus, who can share some of the considerations we've had for coming through to this decision.

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Claus V. Hemmingsen, A.P. Møller - Mærsk A/S - Group Vice CEO, Member of Executive Board and CEO for Energy Division [2]
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Yes, thank you, Soren, and as you already expressed, we started 11 months ago since the announcement on 22nd of September to commence the work with finding separation opportunities for the 4 businesses in the energy division of A.P. Møller - Maersk.

For Maersk Oil in particular, much like the others, we have been looking into possibilities of a stand-alone listing. We have looked into merger possibilities, and we have also, obviously, looked into a tray-tail opportunity. It's important here to say that we have had many considerations in selecting the right solution, and we find that Total is a very fine and best owner of Maersk Oil going forward.

The transaction we have here, as already alluded to, ensures the financial flexibility and the capital structure of A.P. Moller - Maersk, and we feel with the value of this $7.45 billion, we are optimizing shareholder value for all our shareholders in A.P. Møller - Maersk.

It has also been extremely important to us to find the right owner for Maersk Oil's activities and assets and staff and colleagues. And here, they've become part of the fourth largest and a leading global oil and gas company who has dedicated and committed long-term investment interest in the sector.

So we have from Total declared interest in continuing development not only in the Danish sector, but also in the international projects that Maersk Oil has, but there are also commitments to the Danish activities. In fact, the head office for Norway, Netherlands and Denmark will be placed in Denmark.

So actually, what Total is acquiring is a very strong performing company. Maersk Oil is one of the leading operators in the Danish sector, with a proud heritage, and I dare say, one of the -- the founder of the oil and gas industry in Denmark, and as I said, one of the leading players. There are material projects that are available to Total through the acquisition of Maersk Oil, Northeastern Culzean project in the U.K. and the Johan Sverdrup project in Norway, but also numerous other projects in the global portfolio.

So Maersk Oil in second quarter produced 284,000 barrels per day, and they have declared that in the -- in going out of 2017, the production will be around 150,000 to 160,000. Total takes over all that. They take over the 2,800 employees, who will have, in our view, brilliant opportunities for future career developments. And as you've also noted, they do take over the abandonment obligations that Maersk Oil has. So all in all, it's been important to balance the value for the shareholders and value for A.P. Møller - Maersk and find the right and correct future home for Maersk Oil, and we believe we have achieved that.

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Questions and Answers
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Operator [1]
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(Operator Instructions) Okay. Our first question is from the line of Johan Eliason at Kepler Cheuvreux.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [2]
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Congratulations to a good price, I think. Could you just remind us about your debt target for the sort of the focused transport and logistics business eventually? And what that means in terms of dollar value as well if you have any indication to give to us? And secondly, any update on the drilling divestment? We are seeing a lot of consolidation right now in that industry. Will we see something soon for drilling as well?

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Soren Skou, A.P. Møller - Mærsk A/S - Group CEO, Executive Board Member, CEO of Transport & Logistics Div & CEO of Maersk Liner Business [3]
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Thank you. I'll turn that question over to Stausholm except to say that for clarification, we are ending this session at 10:30. And then as far as the drilling transaction, I'll say, and Claus can say in many more ways than I can, but we will communicate about the other transactions as they happen when we have something to tell. We are working hard to finding strong solutions also to the 3 other companies. But we will only provide commentary on that once we have something to comment on. So Jakob, if you will take the debt question?

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Jakob Stausholm, A.P. Møller - Mærsk A/S - Group CFO & Member of Executive Board [4]
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Yes. Thank you. So we're not operating with, so to say, exact debt targets as we go along. It's a major transformation we're going through. We are preparing, of course, structural solutions for all the energy-related businesses. I think the way to look at it, today, you're being told, first of all, what we transacted at, that it is a so-called lockbox transaction. So subject to closing, this deal is effectuated by the end of June. And it basically means that we have reduced our oil exposure and that we've reduced our debt by $2.5 billion. How we're going to distribute the latter part? Well, first for all, we have some time to think about it, because we cannot do anything before we have a closing, which we plan to be in Q1. And of course, we will take into consideration other -- considerations of the other energy businesses. But there's no firm deals, and therefore, we have no updates on this right now. So I think the key thing for us, the guiding star is that we remain investment grade throughout the chains and afterwards. We have no wish to be overcapitalized at A.P. Møller - Maersk, but we have a wish to remain investment grade.

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Operator [5]
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Our next question is over the line of Neil Glynn at Crédit Suisse.

