OREANDA-NEWS. Despite another challenging year for the international tanker industry Sovcomflot maintains operational profitability and makes good progress  with strategy implementation to develop and grow  in the key gas and offshore sectors.

2013 Highlights
 

- Gross revenue: USD 1,262.8 million (2012: USD 1,353.0 million)*
- EBITDA: USD 382.1 million (2012: USD 406.1 million)
- Net loss: USD 39.2 million in 2013 (2012: USD 32.9 million net profit)
- Adjusted net profit (excluding non-cash impairment provisions and results on disposal of assets) USD 11.6 million
- Total fleet size 158 owned and chartered vessels, representing 12.6 million tonnes dwt as at the year end (2012: 158 owned and chartered vessels representing 11.7 million tonnes dwt)
- World’s largest tanker company** with an average fleet age of less than 8 years
- Steady fleet growth with delivery of seven new vessels (681,824 tonnes dwt in total) and expansion into new segments of Very Large Crude Carriers (VLCC) and ice-class LPG gas carriers, on the back of long-term fixed-rate contracts with national oil and petrochemical companies
- Two new multifunctional icebreaking supply vessels - Vitus Bering and Alexey Chirikov (Icebreaker Ice 10) – start operations at Sakhalin I, under long-term charter to the project operator Exxon Neftegas Ltd
- Sibur Voronezh and Sibur Tobol 20,000 cbm ice-class LPG gas carriers delivered and entered service, under long-term time-charter agreement with partner SIBUR, to transport LPG from the Ust-Luga terminal, Russia
- The Group’s first Very Large Crude Carrier (VLCC) Svet employed under a long-term charter with Petrochina International, named a Significant Ship of 2013 by Britain’s Royal Institution of Naval Architects
- Gas Natural extends time-charters for ice-class LNG carriers SCF Polar and SCF Arctic (world’s oldest LNG carrier in service awarded eligibility under US Coast Guard’s prestigious Qualship21 programme reflecting strength of Sovcomflot’s operational and vessel maintenance standards)
- Further implementation of programme of commercial voyages along the Northern Sea Route, involving ice-class tankers SCF Yenisei and Viktor Bakaev (first transit completed by the Group in an East-West direction) and the bulk carrier NS Yakutia.

*2012 numbers restated given adoption of certain new accounting standards, including early adoption of IFRS 11 resulting in closer alignment of Sovcomflot’s financial reporting with peers reporting under US GAAP
**By number of vessels, Clarksons
 
Sergey Frank, President and CEO of OAO Sovcomflot comments:

“Despite another challenging year for the international shipping industry, the Group made further progress with the implementation of its long-term strategy and transformation from purely a tanker company into a provider of diversified marine services for energy companies. The importance of this shift was reflected by the continuing growth of our higher margin business segments in 2013; liquefied gas transportation, shuttle tankers, and high-spec icebreaking supply vessels.

Conventional tanker operations faced continued headwinds throughout the year, though as we ended 2013 and into the first quarter of 2014, some welcome upswings in earnings indicate that the tanker market may have finally bottomed. With the spot market for crude oil tankers firming up in the last months of 2013 and early 2014, we expect first quarter 2014 performance to show an encouraging year on year growth and given the substantially reduced order book for crude oil tankers, we anticipate a further gradual strengthening of the market throughout the year, although not without some volatility.”

Evgeniy Ambrosov, Senior Executive Vice-President, Chief Operating Officer of OAO Sovcomflot noted:

“These results demonstrate the extent to which Sovcomflot is evolving as an integrated provider of energy transportation and offshore exploration and production support services. The Group has developed as a global leader in the provision of transportation logistics for energy in the harsh environments of the Arctic and sub-Arctic seas, making access possible to Russia’s hydrocarbon resources in northern latitudes and connecting these to world markets. Our range of services now includes ice class seismic vessels, multi-functional ice breaking supply vessels, ice class shuttle tankers, and ice class gas carriers. This will extend further in 2014 as Sovcomflot seeks to pioneer Arc 7 ice breaking LNG carriers for the export of gas from the Yamal peninsular.

We are proud also that SCF took delivery of Russia’s first ever VLCC, the tanker Svet, which delivered in December 2013 on long term contract to Petrochina. SCF continues its aim to remain a world leader in focused areas of the conventional tanker segment, especially in the key Aframax and Suezmax sectors which remain fundamental to Russian exports both in the East and West of the country and in which SCF has a long and proud record with international and national oil majors.”

Igor Tonkovidov, Senior Executive Vice-President, Technical Director of OAO Sovcomflot commented:

“As part of our strategic plan, SCF Group continued to invest in advanced design and innovative technologies for vessel construction and operation over 2013. We continued to focus on the training and well-being of our crews, who ensure SCF’s core competitive advantage – the high quality of our services. It is acknowledged by the fact that in 2013 all the Sovcomflot Group vessels received certificates of compliance with the International Labour Organisation’s 2006 Maritime Labour Convention (MLC-2006) before it had entered into force last year. This commitment to our people, as well as being the owner and operator of one of the World’s most technologically advanced and environmentally friendly fleets lies at the heart of our business. Moreover, our dedication to ‘Safety Comes First’ is also deeply engrained within our corporate culture. It is reflected by the unified SCF Group Safety Management System procedures that were implemented in 2013.”

Nikolay Kolesnikov, Senior Executive Vice-President of OAO Sovcomflot, Chief Financial Officer added:

“The Group remained free cash-flow positive in 2013 despite the challenging freight market conditions and a substantial investment programme provided for by the SCF Group’s strategy. Last year we took steps to further strengthen the Group’s liquidity position. In two separate transactions, with leading international financial institutions, we arranged around USD 400 million of long-term non-recourse credit facilities on competitive terms to finance our new build gas carriers.

“The Group’s stable financial position and good earnings visibility have helped us retain access to sources of debt capital, on favourable terms, throughout the shipping cycle.”
Gross revenue for the year to 31 December 2013 declined by 6.7 per cent to USD 1,262.8 million (2012: USD 1,353.0 million). Time charter equivalent (TCE) revenue, however, increased by 1.5 per cent to USD 872.6 million (2012: USD 859.4 million).

Adjusted earnings before interest, tax and depreciation (EBITDA) were USD 382.1 million, a decline of 5.9 per cent on the previous period (2012: USD 406.1 million).
The Group made a loss of USD 39.2 million for the year (2012: USD 32.9 million profit). This performance follows one of the most significant and sustained downturns in the tanker market cycle in a generation. Adjusted for one-off non-operational items (impairment provisions and gains/losses on disposal of assets) the Group reported a profit of USD11.6 million for the year (2012: USD 62.3 million) which translates into USD 0.005 adjusted earnings per share.

2013 Operating Highlights

Chartering
During 2013, 65 per cent of the Group’s vessels were employed under long and medium-term time charters, the majority of which are supporting large-scale industrial oil and gas projects. This has continued to shield OAO Sovcomflot’s earnings from the volatility of the spot markets and the depressed freight rates seen during the protracted downturn of the shipping cycle.


Business Segments

Crude Oil Tankers
 
This is the Group’s largest business segment and involves the transportation of crude oil for OAO Sovcomflot’s global customer base. At the year the fleet comprised 61 crude oil carriers (2012: 60 vessels). The segment continued to be characterized by a surplus of tonnage, which kept freight rates depressed for a further year. Reflecting this challenging background, Time Charter Equivalent (TCE) revenues for the year ended 31 December 2013 declined 4.2 per cent to USD 343.9 million (2012: USD 359.0 million).
On 18 November 2013, the Group took delivery of its first Very Large Crude Carrier (VLCC) Svet (321,038 tonnes dwt). At the period end, her sister ship SCF Shanghai remained on order and subsequently entered service in February 2014. Both vessels are engaged on a seven year time charter contracts to PetroChina International.
Following her delivery to the Group, Svet was nominated a Significant Ship of 2013 by Britain’s Royal Institution of Naval Architects, in recognition of her innovative design and special features.

Oil ProductsTankers

The Group’s fleet of 48 petroleum product carriers (2012: 52 vessels) transports refined petroleum, other oil products and chemicals for customers worldwide.
Time Charter Equivalent (TCE) revenues for the year to 31 December 2013 were USD 215.7 million (2012: USD 222.8 million), representing a decline of 3.0 per cent on the previous year.
During 2013 delivery was taken of two Aframax (LR2) oil product tankers. The first vessel was Anatoly Kolodkin (118,316 tonnes dwt), on 23 January 2013. She was followed by Viktor Bakaev (118,175 tonnes dwt) on 20 May 2013.

In August the oil products tanker SCF Yenisei continued the Group’s programme of Northern Sea Route (NSR) voyages. She made a successful easterly crossing of the NSR, with a cargo of light oil products. In 2013, for the first time, the NSR navigational window was extended and voyages continued up to October, when Viktor Bakaev (Ice class 1C) completed her transit of the NSR. This voyage was the Group’s first in a westerly direction and involved a cargo of 88,000 tonnes of light oil products for discharge in the UK.
During the time the NSR has been open to large vessels (from 2010), seven of the Group’s vessels have undertaken a transit of this Arctic shipping lane. The experience gained from such voyages is an important part of the preparations for the planned development of energy resources in Russia’s Arctic. To this end, SCF Group is cooperating closely with various oil and gas majors, FGUP Atomflot, state agencies and entities of the Russian transport industry.

Gas Tankers

This business segment comprises 10 Liquid Natural Gas (LNG) and Liquid Petroleum Gas (LPG) carriers. At the 2013 year end, the gas tanker fleet comprised six LNG carriers (2012: six vessels) and four LPG carriers (2012: two vessels). The Group has an equity ownership position in four of these LNG carriers, operating under long-term contracts for the Sakhalin 2 and Tangguh projects. At the year end, the Group had four LNG carriers on order for delivery by the first half of 2015.

Time Charter Equivalent (TCE) revenues for the period ended 31 December 2013, for vessels wholly owned by the Group, increased by 11.1 per cent to USD 48.3 million (2012: USD 43.5 million). This segment is an important area of growth within the Group’s development strategy.

During the year the high ice class LPG tankers Sibur Voronezh and Sibur Tobol entered service. They enable the year-round exportation of LPG from the port of Ust-Luga (Leningradsky Region), Russia. The vessels are part of an expanding collaboration with the Russian petrochemical holding company SIBUR.

In November 2013 the LNG carrier SCF Melampus was launched at the STX Offshore & Shipbuilding yard in South Korea. She is the first of two ice class gas carriers ordered by the Group, as part of a long-term agreement with Shell. SCF Melampus is due to be delivered at the end of 2014 and her sister ship is due to follow at the beginning of 2015.

Shortly after the period end, in January 2014, the Group took delivery of the new state-of-the-art gas carrier Velikiy Novgorod, ordered by the Group for the transportation of LNG for Gazprom Group. The tri-fuelled Atlanticmax 170,200m³ tanker is one of the most sophisticated vessels in her class. The second ship of the series, Pskov, is due to be delivered in September, 2014.
Both of these advanced design ice class Atlanticmax gas carriers (cargo capacity 170,000m³, Ice2) are being equipped for operations in low temperature conditions, which allows them to transport gas on a year-round basis from all existing LNG terminals to global markets.

Following the extension by Gas Natural of time-charters for the ice-class LNG carriers SCF Polar and SCF Arctic, both vessels continued to operate throughout the year and into 2014 being the world’s oldest LNG carriers in service. SCF Arctic was awarded eligibility under US Coast Guard’s prestigious Qualship21 programme, reflecting the strength of Sovcomflot’s operational and vessel maintenance standards.
During the year the Group continued work on transportation solutions for the Yamal LNG project, as part of its agreement with OAO Novatek and Vnesheconombank signed in June 2013.

Offshore Development Services

This high margin business segment is an important area of focus within SCF Group’s development strategy, and includes the Group’s shuttle tankers and multi-functional ice breaking supply vessels. As at 31 December 2013, the segment comprised 13 shuttle tankers (2012: 13 vessels) and four ice breaking supply vessels (2012: two vessels).
Time Charter Equivalent (TCE) revenues for the year to 31 December 2013 increased by 10.8 per cent to USD 207.0 million (2012: USD 186.7 million). The segment produced 34.0 per cent of the Group’s net earnings in 2013.

Following her delivery to the Group in April 2013, the multifunctional icebreaking supply vessel Alexey Chirikov commenced work at the Sakhalin-I Project at the end of July. She joined Vitus Bering which was already working for the Project, and enable uninterrupted operations at the oil platforms of the Arkutun-Dagi field in the Sea of Okhotsk.
Both Alexey Chirikov and Vitus Bering were constructed as part of a joint venture involving Russian and Finnish shipbuilders. Around 90 per cent of the structural components for these vessels were produced in Russia at the Vyborg Shipyard (part of OAO USC).

Other

This segment comprises dry bulkers and seismic vessel. Time charter equivalent revenues for 2013 increased by 22.3 per cent to USD 57.9 million (2012: USD 47.3 million).
In January, the Group took delivery of the ice class Panamax bulk carrier NS Yakutia (74,559 tonnes dwt). On 21 September, the vessel embarked upon her first transit of the Northern Sea Route, leaving the port of Murmansk with a cargo of 67,000 tonnes of iron-ore concentrate bound for the port of Lanshan in China. The vessel completed her voyage in October 2013, saving some 18 days compared with the alternative route via the Suez Canal.

Both NS Yakutia and her sister-ship NS Energy have been classified as ENVIRO vessels, reflecting their high standards of environmental protection and safety. Both vessels benefit from reinforced double hulls and double bottoms.

During the period the Russian flagged seismic vessel Vyacheslav Tikhonov completed a 3D acquisition project in the Black Sea and worked on a large scale 3D project for ONGC in India. Between June and October the vessel successfully executed complex acquisition project for OAO Gazprom offshore Sakhalin in Russia’s Far East.

Fleet

As at 31 December 2013, the Group’s fleet (owned and chartered) represented 158 vessels of nearly 12.6 million tonnes deadweight (31 December 2012: 158 vessels of 11.7 million tonnes deadweight), including nine escort tugs operating on a bareboat charter to an associate company.

During 2013, the Group took delivery of seven vessels amounting to 681,824 tonnes dwt in total. The new vessels comprised: one VLCC (Svet); two LPG carriers (Sibur Voronezh and Sibur Tobol); two Aframax (LR2) tankers (Anatoly Kolodkin and Viktor Bakaev); one Panamax bulk carrier (NS Yakutia) and one multifunctional ice breaking supply vessel (Aleksey Chirikov, ice class Ice10).
As at 31 December 2013 the Group’s had five vessels on order, comprising one VLCC and four LNG carriers, due for delivery between January 2014 and April 2015. The total contracted cost of these vessels is USD 881.9 million, of which USD 217.9 million had been paid as of the year end.

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

Financial Review

Despite the presence of continued turbulence within the global financial markets, and extremely challenging conditions facing the shipping industry around the world, the Group’s conservative approach to chartering and financing has continued to support its strategic goals.

Through providing support for long-term industrial energy projects and the offshore sector, and having almost two-thirds of vessels employed via long-term charter arrangements, earnings visibility and stability remains good. As at 31 December 2013, contracted future revenues were USD 4.9 billion.

In July OAO Sovcomflot and ING BANK N.V. concluded a USD 75 million, 10 year project credit facility. The funds have been used to finance the two new LPG carriers operating on long-term charter to SIBUR. ING Bank acted as the sole mandated lead arranger for this project finance facility, which has a non-recourse structure and a favourable long-term tenor as well as competitive pricing, reflecting the robustness of the deal structure and the credit quality of SIBUR. The vessels are owned through Sovcomflot's newly established SCF Gas Carriers Ltd. holding company, the Group’s dedicated vehicle for its expanding gas transportation business.
In December 2013, the Group (OAO Sovcomflot) signed a new USD 316 million, 10 year project non-recourse credit facility with a consortium of three leading international banks: ING Bank N.V. (ING) of the Netherlands; KfW IPEX-Bank GmbH (KfW) of Germany and Sumitomo Mitsui Banking Corporation (SMBC) of Japan. The funds are being used towards financing two new ice-class LNG carriers, Velikiy Novgorod and Pskov, which will operate on long-term contracts with Gazprom Global LNG and will be part of SCF Gas Carriers Ltd.

In 2013 Sovcomflot and Citigroup were shortlisted for ‘Deal of the Year’ in the 2013 Lloyd’s List Global Awards. This was in recognition of Sovcomflot’s USD 700 million, seven year credit facility which was arranged in December 2012 by a consortium of international banks including Citigroup. The funds were used to refinance three existing revolving credit facilities and for other corporate purposes.

In 2013 OAO Sovcomflot declared dividends of RUB 0.15 per share, amounting to RUB 300.0 million in total, equivalent to USD 9.1 million (2012: dividends of RUB 0.21 per share, totalling RUB 420.6 million, equivalent to USD 12.8 million).