Sovcomflot sheltered by long-term charter deals despite counterparty risks

Russian state-owned tanker giant sees conservative strategy paying off

RUSSIAN tanker giant Sovcomflot has sought shelter from long-term charter commitments despite the potential negative impact of low oil prices and sanctions on some of its customers, according to a top executive.

Many of the state-owned carrier’s customers are involved in energy projects in Russia, where growth prospects could be curbed by restrictions on access to capital due to Western sanctions.

Moreover, relatively high production costs in the Russian Arctic area might affect output growth for the medium to long term, if oil prices continue to stay at the current low levels.

While recognising those challenges to some of its major clients, Sovcomflot executive vice-president and chief financial official Nikolay Kolesnikov pointed out that his company’s preference for long-term businesses has sheltered it from those possible negative factors.

As competition among newbuilding projects for capital is keen within the diversified carrier, Sovcomflot has a tendency to choose those “with good cashflows”, Mr Kolesnikov told Lloyd’s List.

“Historically we have been very conservative, rather than taking a bet on markets,” Mr Kolesnikov said.

“This conservatism has served us well.”

Sovcomflot has held back in expanding its fleet of petroleum tankers, while its existing orderbook is only composed of specialised vessels tied to long-term contracts.

The newbuilding vessels include one ice-class liquefied natural gas carrier attached with a charter contract of more than 20 years for the Yamal project, three shuttle tankers with 12-year charter deals with Gazprom, and four ice-breaking platform supply vessels tied to 20-year contracts with Sakhalin Energy.

Mr Kolesnikov said that is Sovcomflot’s preferred way of doing business. “We enter partnership with our clients.”

While enjoying strong earnings from crude and product carriers, Sovcomflot’s fleet of eight liquefied natural gas carriers are all tied to charter contracts of at least 10 years, according to Mr Kolesnikov — thus protecting the carrier from the current weak spot market in this segment.

Sovcomflot recorded net profits of $216.3m for the first half of this year, showing strong improvement from the year-ago level of $63.6m.

The company’s overall time charter equivalent revenues reached $617.6m for the six months, representing an on-year gain of 26%.

TCE revenues in crude transport increased by 27% to $280.5m, as those in products transport rose 24% to $126.6m.

Having taken delivery of two ice-class liquefied natural gas carriers on charter to Shell, the company’s gas shipping division recorded a 50% gain in TCE revenues to $63.6m.

Mr Kolesnikov said his company expected tanker markets to remain strong for a couple of years due to firm supply-demand fundamentals, especially in the mid-sized segment Sovcomflot focuses on.

As for the LNG segment, the commissioning of Australian projects in the coming quarters could also ease oversupply and provide lift to rates, he said.

“Some Australian projects are near completion. They will absorb some tonnage,” said Mr Kolesnikov.

As of June 30, Sovcomflot operated a fleet of 150 owned and chartered-in vessels, including nearly 120 oil tankers and other vessels in LNG, liquefied petroleum gas, dry bulk and offshore segments.