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Neil Glynn, Crédit Suisse AG, Research Division - Head of the European Transport Team and Global Transport Sector Coordinator [6]
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Just a couple of quick questions. I guess, clearly, there's been a lot of management time invested in getting to this point. And I'm just interested in terms of the management of the underlying business. Do you now pause and focus solely on underlying developments and take a little bit of a break before turning attention to the rest of the energy businesses? Or is -- should that be viewed as an ongoing development and top priority getting towards disposal #2? And then the second question with respect to debt capacity of the other divisions. You've, obviously, a push-down of debt into Maersk Oil. Is that the best way to think about intention for Drilling, Tankers and Supply Services in terms of the amount of debt you would ideally like each of those businesses to take with them on disposal?

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Soren Skou, A.P. Møller - Mærsk A/S - Group CEO, Executive Board Member, CEO of Transport & Logistics Div & CEO of Maersk Liner Business [7]
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Yes. Thank you. In terms of management focus, then we have set ourselves out by belief to deal with this separation in a practical way. Claus Hemmingsen, our Vice CEO, and his team works 100% of their time on figuring out how to separate the 4 businesses out, and the management teams in each of the 4 businesses run them as effectively as they possibly can, reporting to Claus in this process. We are also, and certainly, I and the rest of transport and logistics management teams, is working hard every day in terms of doing -- delivering good results in Maersk Line, in APMT, in Damco and so on. So I do believe we have organized ourselves in as practical way given the job at hand. And again, Jakob, if you will take the debt question.

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Jakob Stausholm, A.P. Møller - Mærsk A/S - Group CFO & Member of Executive Board [8]
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Yes. I don't think you can project what we're doing in this case to what we might consider in the other cases. I think it is really a case-by-case. Let me give you the example. If you look at the case here, Maersk Oil, basically, we are handing over the company at a time where we're getting out of Qatar and entering a very significant investment program, particularly around Johan Sverdrup and Culzean. That means that we are having, probably for a period of time, negative free cash flow. So taking away retirement obligations and not taking away a positive free cash flow and then getting in the cash, we see as an attractive metrics. But we might look at it different for the other businesses. Obviously, Maersk Oil is the one that makes most money in the energy sector. So we will just -- we would use the whole tool set for how we go about. The key thing, though, is that the credit metrics is for the whole company, and therefore, we keep on monitoring the whole program against our balance sheet. I hope that gives you some guidance.

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Operator [9]
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Our next question is over the line of Dominic Edridge at UBS.

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Dominic Edridge, UBS Investment Bank, Research Division - Executive Director and Analyst [10]
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Just a couple for me. Just I was wondering if you've had any conversations with the credit rating agencies? Because, obviously, in the past, I know shipping and investment grades have often been oxymorons with each other. It's not been very usual for shipping company to have investment grade. And I believe that your diversification has also been seen as a positive in that light. So maybe if you could say if you've had any preliminary discussions with them as to what the impacts would be of the deal. And then the second question was just on the financial impact. Could you remind us beyond the NOPAT, could you say where did the abandonment provision unwind, et cetera? Does that go through in the financial section? Or is there additional P&L impacts over and above just deconsolidating Maersk Oil?

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Jakob Stausholm, A.P. Møller - Mærsk A/S - Group CFO & Member of Executive Board [11]
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Yes. Thank you. We manage our rating institution in a proactive manner. They are corporate insiders. That means that we can talk to them about our plans. We can talk to them in advance, and we do so. We have done so last year with what we were guiding you around retaining investment grade at our Capital Markets Day, and we've done so in this case here as well. But obviously, they're independent bodies, and we will see how they react to this. But at least the dialogue has been there, and I think we have a good understanding of how they look at our company. With regards to the impacts on NOPAT, it's going to be complicated accounting that we are faced with, but I can tell you that the obligation -- the abandonment provisions is not going to have any impact. We have provided for it, and we will just be lifted for the obligation and lifted for the liabilities. But obviously, our business now will, when we come with our Q3 results, be classified as discontinued operations and be a separate line with whatever the accounting rules requires us to change in that regard. But I think you actually have the key part. There's not missing anything in our press release to see the economic impact there, but the NOPAT is a bit difficult to calculate. It will come over the year as we earn money and then the residual will come at closing the accounting game.

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Operator [12]
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We are now over to the line of Lars Heindorff at SEB.

