Sovcomflot comes to leadership

Sovcomflot Group is ahead of the world’s largest tanker companies in terms of revenue and profit of quarter I, 2014. The debates about the company privatization terms intensified in this context.

Ahead of the curve

Russian tanker company Sovcomflot demonstrates high competitiveness in the global market.

In the first quarter of 2014, the Group’s net profit surged 29.1 times, year-on-year, to $58.1 mln with gross revenue of $365.1 mln (up 16.5 times). 

For comparison: Scorpio Tankers, one of world’s largest tanker companies had $53.34 mln of net profit with revenue of $76.6 mln. Scorpio Tankers’ time-charter equivalent hit $72.76 mln, Sovcomflot’s - $270.6 mln.

Tanker company Frontline had a net loss of $12.1 with $169.99 mln of revenue. 

One more leader of the industry, Teekay Tankers, had a net profit of $26.43 mln with $61.76 mln of revenue.

Norden’s tanker division had revenue of $93.95 mln and a net profit of $3.62 mln.

Meanwhile, the freight market is still poor: freight rates have not recovered from 2009 to pre-crisis level. They are 3-4 times below the pre-crisis freight rates. 

In this situation, the companies have to look for specific market niches. Sovcomflot has seen them in transportation of liquefied gas, servicing of offshore oil & gas projects in adverse climatic conditions and long-term participation in offshore energy projects of Russia and other countries. Also, it should not go unmentioned that Sovcomflot is highly competent in servicing Arctic projects and NSR shipping. 

In this respect, amid worsening relations between Russia and the west, emerges the issue of providing certain preferences to Russian carriers, for example in competitions for servicing oil & gas projects at Russia’s continental shelf. Moreover, it is a matter of national security, Russia’s independence of competitors’ will.

As Sergey Frank, President and CEO of Sovcomflot, commented earlier, Sovcomflot frequently participates in tenders of the leading oil & gas companies all over the world. “Legislation of many countries, even most liberal ones, provides preferences for national carriers, for vessels flying national flags through reserving certain types of cargo for them. Therefore, it is extremely difficult for foreign shipping companies to get access to such cargoes. This approach seems to be appropriate in Russia as well,” Sergey Frank noted.

In the case with Sovcomflot, such preferences would not mean an artificial dragging of a company to a profitability level since the carrier has already demonstrated its competitive ability in the most unfavorable market situation and especially tough competition in global markets.

To sell, or not to sell: that is the question

Amid Sovcomflot’s success, the debates about the company privatization time resumes in Russia. At SPIEF-2014, Olga Dergunova, head of the Federal Property Management Agency (Rosimushchestvo) confirmed the plan on privatization of 25% of Sovcomflot and NCSP in 2014. However, Economic Development Minister, Alexei Ulyukayev later said that Russia’s privatization plan for 2014 will be revised. In June, First Deputy Finance Minister Tatyana Nesterenko said that the Government had decided not to sell stakes in Sovcomflot in 2014, due to the lack of certainty with the value of the assets.

According to the Government decree, 25%+1 share of Sovcomflot is to be privatized by 2016. 

The Government seems to face a dilemma: to replenish the budget as soon as possible (it would be a proper time amid the economic decline, joining with Crimea and international sanctions) or to wait for improving of the market situation and earn more than it is possible today, especially in view of future export of hydrocarbons from the offshore projects in the Arctic and preferences obtained by the Company as a national carrier.

Anyway, we think that Sovcomflot will become one of the most attractive assets in the industry for private investors.

Vitaly Chernov