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SCF business model demonstrates its resilience in an extremely challenging year for tanker markets

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SCF business model demonstrates its resilience in an extremely challenging year for tanker markets

19 March 2018, Moscow: PAO Sovcomflot (SCF Group), one of the world leaders in energy shipping and marine services to offshore oil and gas upstream projects, has today reported its results for the full year to 31 December 2017.
2017 Full Year Financial Highlights
(IFRS audited accounts – year to 31 December 2017)

USD Millions

 

2017

 

2016

% ∆

Gross revenue (Freight + hire)

1,435.4

1,388.1

+3.4

Time charter equivalent revenue*

1,058.0

1,142.2

(7.4)

EBITDA**

544.9

695.0

(21.4)

Adjusted (loss)/profit***

10.1

263.0

(96.2)

Net (loss)/profit

(113.0)

206.8

-

*Time charter equivalent (TCE) represents shipping revenues less voyage expenses and is commonly used in the shipping industry to measure financial performance and to compare revenue generated from a voyage charter to revenue generated from a time charter
**Earnings before interest, tax, depreciation and amortisation calculated on an adjusted basis
*** Profit before income taxes adjusted for impairment and non-operating income / (expenses)

2017 Market Context and SCF Group Performance

2017 proved to be one of the worst years for the conventional tanker market in the last quarter of a century, with similar conditions experienced to those seen in 2011 and 1992. Conventional tanker freight rates fell by almost 50 per cent year-on-year, reflecting an oversupply of speculative orders following the 2015 market spike, as well as the effect of sustained production cuts by OPEC and other oil producing nations and a backwardation in the oil trade. Set against this background, the Group’s time charter equivalent revenue declined by only 7.4 per cent, demonstrating the robust nature of its industrial-focused business model.

Over 2017, the Group continued to implement its strategy to expand the fixed income, industrial shipping segments of its business with Offshore Services and Gas Transportation increasing their revenues by 48.7 per cent and 17.4 per cent respectively. The total share of Group revenue from industrial shipping activities amounted to 51 per cent of its revenue base in 2017, enabling the Group to achieve a positive operating profit for the year.

In line with IFRS accounting standards, the Group recorded a non-monetary charge of USD 108 million in total, reflecting impairment of the fleet and non-operating costs regarding litigation in the English courts, relating to various transactions that took place during 2000 - 2004*.

Profit before tax, when adjusted for the impairment reserve of the fleet and non-operating costs, amounted to USD 10.1 million in 2017, signifying that the Group remained profitable at an operating level despite the severe market conditions affecting its conventional fleet.

2017 Operating Highlights

A highly specialised icebreaking platform supply vessel (IBSV) Gennadiy Nevelskoy was delivered in March. This was followed in June by Stepan Makarov, and Fedor Ushakov in October, the first three in a series of four multifunctional ice-breaking supply and standby vessels. All vessels are contracted to operate on the Sakhalin-2 -Project, under 20-year time-charters to Sakhalin Energy Investment Company.

·           The world’s first ice-breaking LNG carrier, Christophe de Margerie (Arc7 class, 172,600m3 cargo capacity), was delivered into long-term time-charter with Yamal LNG. In August, she successfully completed her first commercial voyage, transporting LNG through the Northern Sea Route (NSR) from Norway to South Korea, becoming the world’s first merchant vessel to travel the full length of the NSR without an icebreaker escort. The vessel commenced loadings from Sabetta following the official launch of the Yamal LNG plant in December 2017.

·            In April the Group announced an agreement with Shell for the supply of liquefied natural gas (LNG) to fuel the first of a new generation of gas powered Aframax crude oil tankers.  Sovcomflot will take delivery of six such ice-class vessels (114,000 tonnes DWT, Ice 1A) over Q3 2018-Q1 2019.

·           Completion of a series of refinancing deals amounting to USD 367 million, including a USD 150 million bond issue and a USD 174 million long-term facility with Sberbank for the Prirazlomnoe Project vessels and a USD 43 million refinancing with Unicredit and Nordea.

·           Contracted future revenues stood at USD 8.1 billion as at 31 December 2017. 

