PXS - Imperial Petroleum: A Tale Of Two Equities

Summary

• Over the past year, the company's common shares have been subject to relentless dilution. Fears of additional equity sales have resulted in shares tumbling to new lows recently.
• In contrast, business fundamentals for Imperial Petroleum's tanker fleet have never been better with charter rates and second hand vessel values sitting at multi-year highs.
• Strictly from a balance sheet and liquidity perspective, the company is among the strongest exchange-listed nano-cap shippers.
• While an 85% discount to NAV looks enticing, the common shares are only suited for highly speculative investors and traders betting on the resurgent momentum crowd to pick the stock up for another ride as witnessed a number of times last year.
• With the common shares remaining more of a crapshoot, income-oriented investors should seriously consider the company's 8.75% Series A Preferred Shares which currently offer a rather safe, double-digit yield.

Based on business fundamentals, it certainly looks like the best of times for tanker operator Imperial Petroleum ( IMPP , IMPPP ) but it is also the worst of times for common shareholders as the company's strategy to pursue growth at the expense of common equity holders has resulted in outsized dilution.

While momentum traders pushed the common shares to an all-time high of $9.70 in last year's spring of hope, the current winter of despair has caused the stock price to tumble to new lows.

Common Shares: Relentless Dilution

Over the course of 2022, Imperial Petroleum raised approximately $156 million in new capital thus causing outstanding common shares to increase by more than 3,500%.

The company has used the funds to expand its fleet from four to ten vessels with two MR product tankers and two Handysize dry bulk carriers having been acquired from related party Brave Maritime, an entity controlled by the family of CEO Harry Vafias.

With the fallout from Russia's assault on Ukraine having altered tanker market dynamics in favor of shipowners, charter rates and second hand vessel values have been going through the roof in recent months.

In late October, Imperial Petroleum released impressive third quarter results and based on recent tanker charter rates, Q4 should have been even better.

Even the drag from the recently acquired dry bulk vessels is unlikely to have impacted the company's performance in a meaningful way.

Fears of additional dilution and a potential, near-term reverse-stock split have caused market participants to abandon common shares thus resulting in a record-high discount to net asset value ("NAV"):

Please note that this estimate does not even account for cash generated in Q4 which could easily exceed $20 million thus bringing NAV closer to $1.60.

While an 85% discount to NAV looks enticing, the common shares are only suited for highly speculative investors and traders betting on the resurgent momentum crowd to pick the stock up for another ride as witnessed a number of times last year.

Preferred Shares: Low Risk, Decent Yield

Investors looking for a considerably less risky way to benefit from Imperial Petroleum's very strong financial condition should consider the company's 8.75% Series A Preferred Shares which at current price levels offer a very safe 10.5% annual yield.

Moreover, should the company indeed decide to make use of its recently-gained redemption right , investors would be rewarded with an approximately 25% short-term capital gain.

In stark contrast to the company's common stock, the preferred shares have actually benefited from last year's dilution which has fortified Imperial Petroleum's balance sheet and liquidity.

At this point, I consider the distribution to be safe for the foreseeable future so it is somewhat surprising to see the preferred shares trading at a sizeable discount to closest peer Pyxis Tankers' 7.75% Series A Cumulative Convertible Preferred Shares ( PXSAP ).

While Imperial Petroleum's preferred stock lacks a conversion option, the company is in much better financial condition than its smaller competitor.

Unfortunately, trading volume in Imperial Petroleum's preferred shares continues to be very thin.

Bottom Line:

Strictly from a fundamental perspective, Imperial Petroleum is among the strongest U.S. exchange-listed shipping companies due to its fortress balance sheet and positioning in the sweet spot of the current tanker market bonanza.

While the company's strategy of pursuing growth at the expense of common shareholders has rightfully alienated investors, market participants have started chasing former meme stocks as of late and with another set of anticipated, very strong quarterly results ahead, Imperial Petroleum's common shares might very well be picked up for another ride by momentum traders in the not-too-distant future.

While a bet on the common shares remains more of a crapshoot, income-oriented investors should seriously consider the company's 8.75% Series A Preferred Shares which currently offer a double-digit and pretty safe yield.

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