PXSAP - Pyxis Tankers: Downgrading On Dry Bulk Market Entry And Hesitant Share Buyback Approach

2023-07-31 19:14:36 ET

Summary

• Company reports second quarter results largely in line with estimates and provides a constructive preliminary Q3 charter rate outlook.
• Cash and cash equivalents including restricted cash increased by $3.9 million quarter-over-quarter to $34.4 million. Net funded debt decreased by $5.3 million to $24.5 million.
• Despite shares trading at a massive 60%+ discount to net asset value ("NAV"), repurchases to date have been immaterial.
• New dry bulk shipping joint venture with CEO and controlling shareholder Eddie Valentis not likely to be well-received by market participants.
• Downgrading shares on decision to enter the dry bulk shipping market rather than aggressively buying back own shares at a fraction of net asset value.

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.

It has been a couple of months since my last update on Pyxis Tankers or "Pyxis", 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 8.6 years and is controlled by its CEO and largest shareholder Valentios "Eddie" Valentis.

Pyxis Tankers gained its Nasdaq listing in late 2015 through 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.

Improved Product Tanker Market Conditions

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

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.

Second Quarter 2023 Results

On Monday, Pyxis Tankers reported second quarter results largely in line with expectations:

That said, the company's final daily time charter equivalent ("TCE") rate of $25,000 came in substantially below the preliminary $29,160 number provided in the Q1 earnings release despite 70% of available days already having been fixed at that time.

As of July 26, 55% of available days for the third quarter were booked at an average TCE of $27,800 per vessel:

Please note that third quarter results will be impacted by an aggregate $2.1 million due to expenses and offhire days related to the upcoming ten-year special periodic survey for the Pyxis Theta .

Cash and cash equivalents including restricted cash increased by $3.9 million quarter-over-quarter to $34.4 million. In combination with scheduled debt repayments, net funded debt was reduced by $5.3 million quarter-over-quarter to $24.5 million:

Miniscule Share Repurchases Despite Massive Discount To Net Asset Value

Despite solid cash generation, net asset value ("NAV") per share was down slightly on a sequential basis as second hand tanker values retreated from multi-year highs during the quarter:

Given Pyxis Tankers' strong liquidity position and the fact that shares are trading at a massive discount to NAV, repurchases for the quarter were highly disappointing:

During the quarter ended June 30, 2023, we repurchased 23,431 common shares at an average price of $3.87 per share, including brokerage commissions, under the authorized $2.0 million repurchase program.

New Dry Bulk Joint Venture With CEO Raises Corporate Governance Issues

Adding insult to injury, rather than investing in its own vessels at a 60%+ discount to net asset value, Pyxis Tankers instead decided to enter the dry bulk shipping market by establishing a joint venture with its CEO and controlling shareholder (emphasis added by author):

After due consideration, our Board, consisting of a majority of independent members, unanimously approved a $6.8 million equity investment in a newly formed company, which has agreed to acquire a 2016 Japanese built 63,520 metric tons deadweight Ultramax bulk carrier from an un-affiliated third party. We will own 60% of this joint venture and the remaining 40% will be owned by a company related to our Chairman and Chief Executive Officer, Mr. Valentis. (...)

The purchase price of the bulk carrier will be $28.5 million, that we anticipate to be partially funded by a $19.0 million five-year secured bank loan priced at SOFR plus a margin of 2.35%. The vessel will be managed by Konkar Shipping Services, S.A., a company that is related to our Chairman and Chief Executive Officer , which is a long-time successful owner and manager of dry bulk vessels. (...)

While the Ultramax carrier will be purchased from an unaffiliated third party, Mr. Valentis is getting a sweet deal as he will own 40% of the joint venture despite contributing less than 30% of the equity investment. In addition, he will be pocketing substantial fees for managing the vessel.

Moreover, I don't think that investors will appreciate the company's move into dry bulk shipping as market participants tend to prefer pure plays. After all, there are plenty of solid dry bulk shipping companies listed on major U.S. stock exchanges for investors looking to get exposure to this market segment.

Convertible Preferred Shares

Considering the current interest environment and recent common share price performance, the company's Series A 7.75% Convertible Preferred Shares ( PXSAP ) have lost much of their appeal in recent months.

While the Preferreds rank senior to common stock and pay an approximately 8.3% annualized cash dividend at current levels, the conversion price of $5.60 per share is not likely to be reached anytime soon again without a major increase in product tanker charter rates.

Please note that 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 interest environment, I firmly expect the company to abstain from calling the Preferreds anytime soon.

Bottom Line

While there's nothing wrong with Pyxis Tankers's Q2 results and third quarter outlook, the company's hesitant approach to share buybacks and particularly the surprise dry bulk shipping joint venture with the company's CEO and controlling shareholder is causing me to downgrade shares from " Strong Buy " to " Buy ".

To be perfectly honest, only today's sell-off and the massive discount to NAV prevented me from double-downgrading shares to " Hold " at this point.

In addition, I am lowering my rating on the company's Preferred Shares from " Buy " to " Hold ".

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