PXSAP - Pyxis Tankers Inc. (PXS) Q3 2022 Earnings Call Transcript

Pyxis Tankers Inc. (PXS)

Q3 2022 Earnings Conference Call

November 14, 2022 16:30 ET

Corporate Participants

Eddie Valentis - Chairman and Chief Executive Officer

Henry Williams - Chief Financial Officer

Conference Call Participants

Presentation

Operator

Good day and welcome to the Pyxis Tankers Conference Call to discuss the Financial Results for the Third Quarter 2022. As a reminder, today's call is being recorded. Additionally, a live webcast of today's conference call and accompanying presentation is available on Pyxis Tankers’ website, which is www.pyxistankers.com.

Hosting the call is Mr. Eddie Valentis, Chairman and Chief Executive Officer of Pyxis Tankers, and Mr. Henry Williams, Chief Financial Officer of the company.

I would like to pass the floor to one of your speakers today, Mr. Eddie Valentis. Thank you. Please go ahead, sir.

Eddie Valentis

Good afternoon, everyone and thank you for joining our call for results of the three months ended September 30, 2022.

The impact from the Russian invasion of the Ukraine continues to take center stage, affecting global energy markets and resetting personal, economic and strategic priorities as well as global relationships. Many countries are battling high inflation, cost of living increases and the slowdown in economic activity. However, the product tanker sector continues to be positively affected with strong chartering activity and rapidly increasing asset values. At Pyxis, we continue to successfully manage through this unprecedented times.

Before starting, please let me draw your attention to some important legal notifications on Slide two that we recommend you read, including our presentation today, which will include forward-looking statements. Thank you.

Turning to Slide three. Our most recent quarterly results reflected strong financial performance in revenues, growth and profitability. In the third quarter ended September 30, 2022, we generated consolidated time charter equivalent revenues, TCE of 12 million, an increase of 8.5 million over the same period in 2021. Charter rates continue to accelerate during the quarter, especially in the spot market, our daily TCE for Q3 2022 for our 5 Eco MRs was $29,062 sequentially, up 10.6% over the prior quarter, and up a factor of four versus the results in the same period last year. Moreover, we reported net income of 5.3 million or $0.48 basic EPS for the most recent period, versus losses in 2021.

Our adjusted EBITDA in Q3 '22, climbed to 8 million. Over the course of the third quarter, the product tanker chartering environment experienced further strength. This was a function of increased mobility with some amplified demand for transportation fuels, despite moderating economic activity. In addition, the ongoing Russian invasion of the Ukraine has resulted in tightening of product inventories, which continue to be below five-year averages in many parts of the world, changing trade patterns, expansion of ton mile, dislocation to end markets, creating arbitrage opportunities and higher transportation costs.

While high inflation persists, petroleum product prices such as gasoline and diesel have softened to varying levels since the beginning of summer 2022. Accordingly, refinery activity continues to be very strong, with healthy crack spreads, reflecting solid global demand. These developments have translated in robust product tanker charter rates in the spot market, and greater time charter activity.

Our booking rates for Q4 2022 continues to show upward momentum. As of November 10, 82% of our available days for the fourth quarter were booked at an average estimated TCE of $36,800. We're continuing to maintain our mix chartering strategy of time and spot charters with a focus on diversification by customer and duration.

Please turn to Slide four for information on our existing fleet and employment activities. As you can see, two of our vessels are currently in the spot market and the remaining three MRs are contracted under short-term PCs that run up to next fall. For the Q4 bookings, the average estimated spot charter rate is $47,700 and another time charter of $32,600. We believe our chartering strategy provides a reasonable balance of risk and return, especially for a small company like ours.

Next, please turn to Slide six for a further update on the product tanker market. In addition to my prior comments about the market, recent economic activity for most of the world has been affected by the war and other geopolitical events. Initial sanctions on exports on petroleum products have had limited financial impact on Russia, which has benefited from market dislocation and low inventories in many parts of the world, especially Europe. But the EU ban on Russian refined products starting in early February 2023 should only compound complexities of the market and according to one analyst, an incremental 8% growth in product tanker demand.

As previously highlighted, tight supplies of gas oil and diesel are changing trade routes and adding ton miles to voyages by increasing exports from the refineries located in the Middle East, U.S. and certain parts of Asia. Increasing demand for transportation fuels more recently for air travel only exacerbates the difficulties in replenishing diesel and jet fuel inventories. Unanticipated events such as Russia’s complete shutdown of Europe's major operating natural gas pipeline Nordstream 1 and subsequent bombing only create chaos through the energy value chain and forced some European utilities to consider switching to alternatives such as fuel oil for power generation, reliable, secure energy sources will continue to be a major priority.

Please turn to Slide seven to review macroeconomic considerations. Historically, seaborne trade of refined products has been relatively correlated to global GDP growth. While the IMF maintain its GDP growth estimate to 3.2% for this year, it slightly reduced its outlook for 2023 to 2.7% in the October update.

The IEA recently reduced its oil consumption to an average of 99.6 million barrels per day for 2022, a 2% increase and slightly lower growth estimates in 2023 to 1.7%. Due to moderating economic activity and lower crude prices. OPEC plus recently cut production by an estimated net effect of 1 million barrels per day through 2023. Orchestrated releases of crude from the strategic petroleum reserves of certain countries such as the U.S. are winding down by the end of the year.

Annual increases of 6% of U.S. oil production will add supply over time. However, given geopolitical and macroeconomic factors, a leading research firm recently estimated demand growth for refined products at 6% for 2023.

