PXSAP - Pyxis Tankers: Change In Strategic Direction Unlikely To Impress Investors

2023-09-22 20:25:48 ET

Summary

• Last week, Pyxis Tankers closed on the previously-announced dry bulk shipping joint venture with its CEO and controlling shareholder Valentios "Eddie" Valentis.
• In addition, the company announced the sale of the 2015-built product tanker Pyxis Epsilon at a stellar price of $40.75 million, an approximately 15% premium to estimated market value.
• Pyxis Tankers has increased the pace of share buybacks since the end of the second quarter.
• In a recent Capital Link interview, management outlined its vision for the company to become a diversified shipping company in the near future.
• While Pyxis Tankers' new strategic direction is causing some uncertainty, I am reiterating my "Buy" rating on the common shares based on the company's strong financial position and discounted valuation.

Note:

I have covered Pyxis Tankers ( PXS , PXSAP , PXSAW ) previously, so investors should view this as an update to my earlier articles on the company.

Two months ago, I downgraded shares of small, Greece-based product tanker operator Pyxis Tankers or "Pyxis" due to corporate governance and capital allocation concerns after the company surprisingly decided to contribute $6.8 million to a new dry bulk shipping joint venture with its CEO and controlling shareholder Valentios "Eddie" Valentis.

With the company's common shares changing hands at an approximately 65% discount to estimated net asset value ("NAV") and an active (albeit small) share repurchase program, acquiring vessels at net asset value is apparently a vastly inferior use of capital relative to buying back shares at a fraction of NAV.

But Pyxis only repurchased a measly 23,431 common shares at an average price of $3.87 during the second quarter.

Last week, the company announced the closing of its above-discussed dry bulk shipping investment and provided an update on charter rates and share buybacks (emphasis added by author):

(...) As of September 18, 2023, 92.4% of the available days in the third quarter of 2023 for our MR’s were booked at an estimated average TCE of $26,200 per vessel . Currently, two vessels are under time charter, one vessel is employed in the spot market and one vessel is undergoing her second special survey .

After funding our joint venture investment, the Company had approximately $31.9 million in total cash . This acquisition is a meaningful enhancement to our growing investment platform.

Moving forward, our liquidity and low leverage should increase our operating and financial flexibility. Subject to market conditions and other factors, the Company expects to further enhance shareholder value by pursuing additional vessel acquisitions with cash on hand, and, as appropriate, utilizing bank financing.

In the meantime, the Company plans to continue to optimize our fleet, amortize our debt and re-purchase common shares under our authorized $2.0 million program.

As of September 15, 2023, the Company had spent $0.53 million to acquire a total of 147,907 shares at an average price of approximately $3.59 , including commissions. As of that date, 10,725,336 PXS shares were outstanding.

While the company's average daily time charter equivalent ("TCE") rate of $26,200 for Q3 is somewhat lower than the indication provided in the Q2 earnings release ($27,800), Pyxis Tankers should remain solidly profitable and continue to generate cash from operations.

However, third quarter results will be impacted by an estimated $2.1 million related to the ten-year special periodic survey of the Pyxis Theta .

Admittedly, the company's plan to " further enhance shareholder value by pursuing additional vessel acquisitions " remains debatable but at least Pyxis has accelerated the pace of share buybacks in recent weeks as the company repurchased another 124,476 common shares since the end of Q2.

While I would like Pyxis Tankers to be much more aggressive in terms of share buybacks, the rather low average daily trading volume of below 50,000 shares remains a major obstacle and reducing the free float further won't help things with this regard.

On Friday, the company surprised market participants by selling its second youngest vessel, the 2015-built Pyxis Epsilon for a stellar price of $40.75 million to an unaffiliated buyer (emphasis added by author):

Pyxis Tankers Inc. (...) today announced that it has agreed to sell the vessel Pyxis Epsilon (...), for a sale price of $40.75 million in cash to an unaffiliated buyer located in the United States. Completion of the vessel sale (...) is expected to occur during the fourth quarter of 2023. After the repayment of the outstanding indebtedness secured by the vessel and the payment of various transaction costs, the Company expects to receive cash proceeds of approximately $26.4 million , which would be used for general corporate purposes. Assuming completion of the vessel sale during the fourth quarter of 2023, the Company expects to recognize a non-cash gain from asset disposition of approximately $16.8 million or $1.57 per current outstanding common share.

Valentios Valentis, our Chairman and CEO commented:

“The sale of our eight year old tanker at what we believe is a very attractive price underscores our focus on optimizing fleet value and providing further financial strength and capital resources. Our current total cash balance of $30.7 million is expected to subsequently increase upon receipt of the net cash sale proceeds of over $26 million. On completion of this latest asset disposition, our substantial cash position and low leverage will further increase our operating and financial flexibility to potentially pursue additional vessel purchases as well as other corporate and strategic initiatives that should enhance shareholder value .”

Please note that the sales price is approximately 15% higher than the vessel's market value estimate provided by VesselsValue.com.

Based on my expectations for cash generation in the second half of 2023, I would expect Pyxis Tankers to end the year with above $60 million in cash and cash equivalents thus resulting in a net cash position of at least $20 million.

Regarding future capital allocation, CEO Eddie Valentis stated its vision for Pyxis to become a diversified shipping company in a recent Capital Link interview which is available on YouTube.

Given the apparent change in the company's strategic direction, I would expect Pyxis to acquire more modern dry bulk vessels in the near future to take advantage of the recent drop in second hand vessel values in the space.

However, I would be surprised to see Pyxis also buying containerships at this point as the near- and medium-term market outlook for this segment remains bleak.

Investors should note that replacing highly profitable product tankers with significantly less profitable dry bulk carriers is going to impact cash generation quite meaningfully going forward, at least when assuming product tanker demand to remain strong and dry bulk charter rates to stay at subdued levels for the time being.

Valuation-wise, the company continues to trade at a large discount to net asset value:

Considering the juicy sales price for the Pyxis Epsilon , my current fleet value estimate might prove too conservative. Raising my estimate to $150 million would result in NAV per share increasing to $11.

Quite frankly, I don't think that market participants will be sharing the CEO's vision of Pyxis becoming a diversified shipping company as pure plays are much better to assess.

In addition, there are plenty of solid dry bulk shipping, tanker and containership companies listed on major U.S. stock exchanges for investors looking to get exposure to individual market segments.

At least in my view, the only way for the company to meaningfully reduce the large discount to NAV would be to more aggressively buy back shares and particularly initiate a quarterly dividend.

For example, paying a quarterly dividend of $0.10 per share would require limited cash outflows of $1.1 million per quarter but likely result in a substantial increase in the trading price of the common shares.

Looking at the company's Series A 7.75% Convertible Preferred Shares ( PXSAP ), the current 8.3% annual dividend yield isn't exactly mind-boggling in the current interest environment and with the conversion option remaining far out of the money, I wouldn't chase the preferred shares at this point.

Please note that starting in October, Pyxis Tankers will have the option to redeem the Preferred Stock at a price of $25 per share, but given the interest environment, I firmly expect the company to abstain from calling the preferred shares anytime soon.

Bottom Line

Kudos to management for selling the Pyxis Epsilon at a sizeable premium to estimated market value and accelerating the pace of share buybacks.

However, I do not expect market participants to embrace management's strategic vision of turning Pyxis Tankers into a diversified shipping company.

Given this issue, it will likely take more aggressive share repurchases and by all likelihood, the initiation of a sizeable quarterly dividend for the share price to move closer to net asset value.

While Pyxis Tankers' new strategic direction is causing some uncertainty, I am reiterating my " Buy " rating on the common shares based on the company's strong financial position and discounted valuation.

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