IMPPP - Imperial Petroleum: Discussion Of Proposed Dry Bulk Carrier Spin-Off

2023-04-13 21:27:04 ET

Summary

• Vafias family-controlled company proposed to spin off two handysize dry bulk carriers into a new Nasdaq-listed entity called "C3is Inc."
• Spin off represents a substantial one-time dividend for Imperial Petroleum's share- and warrantholders.
• Given C3is' tiny initial share count, momentum traders might chase the stock out of the gate.
• Based on statements made in C3is' initial SEC-Filing, the company is likely to follow the same playbook as its parent and aggressively pursue growth at the expense of common shareholders.
• Despite a massive discount to net asset value and recent termination of the company's at-the-market offering, I consider Imperial Petroleum's common shares a "Sell" based on the near-term requirement to conduct a reverse stock split and likelihood of further dilution and related party dealings.

Note:

I have covered Imperial Petroleum ( IMPP , NASDAQ: IMPPP ) previously, so investors should view this as an update to my earlier articles on the company.

Since its late-2021 spin-off from StealthGas ( GASS ), Imperial Petroleum's ongoing strategy to pursue growth at the expense of common shareholders has resulted in outsized dilution.

Since inception, the company raised approximately $170 million in new capital, thus causing outstanding common shares to increase by more than 4,000%.

Between December 16, 2022 and March 13, 2023, the company sold 50.8 million new common shares into the open market under its recently terminated $50 million ATM program at an approximately 85% discount to net asset value for net proceeds of just $12.4 million.

As a result, total common shares outstanding increased to 243.9 million.

The company has used the funds to expand its fleet from four to twelve vessels with two MR product tankers and four Handysize dry bulk carriers having been acquired from related parties associated with CEO Harry Vafias.

The company's most recent related-party purchase of the Handysize dry bulk carriers Eco Wildfire and Glorieuse looks particularly ugly with Imperial Petroleum paying an aggregate cash consideration of $25.5 million and issuing another $13.875 million in new Series C Cumulative Convertible Perpetual Preferred Stock (“Series C Convertible Preferred Stock”) for two vessels with an estimated aggregate value of approximately $33.5 million at the time of the purchase announcement:

The Series C Convertible Preferred Stock has a dividend rate of 5.00% per annum per $1,000 liquidation preference per share, which is payable in cash or additional shares of Series C Convertible Preferred Stock at the Company’s election, and is convertible, at the holder’s option, after the six-month anniversary of issuance into shares of the Company’s common stock at a conversion price equal to the lower of $0.50 and the ten-day volume weighted average price of the common stock.

Even worse, the conversion option provides CEO Harry Vafias the chance to opportunistically grab a material part of the company going forward.

Two weeks ago, the company estimated its net asset value per common share at $1.39:

Imperial Petroleum (...) announced today that at March 27, 2023 the Company’s management, estimates Imperial Petroleum Inc’s Net Asset Value (“NAV”) to be $338.6 million, which is approximately 717% above its current market capitalization. The NAV which includes total outstanding cash of $142.2 million is increasing daily on account of the record net cashflow contributed by our tankers.

This translates into a NAV of $1.39 per common share currently outstanding and $1.17 per common share on a fully diluted basis (assuming exercise of all outstanding warrants for cash).

In recent months, the company has aggressively paid down debt " to utilize its excess cash amidst a positive market environment and shield its cash flow generation going forward against increasing finance costs ".

As a result, total outstanding debt has been reduced from approximately $70 million at year-end to just $15 million as of today.

After the close of Wednesday's session, Imperial Petroleum announced the proposed spin-off of two Handysize dry bulk carriers ( Eco Bushfire and Eco Angelbay ) into a new Nasdaq-listed entity called C3is Inc.:

(...) In connection with the spin-off transaction, the Company will contribute two vessel-owning subsidiaries to C3is Inc., and will distribute all of the common shares of C3is Inc. to the Company’s common shareholders and holders of warrants to purchase the Company’s common shares as required by their terms.

The transaction is expected to be completed in the second quarter of 2023, and remains subject to the registration statement on Form F-1 being declared effective by the Securities and Exchange Commission, the approval of the listing of C3is Inc.’s common stock on the Nasdaq Capital Market, and final approval by the Company’s board of directors. (...)