Moving to Slide eight, U.S. refineries are currently achieving high seasonal utilization at healthy crack spreads in order to meet solid product demand from the U.S., Europe and Latin America. Zero-COVID policies continue to delay the economic rebound in China, and have resulted in recent government approvals for the export of approximately 120 million barrels of gasoline, diesel and jet fuel through early next year. In fact, many of these cargoes should be carried on MRs within the Asian region.

Over the longer term, we expect demand for the product tanker sector to be supported by refinery additions led by the Middle East and Asia. [Duly] [ph] estimated that over 4.9 million barrels per day of new refining capacity is scheduled to come online by 2026 virtually all of which is outside the OECD. Planned shutdowns are likely to slow but over the long run maybe further contribute to the importing of refined products into mature large OECD markets and provide additional ton mile expansion.

Let's move on to Slide nine. The product tankers supply picture is much clearer as the outlook for MR2s continues to look very promising. The order book continues to drift lower with subdued new ordering for the product tankers due to the surge in ordering of new container ships, gas carriers and dry bulk vessels. Many Asian yards don't have available construction slots with deliveries at the end of 2024 or later.

Over the five year period ending 2021, delays in delivery of new build hours almost 18 MRs per year are known as decision-making process for tanker new ordering a further complicated by ongoing developments in ship and engine designs, stricter environmental regulations, rapidly escalating shipbuilding costs as well as an evolving and still unclear selection and availability of lower carbon fuels.

New IMO regulations governing CO2 emissions, including data collections and ratings under EEXI and CII starting 2023, and could limit available supply due to slow steaming by older vessels. Despite the strong chattering market, and the reasonable [gas] [ph] prices, 17 MR2s have been demolished since the beginning of 2022.

Given that about 7% of the worldwide fleet of MRs is 20 years of age or older demolition activities should pick up. Consequently, we continue to estimate that annual net fleet growth for MRs should be around 2% throughout 2023.

Turning to Slide 10, robust charter conditions have led to steep increases in asset prices across the board. New building prices are now over 43 million, with earliest delivery in about two years. Values for young acquisition of the MRs near historical highs and acquisition opportunities are rare. However, higher asset prices have increased our fleet value and NAV. This combined with rising earnings power should lead to higher equity values and hopefully share prices.

At this point, I would like to turn the call over to Henry Williams, our Chief Financial Officer who will discuss our financial results in greater detail.

Henry Williams

Thanks, Eddie.

On Slide 12, let's review our unaudited results for the three months ended September 30, 2022. Our time charter equivalent revenues for Q3 of '22, which we define as revenues net minus voyage-related costs and commissions accelerated to $12 million, an increase of $8.5 million from the same period in 2021 due to higher charter rates, especially in the spot market, where we incur voyage related costs and commissions as well as the impact from changes in our fleet.

Since summer of last year, we have added 2 MRs and sold 2 small tankers. In the third quarter of '22, the TCE rate for MRs was $29,062 per day, a dramatic increase from the comparable 2021 period.

Moving to Slide 13, we generated net income to common shareholders of $5.1 million for the three months ended September 30, 2022 or $0.48 basic and $0.42 diluted EPS compared to a net loss of $3.7 million or $0.37 basic and diluted loss per share in the same period in 2021. For accounting purposes, the fully diluted earnings calculation in 2022 assumes the potential conversion of all outstanding Series A convertible preferred stock into common shares and the elimination of the associated dividends.

In Q3 '22 a substantial portion of the increase in TCE revenues dropped to the bottom-line. Adjusted EBITDA rose to $8 million an improvement of $9.2 million from the third quarter of last year.

Please turn to Slide 14, which reviews our recent MR fleet data as we operate 1 eco-modified vessel and 4 eco-efficient tankers. Given the size of our fleet, changes in these metrics related to a single vessel in one recording period can have a disproportionate effect on the total fleet operating results. Beyond the significant improvement in TCE for 2022, the key takeaway here remains the relative stability in operating expenses, despite rising cost pressures, such as crane, insurance and lubes.

Turning to Slide 15, as you may recall, we believe it is important to periodically review total daily operational costs to run and manage a public tanker company including overhead. These costs vary by fleet composition, vessel delivery removal, company operating structure and management. We define total daily operational costs as the sum of vessel operating expenses, technical and commercial management costs plus G&A expenses. Based upon recent results, the total daily operational costs of our modern eco-efficient MR2s continued to be very competitive compared to the U.S. listed pureplay product tanker peers, despite our small size.

Now flip to Slide 16 to review our capitalization at September 30, 2022. At quarter close, our consolidated leverage ratio to net funded debt stood at approximately 51% of total capitalization. We continue to be in full compliance of our loan agreements, a weighted average interest rate was 5.9% for the most recent quarter, and the next bank loan maturity is July of 2025. Over 21% of our debt as interest rate protection or fixed coupon, mitigating further increases in interest costs. I should point out that during the quarter working capital improved $5.1 million to $2 million.

With that, I would like to turn the call back over to Eddie, to conclude our presentation.

Eddie Valentis

Thanks, Henry. The combination of solid demand, recent geopolitical events including the war, low refined product inventories in many parts of the world has been particularly beneficial to our sector. Despite slowing economic activity, we are optimistic about the prospects of the chartering environment. Over the long-term, we find further support in the positive supply demand fundamentals of the product tanker sector. Given the various uncertainties, we will stay on course with our mixed chartering strategy of spot employment complemented by time charters in order to prudently optimize revenues and provide cash flow visibility. Unless we find an attractive, accretive acquisition, we expect to use excess cash flow to further include improve our financial position.

We appreciate your interest and thank you for joining our call today. We look forward to reporting on future progress at Pyxis Tankers. Be safe. Be well.

Question-and-Answer Session

Q - Unidentified Analyst

Operator

This will conclude the conference call for today. You may all disconnect. Have a nice day.

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