OREANDA-NEWS. December 9, 2011. SCF Sovcomflot (SCF Group) today reported results for the nine month period ended 30 September 2011.

Market Performance

The freight market downturn continued in the first nine months of 2011: the Clarksea tanker earnings index fell by 27 per cent over the reporting period. Oil tanker freight rates in 2011, depending on vessel size, are currently 30-65 per cent lower than 2010. Whilst rates for oil product carriers, depending on their size, are 5-30 per cent lower than in 2010. On the back of freight market deterioration the stocks of public tanker companies have been under significant pressure as well: the Bloomberg Tanker Index dropped by 47%.

SCF Highlights
- Gross revenues USD 1,075.6 million (+ 7.9 pct*)
- Time charter equivalent (TCE) revenues USD 697.3 million (-3.5 pct*)
- EBITDA USD 361.0 million (-13.7 pct*)
- Net profit USD 46.6 million (-53.5 pct*)
- Debt to capital ratio : 47.5 pct (43.8 pct at 30 September 2010)
- Total fleet 156 owned and chartered in vessels of 11.7 million tonnes DWT (+ 8.5 pct*)
- Average tanker age – 6.8 years
- In August-September 2011, SCF Suezmax tanker Vladimir Tikhonov becomes largest vessel ever to transit the Northern Sea Route (NSR), from the Atlantic to Pacific Ocean, with a full cargo of gas condensate of Russian oil major “Novatek”.
- 15-year time charter agreement with Gazprom Global LNG (subsidiary of Gazprom) for two new generation ice-class ‘Atlantic-max’ 170,000 cubic metres LNG carriers
- Aframax tanker Adygea begins serving Statoil-operated Peregrino oilfield in Brazil –marks entry to a new offshore sector, with three more ships with long-term contract to come into operation soon
- Marine seismic operations begun with new generation hi-tech X-bow 3D 1-A ice class vessel Vyacheslav Tikhonov, built in 2011.

*Comparative percentage increases on the previous nine months to 30 September 2010

Senior Management comments on 2011 9 months results

Sergey Frank, President and CEO of OAO Sovcomflot:

“It has been a very challenging yet still profitable period for the company. SCF Group’s business model has demonstrated greater resilience than those of our competitors and peers. The SCF Group probably remains the only profitable tanker company of scale in the first nine months of 2011. Over this extremely difficult time, charter rates in the tanker market fell to their most depressed levels for more than a decade or even two. The tanker market continues to suffer from the twin pressures of an over-supply of vessels and a weak macro-economic outlook for the global economy. To say more, it is difficult to see any material improvement in tanker market prospects over the next 12 months. Despite this background, first three quarters of the year were profitable for SCF Group, which has sharpened its strategic focus on new industrial projects. Future contracted revenues concluded during the reporting period amount to more than one billion USD. SCF Group continues to implement its development Strategy, building the company as an integrated marine services provider to the oil and gas industry. The company is well positioned to deliver long-term sustainable growth in returns for its shareholder, whilst continuing to serve the evolving needs of our customers, providing safe, reliable and effective seaborne energy solutions.”

Evgeniy Ambrosov, Senior Executive Vice-President, Chief Operating Officer (Business Development and Commercial) :

“The company is focusing on the segments and services most demanded by our energy clients – major Russian and international oil and gas companies. During the reporting period we have seen growth in the share of premium industrial projects in SCF’s business mix, namely the offshore and gas business segments. Looking ahead, apart from the attractive further growth opportunities in these segments, there remains considerable scope to leverage SCF’s competitive advantage in ice-class vessels, as energy exports grow from the high potential hydrocarbons region of the Arctic/sub-Arctic.”

Sergey Popravko, Senior Executive Vice-President, Chief Operating Officer (Technical Performance and Innovations):

“During this and the previous nine month reporting period, SCF has undertaken voyages along the Northern Sea Route. The most significant was the latest and pioneering voyage of the ice-class Suezmax tanker Vladimir Tikhonov, carrying 120,000 tonnes of gas condensate from Murmansk to Thailand. This made her the largest tanker to have made this transit so far, the previous record-breaking voyage was undertaken by an Aframax vessel belonging to SCF. The opening by SCF of a new, commercially viable, route across the Northern Sea will provide a sea bridge, linking Russia’s high potential offshore fields to major international energy markets. Despite of the "storming" in global financial and freight markets, we continue to maintain leadership in technical management of vessels and constantly improving the quality of services. Our approach is supported by the program “SCF-2015”, which aims to ensure the highest standards of reliability, safety and efficiency of seaborne energy transportation.”

Nikolai Kolesnikov, Senior Executive Vice-President, Chief Financial Officer:

“SCF’s results for the period are a clear endorsement of the strategic decision to develop a higher value-added, premium industrial business portfolio. In the first nine months of 2011, the offshore segment alone contributed USD 105 million in profit, a 50 per cent increase over the same period in 2010. The Group has a robust balance sheet, given the market circumstances. SCF ended the period with a debt to capital ratio within our target of keeping it below 50 per cent. Importantly, SCF continues to outperform its peers and to maintain access to capital.”
Operating Highlights

Key Business Segments

Crude Oil Tankers
This remains the largest segment of SCF’s business by TCE revenues and profit on vessels’ trading (less depreciation and impairment charges), accounting for a 45 per cent share of the total for each of these measures, over the nine month period to 30 September 2011. However the segment continues to suffer from depressed freight rates, reflecting an industry-wide over-supply of vessels, which contributed to a 24 per cent decline in the profit on vessels’ trading compared with the first nine months of 2010.

During the period, the Group took delivery of a new Suezmax tanker (Leonid Loza – 156,572 tonnes DWT) and a new ice class 1B/1C Aframax tanker (Suvorovsky Prospect – 113,860 tonnes DWT). At the end of the period, SCF had six crude oil tankers on order, amounting to 1.12 million tonnes DWT, for delivery by December 2013. This includes an order for the Group’s first Very Large Crude Carriers (VLCCs), following a long-term charter concluded in H1 2011 with Petrochina, for two 320,000 tonnes DWT vessels.

In the nine months to 30 September 2011, SCF Group further strengthened its long-standing partnership with Statoil when it became one of only two shipping companies to be selected by the Norwegian company as meeting its requirements for the transportation of crude oil from the Peregrino field in Brazil. Statoil is both the operator and retains a 60 per cent shareholding interest in Peregrino. The first cargo to be loaded under this agreement was by the SCF Novoship-owned crude oil tanker Adygeya, in August 2011. SCF will provide shipping for half of the oil produced using its Aframax-type ships, with three tankers already being engaged on the basis of time-charter agreements.

On 30 August 2011, the 160,000 tonnes DWT Suezmax tanker Vladimir Tikhonov completed a transit along the Northern Sea Route (NSR) – the most difficult part of the high-latitude Arctic route from the Atlantic Ocean in Europe to Pacific Ocean in Asia. The vessel began her journey in Murmansk, on 20 August 2011 and completed her voyage at the discharge port of Map Ta Phut (Thailand). Vladimir Tikhonov carried 120,000 tonnes of gas condensate belonging to the charterer OAO Novatek. She is the largest tanker to have made this transit so far.

Oil Product Tankers
The segment continued to suffer from poor trading margins, given a global supply overhang of product tankers. The segment accounted for some 26 per cent of TCE revenues over the first nine months of 2011, and six per cent of profit on vessels’ trading less depreciation and impairment charges.

During the period, delivery was taken of three LR1 products tankers, the SCF Pioneer (74,602 tonnes DWT), the SCF Provider (74,548 tonnes DWT) and the SCF Prime (74,602 tonnes DWT). The vessels form part of a joint-venture with Glencore, in which SCF Group has a 51 per cent shareholding.

On 31 January 2011, the Group’s ice-class products tanker SCF Neva undertook a test sailing from the port of Ust-Luga, bound for Tallinn (Estonia). She was the first vessel to load at this new oil products terminal in Leningrad Region, which was opened for regular loading later in H1 2011. The first vessel to load on a regular basis from Ust Luga was Primorsky Prospect.

Gas Tankers
SCF’s gas tankers contributed eight per cent of TCE revenues and 15 per cent of profit on vessels’ trading, less depreciation and impairment, during the first nine months of 2011. This was a two per cent increase in the equivalent revenue and profit figures for the same period of 2010. SCF is the largest operator of ice-class LNG tankers. Gas carriers performed well compared with the Group’s other deep sea operations, reflecting the more positive dynamics of the global LNG market. LNG transportation by sea represents a growing part of SCF’s portfolio of interests, and is one of the key elements within the Group’s development strategy.

Following a successful international tender, the Group signed a contract in June 2011 with Gazprom Global LNG Limited (GGLNG), a subsidiary of Gazprom. The contract is for the long-term time charter of two ultra-modern ice-class LNG-carriers, providing for a minimum of 15 years’ employment for both ‘Atlantic-Max’ vessels. Each vessel will be of nearly 170,000 cubic meters cargo capacity and Ice 2 Class, with vessel deliveries scheduled for 2013-2014.

Offshore
The Offshore business segment saw the most dramatic growth during the nine month period to 30 September 2011. TCE revenue increased by 55 per cent to USD 135 million, whilst profit on vessels’ trading rose by 50 per cent to USD 105 million, compared with the corresponding period in 2010. The growth was mostly attributed to the acquisition by SCF Group of a modern ice-class shuttle tanker fleet, servicing both the Sakhalin 1 and Sakhalin 2 projects, in the beginning of the year.

On 6 July 2011 a steel cutting ceremony took place at the Vyborg Shipyard for the first in a new series of multifunctional supply vessels, ordered by SCF Group, to service oil production platforms. This follows an agreement signed in December 2010 by SCF Group and Exxon Neftegas Limited (operator of Sakhalin 1 project). The agreement envisages the long-term chartering out of two, high ice class, specialist supply vessels. The relevant shipbuilding contracts were signed by SCF Group and Arctech Helsinki Shipyard Oy – a joint venture of USC and STX Finland. Vyborg Shipyard will be engaged in construction of the hull elements of the new vessels.

On 16 September 2011 a new state-of-the-art seismic exploration vessel Vyacheslav Tikhonov, joined the Group’s offshore fleet. This high-tech X-bow 3D specialist vessel was built in August 2011, and is the youngest of only six existing vessels of her type in the world. She has been acquired on a bareboat charter from Polarcus, one of the world’s leading companies specialising in marine seismic exploration. The vessel is engaged under contract for seismic exploration work at the Tuapse Trough Project, on behalf of OAO NK Rosneft and ExxonMobil. She is being operated jointly by SCF and OAO Sevmorneftegeofizika - one of the leading Russian seismic companies. The two companies participated together in a tender by OAO Rosneft, for the implementation of marine seismic surveys on the continental shelf in the Black Sea during 2011-2012.

Fleet Summary

SCF Group’s fleet comprised 156 vessels, amounting to 11.7 million tonnes DWT, as at 30 September 2011. During the first nine months of 2011, SCF took delivery of 11 vessels, equivalent to 1.1 million tonnes DWT. Over the period the Group sold five vessels including three dry-cargo ships and two handy size tankers, amounting to 110,000 tonnes DWT in aggregate.

A detailed fleet list is available on the Group’s website (www.scf-group.com).

Financial Position

As at 30 September 2011, the Group had contracted future revenues of USD 5.5 billion. This position reflects the solid and long-term nature of SCF’s relationships with its ‘blue chip’ charterers, mainly large national and international energy majors.

At the end of the period the Group continued to enjoy a strong liquidity position, with cash balances of USD 334.8 million.

In June 2011, the international ratings agency Standard & Poor’s awarded SCF Group a long-term credit rating of ‘BBB-’ with a stable outlook. During the first nine months of 2011 both Moody’s and Fitch maintained their investment grade ratings for Sovcomflot, although they each downgraded their outlooks to negative (Baa 3 ‘Negative’ and BBB- ‘Negative’ respectively), reflecting in part the challenging conditions faced by the shipping industry. Meanwhile, during the period Moody’s downgraded its rating of Sovcomflot’s unsecured bond issue to Ba1 ‘Negative’.