The board of directors of the Company believes that the creation of a “pure play” drybulk shipping company will provide significant benefits to both companies and their shareholders. The transaction will enable C3is Inc. to initially focus on the drybulk sector, while Imperial Petroleum Inc. gradually focuses on the tanker sector. Each company will independently attract new investors and provide shareholders the flexibility to adjust their holdings according to the sectors in which they want to invest. (...)

The new company is expected to trade on the Nasdaq Capital Market under the ticker "CISS".

In exchange for contributing the vessels and $5.0 million in cash, Imperial Petroleum will receive 600,000 newly issued supervoting 5% Series A Convertible Preferred Shares which will effectively enable the company to retain control of C3is and provide an opportunity to grab back a sizeable stake in the spin-off at an opportune time going forward:

(...) The conversion price will be adjusted to the lowest price of issuance of common stock by the Company in any registered offering of common stock after the original issuance of Series A Convertible Preferred Shares. These Series A Convertible Preferred Shares will entitle Imperial Petroleum to the right to cast a number of votes for any matters on which our shareholders are entitled to vote equal to the number of common shares into which such shares are convertible multiplied by 30, subject to certain limitations that will prevent Imperial Petroleum from exercising more than 49.99% of the aggregate voting power derived from any voting security then held by Imperial Petroleum on any matter put to shareholders. (...)

Based on approximately 3.1 million outstanding common shares, C3is' initial net asset value per share calculates to $5.81:

With both Imperial Petroleum's common share- and warrantholders entitled to the C3is distribution, the company has set the distribution ratio at one C3is share for every 120 Imperial Petroleum common shares or warrants owned.

Based on C3is' net asset value and Imperial Petroleum's common share price, the spin-off represents an eye-catching 21% one-time dividend for the company's common shareholders.

In addition, investors should note C3is' tiny initial share count which might very well result in momentum traders getting attracted to the stock very similar to what happened to shares of peer OceanPal ( OP ) following its spin-off from Diana Shipping ( DSX ) in late 2021.

Unfortunately, based on disclosures made in the company's F-1 filing with the SEC, I would expect C3is to follow the same playbook as its parent and fellow dry bulk spin-off OceanPal by aggressively pursuing growth at the expense of common shareholders (emphasis added by author):

In order to raise additional capital, including to support our growth plans, or in connection with equity awards, strategic transactions or otherwise, we may in the future offer additional common shares, preferred shares, or other securities convertible into or exchangeable for our common shares, including convertible debt. We expect that a significant component of the financing for the planned expansion of our fleet will be through equity offerings.

Please keep in mind that Imperial Petroleum owns two additional Handysize dry bulk carriers which I would expect to be dropped down to the spin-off at a premium to prevailing market prices as soon as C3is has raised a sufficient amount of capital.

Bottom Line

Quite frankly, with the second proposed spin-off transaction over the past 18 months, the Vafias family shipping empire starts to remind me of Russian Dolls. Following the spin-off, the vessels Eco Bushfire and Eco Angelbay will be owned by the third Vafias family-controlled entity in a row.

To be fair, the upcoming C3is spin-off represents a sizeable one-time dividend for Imperial Petroleum's share- and warrantholders and given the tiny initial number of outstanding shares, the stock might very well attract momentum traders similar to peer OceanPal in late 2021.

Unfortunately, I would expect C3is to follow the same playbook as its parent and aggressively pursue growth at the expense of common shareholders.

Given this issue, I would advise holders to sell their C3is shares shortly after the spin-off date to avoid getting caught flat-footed by the company's first capital raise.

Lastly, investors should note that Imperial Petroleum will be required to conduct a reverse stock split to regain compliance with the Nasdaq's $1 minimum bid price requirement by June 12 at the latest date.

Despite the massive discount to net asset value and recent termination of the company's at-the-market offering, I consider Imperial Petroleum's common shares a "Sell" due to the upcoming reverse stock split and likelihood of additional dilution going forward.

That said, income-oriented investors might want to consider the company's 8.75% Series A Preferred Shares which currently offer a double-digit and pretty safe yield.

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