GASS - Imperial Petroleum: Shares Move Higher With Dry Bulk Carrier Spin-Off Approaching - Hold

2023-06-08 18:30:23 ET

Summary

• Company updates investors on proposed dry bulk carrier spin-off into a new Nasdaq-listed entity. Record and distribution date have been set for June 13 and June 21, respectively.
• As shares will trade with due bills following the record date, investors will have to hold their positions until at least June 22 in order to participate in the spin-off.
• Following a reverse stock split in late April and very strong first quarter results last month, the company recently repaid all of its outstanding debt.
• With the reverse stock split now in the rear view mirror and the upcoming C3is Inc. spin-off representing a sizeable dividend for common equity holders as well as anticipated lack of near-term dilution, I am upgrading Imperial Petroleum's common shares from "Sell" to "Hold".
• Income-oriented investors should continue considering the company's 8.75% Series A Preferred Shares which currently offer a double-digit and pretty safe yield.

Note:

I have covered Imperial Petroleum ( IMPP , 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 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 248.1 million until the company's recent 1:15 reverse stock split reduced this number to approximately 16.5 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 grab a material part of the company going forward.

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 zero as of today.

Two months ago, 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. (...)

Last week, the company provided an update on the proposed spin-off (emphasis added by author):

Stockholders and warrantholders of the Company will receive one C3is common share for every eight shares of Imperial Petroleum’s common stock owned, or in the case of holders of Imperial Petroleum’s outstanding Warrants that they have the right to purchase pursuant to Warrants owned, at the close of business on June 13, 2023 (the “Record Date”). The distribution is expected to be made on or about June 21, 2023. (...)

Shares of Imperial Petroleum common stock will trade with due bills from the Record Date through and including the Distribution Date. Accordingly, shareholders and warrantholders of the Company as of the Record Date must continuously hold such shares of Imperial Petroleum common stock and Imperial Petroleum’s Warrants through and including the Distribution Date in order to receive shares of C3is Inc. in the spin-off.

As Imperial Petroleum's common stock will trade with due bills following the June 13 record date, existing common shareholders will be required to hold their shares until at least June 22 in order to receive the C3is distribution.

Conversely, investors considering to participate in the proposed spin-off, have until June 21 to purchase common shares of Imperial Petroleum.

Based on approximately 3.2 million outstanding common shares, C3is' initial net asset value per share calculates to $5.75:

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.

Following a very strong first quarter report highlighted by decent profitability and superior cash generation and with the spin-off date approaching quickly, Imperial Petroleum's common shares have rallied to new four-month highs in recent weeks.

But based on C3is' net asset value and Imperial Petroleum's common share price, the spin-off still represents a meaningful 18% one-time dividend for the company's common shareholders.

Unfortunately, according to 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.

Following the C3is spin-off and considering recent debt repayments and the company's estimated second quarter free cash flow generation, Imperial Petroleum's net asset value calculates to slightly above $20 per common share:

Even considering recent price appreciation, the company's common shares are still changing hands at an eye-catching 80%+ discount to NAV.

While management has promised to abstain from additional common shareholder dilution for the time being, market participants seem to remain wary.

Bottom Line

Following a 1:15 reverse stock split in late April, Imperial Petroleum stock reported very strong first quarter results last month and recently repaid all of the company's outstanding debt.

Last week, the company updated investors on the proposed spin-off of two handysize dry bulk carriers into a new company called C3is Inc. with the record and distribution date having been set for June 13 and June 21 respectively. With shares expected to trade with due bills following the record date, investors will have to hold their positions until at least June 22 to participate in the spin-off.

With management having promised to abstain from additional common shareholder dilution for the time being and with the spin-off date approaching quickly, Imperial Petroleum's common shares have rallied to new four month highs in recent weeks but still trade at a whopping 80%+ discount to estimated NAV.

With the reverse stock split now in the rear-view mirror and the upcoming C3is Inc. spin-off representing a sizeable dividend for common equity holders as well as anticipated lack of near-term dilution, I am upgrading Imperial Petroleum's common shares from " Sell " to " Hold ".

Income-oriented investors should continue considering the company's 8.75% Series A Preferred Shares which currently offer a double-digit and pretty safe yield.

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