·           On 16 April, the Group and the Admiral Nevelskoy Maritime State University (MSUN, Vladivostok) signed an agreement to establish a joint educational and research project entitled the “Floating Laboratory” to be based aboard Gennadiy Nevelskoy. The agreement is the latest chapter in a long-term cooperation programme between Sovcomflot and the University.

·           The Group has received a number of industry awards and notations including Seatrade’s ‘Deal of the Year’ award for its USD 750 million 7-year Eurobond offering, Lloyd’s List’s ‘Tanker Operator of the Year’ award and Platts Global Energy Award in the ‘Engineering Project of the Year’ category.

Sergey Frank, President and CEO of Sovcomflot commented:

“Despite the very strong headwinds seen in the conventional tanker markets over 2017, with freight rates down by almost 50 per cent reflecting one of the worst years in a quarter of a century, we continued to implement our core strategy of industrialising our business model. Sovcomflot’s growing industrial portfolio (offshore services and gas transportation) enabled us to remain profitable operationally. Our Offshore and Gas businesses saw time charter equivalent revenues increasing by 48.7 and 17.4 per cent respectively year-on-year, providing a welcome relief from the difficult conditions facing our conventional tankers. The robust nature of the Group’s business model has shown our ability to weather the low point of the shipping cycle”.

“In such a challenging year, I am especially grateful to all my colleagues at sea and ashore for their continued professionalism and dedication, and to our clients and partners around the world for their valued support. It’s especially important that, in this extremely challenging year, we continued our commitment to innovation by delivering to our clients some of the most advanced vessels ever constructed, which will contribute to their upstream projects and address some unique operational challenges in the harsh environments. Further, we achieved a significant milestone with the decision to power with LNG our new generation of ice class Aframax tankers, setting new standards for emissions and making the tanker industry greener”.

Evgeniy Ambrosov, Senior Executive Vice-President of Sovcomflot, commented:

“Last year we have delivered several pioneering new vessels, designed in close cooperation with our esteemed strategic charterers, which are destined to become one of the core elements of a unique logistics system for the transportation of hydrocarbons. One such example being the icebreaking LNG carrier Christophe de Margerie, purpose built to make LNG exports possible from the vast Arctic energy reserves of the Yamal Project in Northern Russia. The newest logistical and technical solutions have been tested by us from the beginning of this century on various successfully operating projects. Elsewhere, three highly sophisticated icebreaking platform supply vessels (IBSVs) were delivered during the year to serve the Sakhalin-2 Project, continuing our well-established long-term partnership with Sakhalin Energy Investment Company. Another state-of-the art Arctic shuttle tanker for the Novy Port project was delivered to the charterer Gazpromneft.”

Igor Tonkovidov, Executive Vice-President and Chief Operating / Chief Technical Officer of Sovcomflot said:

“Sovcomflot’s stays commited to shipping innovations which were further enhanced in 2017, with the Group taking the lead amongst tanker owners in delivering a cleaner and safer marine environment. We were delighted to sign an agreement with Shell for the supply of LNG to fuel a new generation of Aframax tankers. These so-called ‘Green Funnel’ vessels are being pioneered by Sovcomflot and our shipbuilding partners in Russia and South Korea. In 2017 we ordered six such tankers, for delivery between Q3 2018 and Q1 2019. These vessels were designed to exceed, rather than simply comply with, emissions legislation”.

Nikolay Kolesnikov, Executive Vice-President, Chief Financial Officer of Sovcomflot, commented:

“During 2017 we completed a series of financing deals amounting to USD 367 million in total, including a USD 150 million tap Eurobond issue, which was well oversubscribed and placed at one of the lowest yields for a global shipping company. Our ability to access competitively-priced domestic and international capital in all market conditions reflects the resilience of Sovcomflot’s industrial shipping model, which provides good earnings stability and visibility. At the end of the year, we had USD 8.1 billion of contracted future revenues, a major part of which comes from long-term industrial projects. The Group has maintained its credit ratings with all the three main international rating agencies in 2017 and into the current financial year.”

* Page 28 and page 52 of the Financial statements.