CTRM - Imperial Petroleum: New All Time Lows Following Surprise Equity Offering - Sell

2023-08-11 19:04:04 ET

Summary

• Last week, Imperial Petroleum reported sequentially weaker Q2 results but nevertheless managed to generate record-high operating cash flow of $32.8 million.
• The sale of the Aframax tanker "Stealth Berana" to recent spin-off and alleged dry bulk pure play C3is Inc. has been causing confusion among market participants.
• One day after CEO Harry Vafias made some encouraging statements with regards to potential share buybacks, Imperial Petroleum shocked investors with a $17 million equity and warrant offering.
• The surprise offering resulted in outstanding shares increasing by 50% while net asset value ("NAV") per share declined by 30%.
• As my previous "Hold" rating was solely based on expectations for the company abstaining from additional dilution following the recent termination of its at-the-market equity offering program, I am downgrading shares back to "Sell".

Note:

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

Last week, Imperial Petroleum reported sequentially weaker second quarter results as fleet utilization was impacted by an elevated number of vessel repositionings as a result of the company's increased focus on spot voyages during the quarter.

Nevertheless, Imperial Petroleum generated record-high operating cash flow of $32.8 million.

However, cash and cash equivalents were down by more than $15 million on a quarter-over-quarter basis as the company utilized approximately $46 million in cash to repay its remaining debt obligations.

While management expects Q3 results to be seasonally weaker, Imperial Petroleum should still generate substantial cash flow from operations.

During the quarter, the company completed the spin-off of the Handymax dry bulk carriers Eco Bushfire and Eco Angelbay into C3is Inc. ( CISS ) or "C3is" with the strategic rationale behind the transaction stated by the Board of Directors as follows (emphasis added by author):

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.

Apparently, things have changed in recent weeks as on July 17, Imperial Petroleum perplexed investors with the sale of its sole Aframax tanker Stealth Berana to the alleged dry bulk shipping pure play C3is (emphasis added by author):

Imperial Petroleum Inc. (...) announced today that it has entered into an agreement to sell for $43 million the M/T Stealth Berana an Aframax oil tanker, built at Samsung shipyard, South Korea in 2010, with a cargo carrying capacity of approximately 115,800 dwt, to C3is Inc.

Payment of 10% of the purchase price has been received, with the remaining balance due within one year following the vessel's delivery which took place on the 14th of July, 2023. The vessel is currently trading in the spot market.

The transaction with C3is Inc., which is an affiliated company, was approved by the Company's audit committee comprising of independent directors.

According to statements made by CEO Harry Vafias on the highly entertaining Q2 conference call , the company will recognize an approximately $11 million gain from the sale of the vessel in Q3.

Please note that Imperial Petroleum received only 10% of the purchase price at closing with the remainder being due on July 14, 2024, at the latest date.

C3is investors should hope that the tanker charter rate environment remains strong over the next twelve months as otherwise the vessel would not generate sufficient cash to pay for the portion of the purchase price not covered by a likely bank financing. As a result, further dilution would be in the cards.

Not surprisingly, the transaction resulted in a number of analyst questions on Thursday's conference call (emphasis added by author):

Dillon Lanius

Hey, good day. Congratulations on all the progress and developing the business. Just curious about the goal set out to get to 15 carriers and some of the transactions that recently adding drybulk spinoff out the Aframax. Just curious where the sort of strategy is going from here?

Harry Vafias

Yes, obviously, by doing the spinoff from the sale of the one ship, doesn't get us to our target, but we have to do this moves. Indeed, because of our amazingly strong financial position, with the cash and the all of the fleet being we need to grow, we need to find the opportunities to grow. And we will do so, as we have done in the past. So the goal of 16 ships is not that far away, we have already nine after selling the one tanker, and I think we can get to that within the next three to six months, unless something dramatic happens to the market.

Dillon Lanius

And then being a pure play, and now adding drybulks into the mix of -- as a fleet?

