Sovcomflot looks to the future with energy

Sovcomflot CFO, Nikolai Kolesnikov.

'Shipping is far too fragmented': Sovcomflot CFO, Nikolai Kolesnikov. Credit: Sovcomflot

From shipping to banking and then back again. For Sovcomflot chief finance officer Nikolai Kolesnikov, a move from the impalpable world of banking to the very tangible assets of shipping was simply going full circle.

After completing academic studies at the Moscow Institute of Finance, the 54-year-old Russian spent several years working for the USSR Ministry of Merchant Marine before being lured into the world of finance in the early 1990s, which included international postings with Morgan Grenfell, Deutsche Bank, and JP Morgan.

As a banker, Kolesnikov never got a chance to work with Sovcomflot and but after an encounter with a very “persuasive” Sergey Frank, the tanker owner’s chief executive, while pitching some banking business he was invited to come and sit on the other side of the table. He agreed to join the Russian state-controlled tanker giant in 2005.

With more than a decade of experience at Sovcomflot under his belt, Kolesnikov says that shipping, as a business, needs to face the future.

“Shipping is far too fragmented,” Kolesnikov tells Fairplay. “There are too many small owners and some of the family-owned and cross-generational structures can create challenges. Shipping needs to grow up and become more institutionalised,” he says.

For a strategic thinker with a steady eye on the bottom line, the emotion some shipowners display around vessel assets, the appetite for heavy exposure in one particular sector, and that few are willing undertake such a cyclical industry all remain sources of incredulity for a numbers man like Kolesnikov.

Consequently, one of his first objectives when he joined Sovcomflot was to diversify its operations and move away from being a pure play-tanker owner to an energy service provider. The company, which controls a fleet of 150 vessels – 124 tankers (including 16 ice-class shuttle tankers), 13 LNG carriers, 11 specialist vessels and two bulk carriers – is moving close to achieving its goal of having a 50:50 split between the two operations, he tells Fairplay.

The evolution of Sovcomflot, which will celebrate its 30th anniversary in May, has been closely with aligned with Russia’s ambitions to maximise its mineral resource potential. One recent example is the Yamal LNG project where Russia’s largest independent natural gas producer Novatek and French oil major TOTAL SA are looking to monetise large but remote low-cost natural gas reserves. The project’s first train began operations in November 2017.

The shipowner regularly orders specialist tonnage to support such national projects in an effort to become an energy service provider.

Last year, Sovcomflot, along with compatriot oil major Rosneft, ordered five liquefied natural gas (LNG)-fuelled Aframaxes to service Russian exports of crude from the Baltic ports. The company also ordered a fourth vessel in a series of shuttle tankers to support crude exports out of the Novy Port field.

Sovcomflot, along with Mitsui OSK Lines (MOL), Teekay, and Dynagas LNG Partners, have been contracted to ship LNG from Yamal and these companies were each respectively, awarded one, three, six and five ice-class vessels that were built by Daewoo Shipbuilding & Marine Engineering. China COSCO Shipping Corporation later took joint investments in the vessels contracted by MOL, while Teekay and Dynagas have brought in Chinese partners in the vessels as well.

Christophe de Margerie. Credit: Sovcomflot

Sovcomflot took delivery of the ice-class LNG carrier Christophe de Margerie in early 2017 and it completed loading of the first LNG cargo produced at the Yamal LNG plant on 8 December 2017, an exercise that was witnessed by the Russian president along with other political dignitaries.

As demand continues to grow, the Russian shipowner has seen a number of foreign shiping companies muscling into its homepatch. Russia is big domestic customer and its demands are “too big for us” to manage on our own, Kolesnikov assures Fairplay. Its willingness to work alongside other tanker owners should not detract from Sovcomflot’s tanker prowess.

According to IHS Markit Maritime and Trade data, Sovcomflot is the seventh biggest tanker group beneficial owner, a list that is topped by Anangel Shipping Enterprise which controls a whopping 15.9 million dwt.

With its fleet of 11.4 million dwt, more than Euronav’s 10.9 million dwt and Frontline’s 7.7 million dwt, Sovcomflot naturally keeps a steady eye on tanker consolidation, which most recently saw Euronav and Gener8 announce a USD490 million merger deal in December 2017.

The shipowner has a history of inorganic growth, dating back to its acquisition of compatriot Novoship in 2007, but, according to Kolesnikov, it takes a cautious approach towards consolidation.

“We tend to use mergers and acquisitions (M&A) selectively when there is a good business rationale for the deal, be it fast-tracking entry into a new segment, consolidating market position, acquiring operational expertise, or expanding fleet renewal.

“As a sizeable player in the tanker space, Sovcomflot is viewed as a consolidator, and most acquisition opportunities are being flagged to and screened by us,” he says.

There were several other significant tanker consolidation plays in 2017, including Frontline’s unsolicited and unsuccessful offers for DHT in January, DHT’s acquisition of BW Group’s very large crude carrier fleet in March and Teekay Tankers acquisition of TIL in May.

While declining to comment on specific deals, Kolesnikov, like many in shipping, expects consolidations to continue in the months ahead and challenging market conditions could be a contributing factor.

“The scarcity of publicly-listed shipping companies with liquid stock that can be used as an acquisition company, combined with a reduced appetite on the lenders’ side, have put a natural constraint on more M&A in the industry.

“For the conventional tanker business, the markets have not been good and I expect some of these difficulties to continue into 2018,” he says. Sovcomflot has been subject to these challenges and in the first nine months of 2017, it sustained a USD6.8 million loss from the USD218.1 million profit recorded over the same period of 2016.

Like peers in the tanker business, Sovcomflot has also to navigate the effect of the sanctions imposed on its Russian energy clients in July 2014 following the fallout over Russia’s invasion of Ukraine.

“Sanctions are not a new thing”, Kolesnikov says, telling Fairplay that the long-standing relationships the company enjoys with its main clients – mostly energy majors – have not changed as a result.

An established ambition that has dominated maritime headlines over the years is Sovcomflot’s proposed initial public offering (IPO). These plans were first mooted in the mid-2000s and dominated much of Kolesnikov’s attention when he started in his role.

“We had all the structures in place for flotation and then the Lehman Brothers’ happened and the market collapsed,” he says. This resulted in the privatisation plan being put on ice but the plans “can be revived at any time and that is the intention when the time is right”, he says.

Only time will tell whether Sovcomflot will be able to quench its IPO thirst. For now though, it is business as usual for Russian owner, which Kolesnikov says is to be the “coca-cola of shipping” – universally available, serving multiple markets, and with its clients able to rely on a consistent level of quality.

Contact: Nicola Good and follow her on twitter @nicgoodmaritime