IMPPP - Imperial Petroleum: Sugarcoating An Ugly Related-Party Deal - Sell

2023-09-11 05:32:24 ET

Summary

• Last week, Imperial Petroleum surprisingly announced a $10 million share repurchase program despite having just closed on another heavily dilutive capital raise.
• In my opinion, considering management's aggressive near-term fleet expansion targets, further dilution looks far more likely than share buybacks.
• The company continues to engage in related-party dealings with entities controlled by the family of CEO Harry Vafias to the detriment of shareholders.
• Last week's $71 million purchase of the product tanker "Aquadisiac" and the Aframax tanker "Stealth Haralambos" was done at a large premium to market prices.
• With further dilution apparently much more likely than share repurchases, I am reiterating my "Sell" rating on the common shares.

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 surprisingly announced a $10 million share repurchase program despite having just closed on another heavily dilutive capital raise .

IMPERIAL PETROLEUM INC. (...) today announced that its Board of Directors has approved a share repurchase program and authorized the officers of the Company to repurchase, from time to time, up to $10,000,000 of the Company's common stock. Shares may be purchased in open market or privately negotiated transactions, at times and prices that are considered to be appropriate by the Company, and the program may be suspended or discontinued at any time.

Apparently, there's not much sense in returning recently raised funds to investors, particularly not when considering management's stated goal of increasing the fleet to sixteen vessels within the next three to six months.

At least in my opinion, the share repurchase program was announced to sugarcoat another ugly related-party deal (emphasis added by author):

The Company also announced that it has entered into an agreement to acquire two tanker vessels, the aframax tanker Stealth Haralambos, built in 2009 and the product tanker Aquadisiac built in 2008, with an aggregate capacity of approximately 163,716 dwt.

The aggregate purchase price for these acquisitions is $71 million . Both vessels will be delivered on a charter-free basis by the end of January 2024.

The Company expects to finance the purchase price with cash-on-hand. The transaction with affiliates of the Vafias family, was approved by the Company's audit committee comprised of independent directors.

Quite frankly, I have no idea why the company's independent directors approved a transaction that resulted in Imperial Petroleum overpaying by almost $10 million as VesselsValue states the combined market value of the vessels at just $61.2 million.

Moreover, the acquisition of the Aframax tanker Stealth Haralambos makes the recent sale of the very similar Stealth Berana to spin-off C3is (CISS) look even more odd .

However, with the family of CEO Harry Vafias controlling the company's vessel management company, Stealth Maritime, and the management agreement providing for a 1% fee " of the contract price of any vessel bought or sold by them on our behalf ", selling vessels from Stealth Maritime to Imperial Petroleum and further to C3is apparently generates a decent amount of fees for the Vafias family.

In case of the Stealth Berana , the newbuilding contract was acquired by StealthGas (GASS) from a Vafias family-controlled entity in 2010 for $56.5 million. The vessel was part of the Imperial Petroleum spin-off in late 2021 before being sold to C3is in July for $43.0 million.

Please note that both StealthGas and C3is have similar management agreements with Stealth Maritime and Brave Maritime respectively, another Vafias family-controlled entity.

As a result, the recent sale of the Stealth Berana from Imperial Petroleum to C3is has resulted in both companies paying the 1% fee to their respective, Vafias-controlled managers:

Please note that there's nothing that would prevent the sale of Stealth Berana back to Imperial Petroleum or any other company also managed by Stealth Maritime/Brave Maritime at some point going forward to further maximize fees.

With last week's purchase of Aquadisiac and Stealth Haralambos , Imperial Petroleum's fleet will increase from nine to eleven vessels, so still ways to go until management's near-term fleet expansion target will be reached.

With the Vafias family selling the vessels to Imperial Petroleum at a large premium to market value, overall net asset value ("NAV") has been reduced by approximately 3%:

Even worse, this most recent related-party dealing resulted in the Vafias family extracting $71 million in cash from the company thus reducing Imperial Petroleum's pro forma cash position from $114.6 million to $43.4 million.

This is actually bad news for holders of Imperial Petroleum's 8.75% Series A Preferred Shares (IMPPP) as their margin of safety has decreased.

Bottom Line

Imperial Petroleum continues to engage in related-party dealings with entities controlled by the family of CEO Harry Vafias to the detriment of shareholders.

Moreover, considering management's aggressive near-term fleet expansion targets, I do not expect Imperial Petroleum to utilize its new $10 million share repurchase program anytime soon if ever. In fact, I would anticipate more dilution sooner rather than later to finance additional vessel purchases.

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 ).

With further dilution much more likely than share repurchases, I am reiterating my " Sell " rating on the common shares.

In addition, with the latest related party dealing resulting in a large cash drain for Imperial Petroleum, I am downgrading the company's 8.75% Series A Preferred Shares to " Hold " from " Buy " due to the decreased margin of safety for preferred shareholders.

For further details see: