PXS - Pyxis Tankers' Convertible Preferred Shares - Safe Yield With Embedded Call Option

2023-03-16 22:50:49 ET

Summary

• On Thursday, Pyxis Tankers reported strong fourth quarter and full-year results. Adjusted EBITDA margin increased from negative 3.2% to 41.6% year-over-year.
• Recent geopolitical events have changed product tanker dynamics materially with the healthy charter rate environment likely to persist for the time being.
• Company sold its oldest vessel, the 2009-built MR2 product tanker "Pyxis Malou" for gross proceeds of $24.8 million.
• In absence of dividend payments or share buybacks, the company's shares continue to trade at a substantial discount to net asset value.
• Investors looking for a combination of yield and exposure to potential common share price appreciation, should consider the company's Series A 7.75% Convertible Preferred Shares.

It has been more than six months since my last discussion of Pyxis Tankers or "Pyxis" ( PXS , PXSAP , [[PXSAW]]), a small, Greece-based operator of product tankers.

Introducing Pyxis Tankers

For those still unfamiliar with the company, Pyxis currently owns a fleet of four MR2 product tankers with an average age of approximately 9.3 years and is controlled by its largest shareholder Valentios "Eddie" Valentis.

Last week, the company announced the sale of its oldest vessel, the 2009-built Pyxis Malou for gross proceeds of $24.8 million (emphasis added by author):

After the repayment of the outstanding indebtedness for this vessel and the payment of various transaction costs, the Company expects to receive cash proceeds of approximately $18 million , which would be used for general corporate purposes, including additional debt repayment. Assuming scheduled completion of the sale at March 31, 2023, the Company expects to recognize a non-cash gain from asset disposition of approximately $8 million or approximately $0.75 per outstanding common share .

Pyxis Tankers gained its Nasdaq listing in late 2015 by a reverse merger with the shell of LookSmart, once a leading search engine back in the early days of the World Wide Web. After the remains of LookSmart were transferred into a privately held entity, Pyxis Tankers was merged into the empty shell.

The stock has been quite volatile ever since the company went public, mostly due to its small free float and generally unfavorable market dynamics in the product tanker segment over the past couple of years.

Occasionally, shares have been chased by momentum traders, mostly as a side-play to current or former momentum crowd favorites like Castor Maritime ( CTRM ), Performance Shipping ( PSHG ), Top Ships ( TOPS ), Globus Maritime ( GLBS ), and Seanergy Maritime ( SHIP ).

In the past, the company largely failed to capitalize on these mostly short-lived but often violent moves but in 2021, management seized the opportunity and sold 14.3 million new common shares in a private placement for gross proceeds of $25 million. The reverse stock split-adjusted purchase price of $7 per share represented an almost 200% premium to estimated net asset value per share ("NAV") at that time.

Pyxis Tankers has since used the funds to acquire two additional MR2 product tankers ( Pyxis Lamda and Pyxis Karteria ).

Improved Product Tanker Market Conditions

After many years of operating losses, 2022 turned out to be a banner year for Pyxis Tankers:

As very much visible in the slide from larger competitor TORM plc's ( TRMD ) fourth quarter earnings presentation below, Russia's assault on Ukraine has been a game changer for the tanker markets as sanctions on Russia have led to trade recalibration towards longer distances with refinery dislocation adding further to ton-miles.

That said, the market has been volatile in recent months with MR charter rates approaching $60,000 in December only to drop by almost 75% until late January followed by a 200% recovery in February.

For Q4, Pyxis Tankers reported an average daily time charter equivalent ("TCE") rate of $33,182 with the fleet operating on a mix of short-term time charters and spot market employment.

As of March 14th, 80% of available days in Q1 were booked at an estimated average TCE rate of $28,000.

Given the temporary charter rate weakness at the beginning of the year, the lower quarter-over-quarter performance shouldn't be considered a surprise.

Strong Second Hand Vessel Market Conditions

The robust chartering outlook in combination with vastly increased costs for newbuildings has resulted in strong appreciation of second-hand vessel values:

Since my last update on Pyxis in September, fleet value has increased by another 11%, thus in combination with substantially lower net debt levels resulting in net asset value ("NAV") per common share soaring by 37%:

Even after the massive price appreciation in recent quarters, the company's common shares continue to change hands at a 40%+ discount to NAV which can be attributed to a number of factors:

1. Greek family-controlled nano-cap shipping business
2. Miniscule company size
3. Long history of losses
4. Lack of dividends and share buybacks

But with the company likely to generate healthy earnings and cash flows for the foreseeable future, the common shares still have room to run even with the discount to NAV remaining at current levels.

Convertible Preferred Shares - Less Risky With Decent Optionality

Investors looking for a somewhat less risky and volatile investment in Pyxis Tankers should consider taking a position in the company's Series A 7.75% Convertible Preferred Shares ((PXSAP)) which are ranking senior to common stock and paying an 8.0% annualized cash dividend at current levels.

While the dividend yield alone is nothing to write home about anymore in the current environment, the preferred shares feature the option to convert into common stock at a price of $5.60 per share at any time.

In fact, the option has been well into the money until the recent market turmoil caused common shares to tumble by 20% from their early March highs.

Should financial markets regain their footing and product tanker charter rates remain healthy over the next couple of quarters, the embedded call option might very well move back into the money soon.

That said, starting in October 2023, Pyxis Tankers will have the option to redeem the Preferred Stock at a price of $25 per share but given the current interest environment, I firmly expect the company to abstain from calling the Preferreds anytime soon.

Bottom Line

Despite the current market turmoil and some recent volatility in spot charter rates, product tanker market fundamentals remain sound as also evidenced by ongoing healthy time charter rates:

That said, investors should not expect the company to start paying dividends or repurchase shares anytime soon given management's stated intent to " use free cash flow to further increase balance sheet liquidity and reduce leverage " unless accretive acquisition opportunities present themselves.

Assuming elevated second hand vessel values to persist and strong earnings to decrease net debt even further, Pyxis Tankers' common shares would have plenty of room to run even without the discount to NAV narrowing substantially.

Investors looking for a more balanced risk/reward scenario should consider taking a position in the company's Series A 7.75% Convertible Preferred Shares ((PXSAP)) which currently offer a very safe 8.0% yield while providing decent exposure to potential price appreciation in the common shares.

Please be aware of the fact that liquidity in the Preferred Shares remains pretty low.

For further details see: