OREANDA-NEWS. April 29, 2009. At a regular meeting of the Sovcomflot Board of Directors, held on 21 April 2009, the 2008 annual report of the Company and its subsidiaries, prepared by the Executive Board, was presented to Board members for consideration.

According to the Group’s audited Consolidated Financial Statements, prepared in accordance with IFRS:
- the Group’s gross revenues (freight and hire receivable) for 2008 reached USD 1,634.1 million (+ 31.5 per cent on 2007);
- EBITDA was USD 834.7 million (+30.1 per cent on 2007);
- profit on vessels’ operations was USD 550.7 million (+20.2 per cent on 2007);
- net profit was USD 406.2 million ( - 13.7 per cent on 2007) – adjusted in accordance with IFRS to reflect value impairment provisions for some vessels and newbuildings

All the items of the Group’s financial plan, approved by the Board of Directors in December 2007, have been fulfilled.

As at 31 December 2008, the Group’s fleet included 132 vessels of an aggregate 9.4 million tonnes dwt. The average age of the tanker fleet is 6 years, the world’s average being 12 years.

The Group is the world’s largest ship owner in the product-carrier segment, it holds second place in Aframax tankers, and is fourth largest in the Suezmax tankers segment - the market niches most in demand for servicing Russia’s foreign trade.

The new vessel order portfolio as at 31 December 2008 was 31 vessels of an aggregate 2.8 million tonnes dwt, including 6 ships at a total cost of USD 277.3 million, under the construction in Russian shipyards. The Group’s shipbuilding programme has been fully financed by equity and loan facilities.

Commenting on SCF Group’s results in 2008 Sergey Naryshkin, Chairman of the Board of Directors and Chief of Staff of President Medvedev’s Executive Office, noted that the Group’s strong operating results, gained while the rate of growth in the world’s economy and trade was slowing down, prove the timeliness of the decision to consolidate the State-owned assets of Russia’s two major shipping companies – Sovcomflot and Novoship. The successful integration of the shipping companies contributed to a broadening of services offered and their improved compatibility, increased market positions for the united company and provided for a stable financial position. The Group is prepared for finding solutions for large-scale tasks designed to provide transportation services for Russia’s offshore oil and gas fields and offering LNG shipments, using the most advanced technologies.

The Board of Directors approved the proposals of the Executive Board on the distribution of profit and on the payment of dividends for 2008, in accordance with the Group’s Dividend Provisions plan for 2007 – 2009. It was proposed to allocate the sum of RUB 1 billion (+ 4.2 per cent on 2007) for dividends. The Group’s Dividend Provisions envisage the necessity to reinvest a significant part of profit into future industrial projects that form a part of the Group’s development strategy, approved by Shareholders.
 

Year Highlights
•  Full year gross revenue USD 1,634.1 million (+ 31.5 per cent on 2007) – the best operational Year in the Company’s history
•  EBITDA USD 834.7 million (+30.1 per cent on 2007)
•  Profit on vessels’ operations USD 550.7 million (+ 20.2 per cent on 2007)
• USD 625.2 million investment in new tonnage, eleven  vessels for oil and gas transportation of 0.7 million tonnes DWT have been delivered to the Group
• Sovcomflot and Novoship’s commercial operations merged and international sales activities unified under Sovcomflot (UK) Ltd. in London
•  Further consolidation of Sovcomflot ownership position in Novoship through two succesful offers to minority owners of Novoship ordinary shares during the year
•  Start up of unique shuttle tanker crude oil transportation in the Russian Arctic within the Varandey Project
•  Joint Venture with Sakhalin Energy to operate Russia’s first and only LNG terminal at Port Prigorodnoye on Sakhalin
•  Cooperation agreements with Transneft, Gazflot, the United Shipbuilding Corporation and participation as founding shareholder in the launch of St Petersburg International Mercantile Exchange
•  Sergey Naryshkin, Chief of Staff of President Medvedev’s Executive Office, was elected as a new Chairman of the Board of Sovcomflot, together with four independent Directors
•  New unified group corporate identity introduced across all operations.
 
Commenting on the results Sergey Frank, President and CEO of OAO Sovcomflot, said:
“Sovcomflot has achieved robust results in 2008, which was a generally favourable year for the tanker sector despite the challenging international macroeconomic conditions that started to impact ship owners worldwide in the fourth quarter of 2008. During the year we benefited from the first full-year contribution to results from Novoship, and made further progress to diversify and improve the efficiency of our operations.
I am especially grateful to our shareholders, our clients and employees, ashore and afloat, for their continued support throughout the year. Sovcomflot will continue to develop its customer-oriented industrial shipping business model and strategy focused on providing integrated seaborne energy solutions to the oil & gas industry, especially for large industrial energy projects. The volume of contracted future revenues and the Group’s strong financial position make it well positioned to withstand the current highly challenging environment and to achieve long-term sustainable growth.”

President & CEO Statement

The SCF Group performed remarkably in 2008, helped by the favourable situation in the tanker market, which remained strong until negative indicators started to emerge in the fourth quarter. Importantly, we made significant progress with the implementation of our strategy to create a global leader in the provision of seaborne energy logistics and solutions for our customers. In addition to our current activities of ship owning, ship management and terminal operations, we plan to add new activities such as the operation of offshore supply vessels and drilling rigs and port related business, including tugs, bunkering operations and port agency.

At an operational level, SCF Group achieved a 31.5 per cent increase in gross revenue. Following the merger of Sovcomflot and Novoship in December 2007, the commercial operations of both companies were integrated in 2008. This transaction alone has transformed the scale of our business and is fundamental to our long-term commercial development plans.

During 2008, we took delivery of some of the most technologically advanced ice-class vessels in the world. The arrival of vessels such as these is helping to facilitate shipments of hydrocarbons from the remote regions of Russia’s Arctic and Far East, which remain ice-bound for many months of the year. In line with our general operating philosophy, these vessels provide transportation as part of large-scale integrated industrial projects. The substantial investment required for such vessels is offset by the long-term, predictable nature of their employment and earnings.

At a corporate level, as part of our commitment to maintaining strong, transparent and effective governance, a new Chairman and four independent directors were elected to the Board of Sovcomflot. Further steps were also taken to enhance our operating procedures. Such procedures are an important part of the Group’s broader commitment to ensuring that safety comes first in all our operations.

Gross Revenue for 2008 was USD 1,634.1 million, an increase of 31.5 per cent over the previous year. Time charter equivalent earnings representing gross revenues less voyage costs, an indicator widely used in the shipping industry to compare revenue generated from a voyage charter to revenue generated from a time charter, reached USD 1,236.9 million (+26.7 per cent on 2007), and profit from vessels’ operations increased by 20.2 per cent to a record USD 550.7 million.

Earnings before interest, tax, depreciation and amortisation (EBITDA) were USD 834.7 million (2007 USD 641.4 million). Net profit for 2008 was USD 406.2 million. Despite a record operating performance in 2008, the net profit was adversely affected by non-cash items including value impairment provisions for a few vessels and newbuildings, made strictly in line with IFRS requirements and the highly conservative accounting policy applied by the Group.

Capital expenditure on new vessels during 2008 amounted to USD 625.2 million, 27.5 per cent below that of 2007. The Group’s committed investment programme remains fully funded and importantly we have no immediate additional funding requirements. The Company has an investment-grade credit rating from Moody’s, and significantly, on 17 December 2008, Moody’s Interfax assigned an Aaa.ru national credit rating to OAO Sovcomflot.

As at 31 December 2008, the Group had total assets of USD 5,727.0 million (2007: USD 5,274.6) and net assets of USD 2,817.0 million, 3.5 per cent higher than in 2007.

2008 Operating Highlights
During the first half of 2008, the tanker freight market enjoyed its strongest performance in a decade. However, conditions steadily deteriorated in the fourth quarter as global economic activity began to slow. Although not immune to the downturn in freight rates, the long-term nature of Sovcomflot’s charter arrangements and our relatively low exposure to the spot freight markets enabled a solid operating performance to be achieved for the year.

The Group maintains a freight policy whereby more than 60 pct of the fleet operates on a time charter basis, with the remainder operating on the spot market, contracts of affreightment and consecutive voyages. This provides good earnings visibility and reliability, through time charter agreements with major customers such as Gazprom, Lukoil, Rosneft, Chevron, ExxonMobil, Shell, BP, Vitol and Glencore, while at the same time providing some flexibility to pursue opportunities on the spot market. At the end of 2008, 65.4 per cent of the fleet was employed on a time charter basis.

Merger with JSC Novorossiysk Shipping Company (“Novoship”)
In December 2007, OAO Sovcomflot completed its merger with Novoship. During the course of 2008, two offers were made to acquire the outstanding ordinary shares in Novoship not already owned by Sovcomflot. Following this, as of 31 December 2008, OAO Sovcomflot and its affiliates controlled 98.2 per cent of the ordinary shares of Novoship.

At an operational level, good progress was made during the year to maximise the synergies between the two companies. This included the integration of commercial operations into one entity and the unification of international sales, now run out of the offices of Sovcomflot (UK) in London.

Fleet Development
As at 31 December 2008, the SCF Group was ranked amongst the top five tanker companies in the world, with a fleet of 132 vessels (127 – wholly owned) representing some 9.4 million tonnes (dwt) in total. At the end of 2008, the Group had 31 new vessels of some 2.7 million dwt due for delivery before December 2010.

The average vessel age of the Group’s tanker fleet is less than six years. Sovcomflot is a world leader in the product carrier, Aframax tanker and ice-class shuttle-tanker market segments. The Group is also the leading ice-class tanker operator for the transportation of liquefied natural gas (LNG). These market segments remain the most important for Russia’s foreign trade and its oil and gas companies.

