Industrial shipping key to beating spot market, says Sovcomflot


Lloyds' List

Relationship with core clients 'like a marriage', according to Kolesnikov.

SOVCOMFLOT’s industrial shipping activity proved the key to remaining profitable last year, despite the sharp fall in the spot market that saw many other tanker operators plunge into the red, according to the Russian giant’s chief financial officer.

Even so, market volatility ensured a hit for the world’s number two tanker operator by fleet size, which saw full-year net profit for 2016 decline 42% to $206.8m, from $354.5m last time round.
Revenue was more stable, coming in at $1.39bn rather than $1.48bn last time round, even though the spot and time charter tanker markets declined by more than 40%. Time charter equivalent revenue was $1.14bn.
But taking a look at the segmental breakdown is the key to understanding the numbers, SCF’s chief finance officer Nikolay Kolesnikov said.

Liquefied gas transportation and offshore services together contributed 45% of operating profit, with exposure to spot market never exceeds one-third of the revenue base.
Most of the decline in the headline profit figure is attributable to spot activity and the acquisition of new vessels, which have added to SCF’s asset base, but led to a higher depreciation charge.
“Altogether we are happy with the results as they stand, in a challenging market environment,” Mr Kolesnikov said.

The strategy of serving core fixed clients such as Gazprom, which like SCF is owned by the Kremlin, is deliberate, he went on.

“We are not speculating or trying to second-guess the tanker cycle. We are allocating capital on the back of long-term employment of the assets. They have a particular use, they have an end user, and it is a completely different type of relationship we have with the clients.

“In effect, we are becoming part of their projects. It is like a marriage. It can last for decades.”

Debt capital

SCF Group also raised $1.26bn of debt capital in 2016, including $750m of unsecured public debt and $512m of bank loans, reinforcing its standing as one of the few operators banks will gladly lend to in the current climate.
“Basically we have all our current investment needs fully funded and the deliveries for this year are all fully financed. The rest is basically refinancing some of the facilities that are maturing or approaching maturity.”
The money has refinanced the bulk of SCF’s debut eurobond. In addition, the company is one of the few tanker operators to enjoy high ratings with credit agencies, meaning that most big banks are happy enough to lend.
Nor are political issues, such as the western sanction imposed in the wake of the Crimea crisis, having any particular impact, he said.

“The company has been in existence since the Soviet days, so we have seen a lot of changes over the decades. But so far, we have not had any impact from geopolitical events. We are a commercial enterprise, we are not political ourselves.”

Meanwhile, the idea of privatising SCF — which has been mooted by the Russian government on and off for more than a decade — remains a possibility.

“We are on the list of potential privatisation candidates. Again the government will continue to explore this, and at some point decide how they want to proceed. It is hard for me to comment and try to second guess what their intentions are. But I think Sovcomflot is an interesting proposition to equity investors, given our diversification, and given our operational platform."