Sovcomflot sees stronger second quarter after profit spike

Lloyd's List

The Russian company plans to pivot away from the conventional side of shipping and more towards the industrial one that is dependent on long-term collaborations with energy majors. But in the first quarter of the year, conventional shipping paid off and drove the big rise in profits

Russian shipping giant sees profits jump by 65.6% in the first quarter of the year as crude and product tanker markets pay off

SOVCOMFLOT, the Russian shipping company, is maintaining a positive outlook for the year on the back of a strong first half of 2020, as tanker market fundamentals and steady industrial revenues are causes for optimism.

“We safely say that we anticipate a fairly strong performance in the second quarter of 2020. The first half of the year is pretty secure, given where we are currently fixing the vessels and the upcoming voyages,” chief financial officer Nikolay Kolesnikov told Lloyd’s List.

Sovcomflot, which owns and operates more than 130 vessels primarily in the crude, product, gas carriers and other segments, increased its net profits for the first quarter of the year by 65.6% year on year to $116.1m. Revenue rose 20.1% to $493.3m.

“The conventional fleet overperformed on the back of a strong spot market environment which, together with a further increase in overall productivity and operational efficiency, helped drive the increase in revenues,” chief executive Igor Tonkovidov said in a statement.

The considerable increase in fortunes is in line with that of other tanker firms, some of whom enjoyed an historic first quarter of the year, thanks to a very volatile oil market that has been destabilised by a price war, which helped flood the market with products, and the coronavirus hit on global oil demand, which propped up demand for floating storage.

While Sovcomflot was one of the companies that enjoyed the strong rates in the crude and product tanker markets, Mr Kolesnikov also said it has used this stronger tanker market to lock some of its ships into time charters of around a year and thus reduce our exposure to the spot market.

The company’s outlook for 2020 is fairly positive, he said. While the company cannot control oil market disruptions and volatility, the low orderbooks in the tanker markets allows shipowners to have some influence over their fates.

That could prove especially important when the oil market rebalances under a global recession, tanker earnings from floating storage and tanker demand sours.

“This is what we like to rely on. We much rather rely on the supply demand fundamentals,” said Mr Kolesinkov.

But Sovcomflot’s stated focus has been to increase its exposure to the industrial sector, the other side of its business that caters to oil and gas projects through long-term contracts. It hopes that by 2025, 70% of its revenues will come from this segment.

With a fleet of ice-breaking supply vessels, Sovcomflot has become key mover of LNG cargoes out of the Yamal liquefied natural gas facility. It has also become involved in the upcoming Arctic 2 LNG project in Russia, which is expected to begin operations in 2023.

During the first quarter of the year, Sovcomflot’s joint venture with gas provider Novatek, SMART LNG, agreed to long-term time charters for four Arc7 ice-breaking LNG carriers with the Arctic LNG 2. The joint venture also agreed with major Russian state-controlled financier VEB.RF Group for lease financing the construction of these vessels at the country’s Zvezda Shipyard.

While oil and gas companies have been cutting down on exploration budgets amid the global downturn, Sovcomflot has not felt the impact and the company benefits that the projects it services do not require further investments for maintenance and operations.

The company also feels comfortable in the current environment because of the climate the projects it services operate in; its fleet’s ice-breaking capabilities and the ships’ specificity to projects means that their assets do not face the same kind of abandonment offshore supply ships off Norway and the US Gulf are seeing, according to Mr Kolesnikov.

“Our Arctic shuttle tankers are irreplaceable,” he added, conceding that for new streams of revenue in the future, spending decisions by its potential customers on projects will affect its business.