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Lars Heindorff, SEB, Research Division - Analyst [13]
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Two questions for my part. Firstly, regarding the net financials. The interest rate that you get on the enterprise value is fairly substantial. I wondered if you could give us any indication and also draw some lines towards the guidance on net financials that you gave last week in connection with Q2 reports. That's the first one. And then the second one is regarding cash flow. I understand that Total is taking over all obligation from the end of June until closing in Q1. Who will then obtain the right for the cash flow in Maersk Oil?

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Soren Skou, A.P. Møller - Mærsk A/S - Group CEO, Executive Board Member, CEO of Transport & Logistics Div & CEO of Maersk Liner Business [14]
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Yes, I'll ask just very -- I think the way to look at this is that Total is paying us a 3% interest rate until closing. So if we close sometime in the first quarter, it could be $100 million to $125 million of interest payments. It's a lockbox transaction, which means that Total takes over the financial responsibilities for the company from the 30th of June. And that means they will also have the cash flow and do the CapEx. But we will, of course, be financing the company until closing.

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Lars Heindorff, SEB, Research Division - Analyst [15]
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Yes. Then maybe a follow-up on the tax side. I know you said that the gain is tax-free, but do you pay any tax at all on the proceed?

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Jakob Stausholm, A.P. Møller - Mærsk A/S - Group CFO & Member of Executive Board [16]
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There is no tax in that transaction. There could be some taxes related to whatever we decide when it comes to distribution. But on the transaction, there's no tax.

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Operator [17]
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We now go over to Patrick Creuset at Goldman Sachs.

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Patrick Creuset, Goldman Sachs Group Inc., Research Division - Equity Analyst [18]
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Congrats on the swift execution. There's only one question left for me, which is, do you have any lock-up on the Total shares?

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Soren Skou, A.P. Møller - Mærsk A/S - Group CEO, Executive Board Member, CEO of Transport & Logistics Div & CEO of Maersk Liner Business [19]
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This is an easy question. No. The answer is, no.

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Operator [20]
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We now go to the line of Thijs Berkelder at ABN AMRO

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Thijs Berkelder, ABN AMRO Bank N.V., Research Division - Equity Research Analyst [21]
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One question. In the past, you more or less hedged your oil exposure in the transport and logistics by being long in Maersk Oil. In the near future, how do you plan to hedge your oil positioning in container shipping? Is that via hedging policy? Or can you maybe explain that?

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Soren Skou, A.P. Møller - Mærsk A/S - Group CEO, Executive Board Member, CEO of Transport & Logistics Div & CEO of Maersk Liner Business [22]
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We currently do not do financial hedges of our bunker exposure. We certainly don't have any plans to change that before closing. We may decide to change our policy next year, but that is something that we consider as we speak.

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Operator [23]
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Our last question for today is over to the line of Joel Spungin at Berenberg.

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Joel Spungin, [24]
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Two very quick ones for me. First one, just to clarify your earlier comments about the $100 million to $125 million of interest payment that you expect to receive. Does that impact the $500 million of net financial costs that you gave in the guidance at the end of the second quarter? And then just one other thing, which was, I think I saw that Total said that you had been offered a seat on the board of Total. I was just wondering what your considerations are with regard to that and whether you intend to take up that offer.

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Soren Skou, A.P. Møller - Mærsk A/S - Group CEO, Executive Board Member, CEO of Transport & Logistics Div & CEO of Maersk Liner Business [25]
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Yes. On the last question about the Total board, it is correct that Total, given the fact that we've become the third largest shareholder, I believe, in Total, have offered a board seat. We are still to consider and decide what to do with that at this point. And on the interest and...

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Jakob Stausholm, A.P. Møller - Mærsk A/S - Group CFO & Member of Executive Board [26]
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Yes. I think the way you should look at this interest is, we're basically selling Maersk Oil for $7.45 billion at 30th of June. But when we come to closing in January, you basically should see that we will get $7.55 billion or whatever the amount will be exactly on the day we close. So you could also just say that the sales price is slightly high. It will not go in a separate line. It will just be part of the overall accounting for the transaction.

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Joel Spungin, [27]
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Right. So no impact on the $500 million guidance given at the last update?

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Jakob Stausholm, A.P. Møller - Mærsk A/S - Group CFO & Member of Executive Board [28]
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Correct.

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Soren Skou, A.P. Møller - Mærsk A/S - Group CEO, Executive Board Member, CEO of Transport & Logistics Div & CEO of Maersk Liner Business [29]
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Okay. I believe that was the last question. Thank you for calling in. And thank you for your questions. Have a good day.

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