After a loss-making 2018, Sovcomflot generated a towering $225.4m net profit in 2019. The company’s chief financial officer tells Lloyd’s List that beyond the current shock, which the crude oil sector is undergoing, the basics are right
Profits soar in 2019 amid stronger charter markets and the company’s view is the momentum can continue in 2020
RUSSIAN tanker giant Sovcomflot expects a strong market for energy shipping in 2020, following lofty profits in 2019, as the temporary jolt in rates lies on top favorable market dynamics.
With earnings for very large crude carriers breaking the $200,000 barrier this week on the back of dropping oil prices, the tanker market is seeing the kind of revenue spike it experienced in the fourth quarter of 2020 when rates reach even greater heights.
Sovcomflot chief financial officer Nikolay Kolesnikov told Lloyd’s List that while it is too early to make assessments about the implications of the current situation, even without these current disruptions, the company has positive market outlook for the year due to market fundamentals, underpinned by continued low levels of vessel supply.
“For once the supply side seems to be under control and that is why with every pick up of the demand you see that markets tend to overreact like what we are observing currently, particularly in the larger sized vessels,” he said.
The company announced on Friday it had a $225.4m net profit in 2019, a thumping reversal of last year’s $45.6m net loss from 2018, largely because of an almost $200m increase in time charter revenues.
With almost 150 vessels in its fleet, primarily consisting of oil and gas carriers, but also shuttle tankers, Sovcomflot has also become one of the most active in the Arctic Sea, moving cargo out of the Yamal liquefied natural gas facility and having already gotten involved in the upcoming Arctic 2 LNG project in Russia, which is expected to begin operations in 2023.
Sovcomflot may have a strong presence in conventional shipping but it has set out a strategy to step in more aggressively into industrial shipping, hoping to generate 70% of its revenues from that business by 2025.
Mr Kolesnikov said that from a capital allocation point of view, Sovcomflot sees much greater potential in the industrial side rather than the conventional one.
“We would rather position ourselves as a service provider capable of undertaking bigger sized projects, longer term projects and effectively selling our operational capabilities and expertise,” he said.
These industrial projects include the Arctic LNG exporting facilities in Russia.
“Once you are in, basically you become a critical part of the project infrastructure. Yamal or Arctic LNG 2 do not continue without these specialist icebreaking Arctic LNG carriers,” said Mr Kolesnikov.
Sovcomflot in 2019 also forged a joint venture with Russian gas producer Novatek, to own and operate vessels that will be used to service Novatek projects. Earlier this year they announced they had signed an agreement with Russian state-controlled financier VEB.RF Group for lease financing of four Arc7 icebreaking LNG carriers for the Arctic LNG 2 project.
The company is also investing in LNG as a fuel for ships. Earlier in 2020 it took delivery of a new LNG carrier and is awaiting two more in 2020 that will go out to charters with Shell. It also has two LNG-powered aframax tankers to be delivered by March 2022 for Rosneft and three LNG-powered medium range tankers that will be charted by Novatek.
It also received three LNG-fuelled aframax crude oil tankers in 2019.
These newbuildings mean significant levels of financing are required and in 2019 alone the company raised over $1bn worth of long-term debt capital, Mr Kolesnikov said.
The money will be used for financing its current investment programme and to refinance its maturing debt obligations.
“Access to debt capital through the cycle allows the company to successfully implement strategic plans to expand its portfolio of long-term industrial contracts, which are characterised by the stability and good visibility of future cashflows and attractive financial returns,” Mr Kolesnikov said in a statement.
Sovcomflot chief operating officer Sergey Popravko, claimed that the vessels running on LNG achieved up to 30% reduction of CO2 emissions to the atmosphere, exceeding the forecasted indicators.
“At the same time, we continue to study the possibility of introducing other alternative technologies that have the potential to further reduce the environmental impact of our operations,” he said.
2019 was an important year for Sovcomflot, as Sergey Frank, chief executive for 15 years became the company’s chairman.
Igor Tonkovidov, who at the time Sovcomflot’s executive vice-president, chief operating officer and chief technical officer, became the new chief executive.