During the course of 2008, several technologically advanced vessels joined the fleet. These included Grand Aniva, an ice-class LNG vessel of 145,000m3 capacity with four Moss-type spherical tanks. She and her sister ship Grand Elena have been built for a Russian-Japanese joint venture, established in 2004 by Nippon Yusen Kabushiki Kaisha (NYK) and JSC Sovcomflot. The vessels are employed in the Sakhalin-II project on a 20 year contract, transporting LNG from the Prigorodnoye terminal near Yuzhno-Sakhalinsk in Russia, to Japan, South Korea and Baja California (Mexico). The first shipments under this contract took place in March 2009.

Elsewhere, on 9 June 2008, a new oil export facility began operation at Varandey on the coast of the Barents Sea. On this date the new ice class tanker Vasily Dinkov began her maiden voyage bound for the Canadian port of Come by Chance. Vasily Dinkov is the first in a series of three advanced design 70,000 tonne deadweight arctic shuttle tankers, ordered by Sovcomflot Group, which will all transport oil from the Varandey terminal. The second vessel – Kapitan Gotsky – was delivered at the end of May 2008 and the final vessel – Timofey Guzhenko – was delivered in February 2009. With double, ice-breaking, hull structures these unique ships can break ice of up to 1.5 metres thick. Both vessels - Vasily Dinkov and Kapitan Gotsky made 30 voyages from Varandey in 2008 and transported more than 2 million tonnes of crude oil.

Cooperation Agreements
In January 2008, Sovcomflot concluded an agreement with Transneft, Russia’s largest energy pipeline company. This involves cooperation between the parties on the joint development of the most effective and safe projects transporting liquid hydrocarbons. It foresees collaboration in the building and the joint operation of oil terminals, as well as the modernisation of oil trans-shipment complexes in Russian ports.

In March 2008, the Group signed a cooperation agreement with Gazflot, a wholly-owned subsidiary of Gazprom. This provides for the joint servicing of Gazprom’s current and future offshore projects and energy transportation. In particular, both parties have agreed to work together to develop logistical solutions for the transportation of oil and gas in the Arctic region.

In December 2008, the Group signed an agreement with the United Shipbuilding Corporation to promote mutually beneficial cooperation. Sovcomflot currently is the largest customer of the civil shipbuilding industry in Russia, and the Group’s strategy provides for further growth of orders from Russia’s shipyards, including tankers for the transportation of liquefied natural gas (LNG) of 75,000 m³ capacity, product tankers of 70,000 dwt, ice-class bulk carriers, bunker tankers, ice-class tugs, offshore support vessels and offshore drilling platforms.

Governance
On 22 July 2008, Sergey Naryshkin, Chief of Staff of President Medvedev’s Executive Office, was elected as a new Chairman of the Board of OAO Sovcomflot. His election followed that of four new directors to the Board of Sovcomflot in June, namely: Andrey Kostin (Chairman and CEO of VTB Bank); Charles Ryan (Chief Country Officer and CEO, Deutsche Bank Group in Russia); Elena Titova (Managing Director, and First Deputy Chairman of the Management Board of Morgan Stanley Bank in Russia) and Nikolai Tokarev (President, JSC Transneft).

The increased number of independent directors and the establishment of Committees of the Board are provided for under Sovcomflot’s Code of Corporate Governance. The Code which has been in place since February 2007 facilitates the further development of the Group’s corporate governance procedures and is designed to set best standards for the shipping industry as a whole.

Corporate Identity
In November 2008, the Group began the roll-out of a new unified corporate identity. This followed a series of mergers, acquisitions and other changes which have occurred within the holding company and all its subsidiaries in recent years. The new identity provides a modern, unified and integrated brand for all the Group’s subsidiaries. Our new logotype also acknowledges the traditions and history of the various components of our Group.

Outlook
While it is too early to predict when the global economy will return to growth, it is clear 2009 will be a difficult year and that significant improvement maybe unlikely in 2010. Against this background, the freight markets will continue to suffer in the short-term. The shipping industry looks likely to experience further market consolidation. At some stage, this will put pressure on vessel values and charter rates to trend towards their historical replacement costs.

Looking ahead, there will certainly be worthwhile opportunities for well funded and efficient ship owners like Sovcomflot to deliver sustained earnings growth. Even in the turbulent markets of today, the company has the necessary resources, including the much valued support of its shareholders and employees, to concentrate on providing the best possible service and solutions to its customers.

Sovcomflot has one of the lowest levels of leverage in its industry, and has a young and growing fleet. Over 60 per cent of its vessels are fixed on a time-charter basis, mainly with blue chip charters. In addition to all this the Group has around USD 4.0 billion of contracted future revenues.

As Sovcomflot develops, a much wider involvement across the energy supply chain is anticipated. This means providing broader seaborne energy solutions, rather than continuing to be just a tanker owner and operator. In such circumstances, the Group can continue to face the future with confidence.