Pyxis Tankers: Bet On A Strong MR Product Tankers Market (NASDAQ:PXS)

Introduction

Shipping stocks with a market cap below $100 million offer exciting opportunities for entrepreneurs’ investors. Most of the time, they are not as straightforward as shipping majors such as Frontline plc (FRO) or Star Bulk Carriers Corp. (SBLK). In today’s article, I discuss such a company.

Pyxis Tankers Inc. (NASDAQ:PXS) is an obscure shipping company with a $46.17 million market cap. It owns three product tankers, MR2, and two bulk carriers, one Kamsarmax and one Ultramax. PXS’s fleet average age is 9.2 years. The company has $31 million cash and $69 million long-term debt. It delivers excellent margins and returns. PXS issued preferred units with a 7.95% yield. PXS is an investment idea for income-minded investors with an adventurous spirit betting on a stronger MR market.

Investing in PXS has some caveats, as it’s a relatively older fleet. Although the latter might not be such a drawback given where we are in the shipping cycle. I expect the single-digit order book for MR product tankers and bulk carriers to keep vessel supply lower than the demand. PXS offers a good fleet, a healthy balance sheet, while the preferred shares offer attractive dividend yields. My verdict is a buy rating.

Company Overview

The company owns three MR2 tankers with 46,000 – 50,145 dwt capacity and two bulk carriers. One Kamsarmax has 82,013 dwt capacity, and one Ultramax has 63,520 capacity. The company’s fleet average age is 9.2 years. 84% of 4Q23 days are booked at $29,600 average TCE. Three MRs are employed under short-term time charters, and one is under a spot contract.

PXS’s present fleet is shown below:

Three company ships are employed under time charters and one under spot contract. Pyxis Karteria and Konkar Orni’s time charters end in March 2024, while Pyxis Theta’s end in August 2024. At the present stage of the shipping cycle, I prefer higher spot exposure.

On September 14, PXS purchased a 2016-built bulk carrier, Konkar Orni. The company owns 60% of the vessel as part of the JV. $28.5 million is funded by the company’s cash and a $19 million secured bank loan with a 5-year term.

On February 15, the company announced the Konkar Asteri 2015-built Kamsarmax bulk carrier purchase for $26.625 million. The vessel is fitted with a ballast water treatment system and scrubber. The acquisition is funded by a $14.5 million secured bank loan. The loan has the following terms: maturity in five years, interest rate at SOFR +2.35%.

On 22 September, PXS announced its plans to sell Pyxis Epsilon, a 2015-built MR2 product tanker, for $40.75 million. After covering all outstanding debt related to Epsilon, the company will receive $26.4 million in cash proceeds.

Diversifying its fleet with two dry bulk carriers gives PXS an advantage. The bulkers have order books below 10%, while the ships older than 15Y are 20.6% of the fleet. The chart below from the 4Q23 presentation shows dry bulk market dynamics.

Orni and Asteri are approaching their tenth year. So, they have passed half of their life span. In my opinion, buying second-hand vessels in the middle of the cycle is a smart move. There are two reasons. First, the company takes delivery in a few months at worst, though newly built delivery takes more than 18 months. A year and a half is too long in the shipping business. Over that time, the cycle might shift from expansion to contraction. The second reason is the inflationary environment, pushing companies’ NAV north.

MR2 order book at 6.6% is lower than 20+ years old vessels as a percentage of the global MR2 fleet at 8.5%. 111 vessels are ordered, while 144 are approaching their economic life limits of 25 years. PXS is well positioned with its MRs to benefit from declining orders and an aging fleet.

The following charts represent PXS operational and financial results for 3Q23 and 9M23.

3Q23 MR TCE rates were $28,024/day, $1,000 lower than 3Q22 rates. The revenue mix changed YoY from 65% spot/35% TC in 3Q22 to 41% spot/59% TC in 3Q23. The number of MR vessels dropped from 5 to 4 YoY. The company sold the 2009-built MR Pyxis Malou in 1Q23 for $24.8 million in 1Q23. The fleet utilization increased from 89.6% in 3Q22 to 98.5% in 3Q23.

3Q23 PXS delivered $9.3 million in TCE revenues, 22.3% lower than in 3Q22. YoY operating income dropped by 35%, to $4,087 million in 3Q23. The net income for the same period was $3.08 million, resulting in $0.26 fully diluted EPS. Adjusted EBITDA declined YoY by $2.5 million, reaching $5.5 million in 3Q23. The declining profitability is due to reduced spot exposure, lower YoY day rates, and reduced fleet size.

TCE rates increased 9M23 by $2,325/day, reaching $25,404/day 9M23. The fleet utilization increased from 86.4% to 95% YoY. Revenue composition for the same period shifted from 71% spot/29% TC to 26% spot/74% TC in 9M23.

For 9M23, PXS delivered $32.2 million net revenue, 23% lower than 9M22. The voyage costs were significantly higher in the 9M22 period due to higher exposure to spot contracts (71%). The lower voyage costs offset the declining revenues, so PXS TCE revenue for 9M23 remained unchanged compared to 9M22. 9M23 operating income increased to $18.6 million from $9.2 million in 9M22. Net income grew to $14.59 million for the same period, resulting in $1.21 fully diluted EPS.

Company financials

PXS maintained a healthy balance sheet over the years. Since 2019, the company significantly reduced its leverage to 95.9% total debt/equity and 51.4% total liabilities/total assets.

The company has $31 million cash and $69 million long-term debt. PXS has $4.8 million LTM net interest expenses. The company has adequate interest coverage given its strong results, $25 million LTM operating cash flow, and $18.8 million LTM operating income.

To compare PXS’s balance sheet, performance, and valuation, I choose companies with a market cap below $100 million and small fleets (below ten vessels). Imperial Petroleum Inc. (IMPP), a spin-off from StealthGas Inc. (GASS), owns 5 MRs, 2 Handy bulk carriers, and 2 Suezmax crude oil tankers. IMPP’s average fleet age is 14.6 years. Globus Maritime Limited (GLBS) owns six dry bulk carriers, 4xKamsarmax, 1xSupramax, and 1xPanamax, with an average fleet age of 7.2 years.

The following chart shows PXS, IMPP, and GLBS solvency and liquidity metrics. All figures are LTM.

IMPP is the most conservative, with practically zero debt. GLBS has a 31% total debt-to-equity ratio, while PXS has 95.9%. However, PXS scores better than GLBS on total debt to EBITDA and EBITDA/Interest Expenses.

PXS delivers superior results, 57% Gross Margin, 47% EBITDA Margin, and 32% ROE. It’s worth mentioning the IMPP 25% ROE achieved at zero debt. The higher the debt, the lower the equity, hence the higher the ROE, at equal profits. IMPP has an aging fleet compared to GLBS and PXS. Despite that, it delivers robust results. In conclusion, given its fleet age and composition, PXS performs best in the sample group.

PXS does not distribute dividends on its common shares. However, the company has preferred units (PXSAP) with a 7.94% yield. PXSAP’s original coupon is 7.75%. For reference, Imperial Petroleum Inc. 8.75% CUM PFD A preferred share (IMPPP) offers a higher yield at 8.75%. PXS preferred units are cumulative convertibles with a conversion price of $5.6 and a conversion ratio 17.86.

In 2023, PXS repurchased 294,338 common shares at an average price of $3.73/share as part of the $2.0 million share buyback program. In the 3Q23 report, the company announced its plans to extend the buyback program until May 2024 and to re-purchase some preferred units.

Shipping companies have a few options besides bank loans to fund their operations and capital investments. One of them is to issue preferred units. They have pros and cons for every source of capital. Preferred stocks have two significant advantages: the lack of collateral and the capital risk of being transferred to the shareholder. However, the company is obligated to distribute dividends on its preferred units.

The chart below shows PXS’s operating cash flow, operating income, and preferred dividends for the last three years.

In 2021, the company had to pay dividends on its preferred units despite negative cash flow and operating income. With a stronger TCE rates market, I do not expect liquidity issues with PXS covering its preferred units’ distributions. On top of that, the company has $31 million cash as the last line of defense in case my thesis on TCE is wrong.

Valuation

To value the PXS fleet, I use the following chart from the last corporate presentation:

The company owns three MRs at an average age of 9.6 years. So, the PXS MR2 fleet replacement cost is $97.8 million. The acquisitions of the bulk carriers Asteri and Orni happened in the last few months. So, their prices, $26.2 million and $28.5 million, are still relevant. PXS fleet replacement cost is $152 million.

Inputs for the PXS equation are:

• Fleet replacement value: $152 million.
• Current assets: $37 million.
• Total Liabilities: $84.0.

PXS’s Net Asset value is $105 million based on the above inputs.

PXS’s market capitalization is $46.9 million, while its net asset value is $105 million. Hence, PXS trades at 44.6% P/NAV.

All three companies, PXS, IMPP, and GLBS, trade below 0.7 Price/Book ratio. PXS seems the most expensive, with 1.88 EV/Sales, 3.92 EV/EBITDA, and 0.61 price/Book.

PXS strikes the best balance between fleet age and balance sheet composition. IMPP offers the highest yield and zero debt balance sheet, although its fleet is too old. GBLS has a younger fleet, though it scores poor margins and returns.

Investors takeaway

PXS balances fleet quality, healthy financials, and price vs. value. As with every investment idea, PXS carries a few risks. The first one is the age of its fleet. Its MRs are 9.6 years old on average, and its bulkers are 8.5 years old. Of course, those figures are much better than the IMPP fleet. However, if the company wants to stay afloat, it must renew its fleet. On the other hand, the last new addition to the fleet, Konkar Asteri, has scrubbers and a ballast treatment system already installed.

Financially, the company is healthy, with $31 million cash and $69 million long-term debt. The company generates adequate cash flows to cover its interest expenses and preferred unit distributions. PXS also deserves credit for its margins and return on equity.

MR tanker’s order book as a percentage of the total fleet is lower than that of the fleet older than 20 years. This is a long-term tailwind for MR owners. On the other hand, the demand is poised to grow due to the shifting geography of oil production and refineries. The former grows in the Western Hemisphere, while the latter in the East. The ban on Russian seaborne refined products and supply chain disruptions will continue to act as a constraint. Simply put, the tonne-mile demand for product tankers will grow, in my opinion.

I like PXS because it offers a balance between fleet size and age, balance sheet, and dividend yields. My verdict is a buy rating.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.