Harry Vafias

We never said we're going to be a pure play, we have to buy and sell ships according to the market cycles. And therefore, we will look to buy anything that makes sense for the company, the shareholders and the bottom line.

So much for providing "shareholders the flexibility to adjust their holdings according to the sectors in which they want to invest".

Kudos to Ross Haberman from RLH Investments for taking the heat due to poking management on related party dealings:

Ross Haberman

(...) I just had a question about the about the bulk transaction. You bought that ships from yourself? And then a year later you spun it off and took a $9 million write-down? Is that correct?

Harry Vafias

Not really.

Ross Haberman

That's how I read it. How would you describe that?

Harry Vafias

We bought the ship from an affiliated company, when the market was higher, because obviously we cannot predict the future. And then we spun them off. And because we spun them off, we had an impairment. Impairment is a non-cash item, it doesn't affect us in any way financially, or cash flow wise. It's actually a protection. Because since we took the impairment, it means that if at any time we want to sell the ships, we're not going to have a loss. So, that's the summary of it.

Ross Haberman

I just want to make one observation that, these related party transactions, although you've done it and your Board blessed it. Optically, it doesn't look great. And I'm just saying that might be part of the reason why your stock trade at such a low multiple, that because of these related transactions, that not a good idea for the future. And I'll just say that…

Harry Vafias

When we were buying the ships from affiliates, when we were buying tankers from affiliated parties at $13 million and $14 million and then the same shot [ph] over $30 million we didn't hear the same comments. What do you say about that?

Management was also asked questions regarding a potential share buyback (emphasis added by author):

Unidentified Analyst

(...) I'm just curious if there any plans to do a buyback on the company concerning the share price is hovering around the lowest right now? Yes, what are your thoughts on that? Because it was mentioned previously.

Harry Vafias

(...) It's for that, indeed, is passing through my mind it has not been discussed at Board level. But if we continue to generate this kind of results and the stock doesn't do anything impressive, I think we should discuss it at the Board level with the rest of the directors .

Well, just one day after the CEO's statements the stock actually did an impressive move albeit to the downside as Imperial Petroleum caught market participants flat-footed with a $17 million equity and warrant offering out of left field:

(...) IMPERIAL PETROLEUM INC. (...) has entered into securities purchase agreements with institutional investors to purchase approximately $17.0 million of its units in a registered direct offering at a price of $2.00 per unit. Each unit will consist of one share of common stock (or one pre-funded warrant in lieu thereof) and one warrant to purchase one share of common stock and will immediately separate upon issuance The warrants will be immediately exercisable, will expire five years from the date of issuance, and will have an initial exercise price of $2.00 per share of common stock.

Maxim Group LLC is acting as the sole placement agent in connection with the offering.

With the offering increasing outstanding shares by approximately 50%, Friday's 35%+ selloff to new all-time lows very much reflected the resulting decrease in net asset value ("NAV") per share from well above $20 to approximately $14.50:

Given management's course of action, it can hardly be considered a surprise that shares are trading at an approximately 90% discount to net asset value, very similar to other relentless diluters in the Greek shipping space like Castor Maritime ( CTRM ), Globus Maritime ( GLBS ), Performance Shipping ( PSHG ) and OceanPal ( OP ).

While the offering is apparently bad news for common shareholders, the additional cash raised only strengthens the case for Imperial Petroleum's 8.75% Series A Preferred Shares ( IMPPP ) which at prevailing trading prices offer a very safe 11% yield.

Bottom Line

While Imperial Petroleum remains one of the financially strongest publicly-listed shipping companies, renewed dilution has resulted in shares cratering to new all-time lows.

As my previous " Hold " rating on the stock was solely based on expectations for the company abstaining from additional dilution following the recent termination of its at-the-market equity offering program, I am downgrading shares back to " Sell ".

However, income-oriented investors should consider taking a closer look at the company's 8.75% Series A Preferred Shares ( IMPPP ) which currently offer a very safe double-digit yield.

For further details see: