About eighteen months ago I thought that Pyxis Tankers preferred stock (NASDAQ:PXS), trade with (NASDAQ: PXSAP) as a stock symbol offered an interesting opportunity. Charter rates for MR tankers were low at the time, so that was my ‘safer’ bet on increasing charter rates. It took longer than expected, but in recent months charter rates for Pyxis-owned vessels have tripled. Which means the company is making money again. This fully funds the preferred dividend and improves the level of the asset coverage ratio of the preferred shares.
In this article, I will mainly focus on improving the position of preferred shareholders. For a great recent overview of the Pyxis fleet, I’d like to refer you to Henrik Alex’s May article. In May, Henrik estimated the fair value of the fleet at around $114 million, lending credence to the book value used by Pyxis.
Please Note: Pyxis Tankers is a micro cap with a market capitalization of just under $35 million and therefore the stock falls into the high risk category. Although the security is very liquid, limit orders are strongly recommended to avoid any unpleasant surprises. This article is an update of an article published in April 2021.
A look at Q2 results and their impact on the balance sheet
Pyxis Tankers had previously signaled that its second quarter results would show substantial improvement, so the strong results shouldn’t come as much of a surprise. During the second quarter of this year, Pyxis Tankers reported a TCE rate above $26,000 per vessel per day which is more than double the charter rates in the same quarter last year.
This immediately boosted revenue to $16 million (as the fleet now consists of five MR vessels), resulting in an operating profit of almost $5.7 million. This is a massive improvement from the operating loss of $0.8M in Q2 2021. After deducting interest expense and preferred dividends, net income attributable to common shareholders of Pyxis Tankers s is established at $4.6 million for an EPS of $0.43.
The strong net income obviously also boosted cash flow and in the first six months of the year reported operating cash flow was $774,000 and after adding the changes in the position of the working capital, adjusted cash flow from operations was $4.1M (including payment of preferred dividends.
We also know the adjusted operating cash flow in the first quarter of this year was a $2.1 million negative meaning second quarter adjusted cash flow from operations exceeded $6.5 million. This helped the balance sheet as net debt decreased to approximately $73.3 million (including restricted cash) from nearly $80 million at the end of 2021. And as the company did not generate cash flow positive operating cash flow or free cash flow in the first quarter, almost all of the decrease in net debt came from second quarter performance.
So, using an average daily rate of just over $26,000, Pyxis Tankers generates approximately $26 million per year in operating cash flow. And as of August 5, nearly 57% of available days in Q3 were already booked at an average of $30,500/vessel, including three vessels at just $25,000/day with two MRs in the spot market with daily rates over $40,000/day.
That means the odds are that the third trimester will be at least as strong and probably better than the second trimester. Which also means that net debt will likely continue to decline to less than $70 million when it’s now also realistic to aim for net debt of around $60 million by the end of this year, although this will obviously also depend on changes in working capital and aiming to reach this level of leverage in the middle of the first quarter of 2023 is perhaps more realistic.
Preferred dividends are now covered and the level of asset coverage is improving significantly
For a detailed overview of the terms and details of preferred shares, I refer you to my April 2021 article. These preferred shares can be converted into ordinary shares but that’s not an item at the moment because the stock is expected to quadruple before this feature kicks in. So for now I’m just looking at preferred stocks from an income perspective because those preferred stocks pay $1.9375 per share per year, in twelve monthly installments of $0.161458. At the current share price of just under $20, the preferred dividend yield is around 10%.
Thanks to the substantial increase in net profit in the second quarter, the preferred dividend is now largely covered. Since there are only 449,673 preferred shares outstanding, Pyxis only has to pay out $218,000 per quarter in preferred dividends. This represents less than 5% of second quarter net income.
Even if we look at the results for the first half of 2022 which uses an average charter rate of just under $20,000/day, which is perhaps a good long-term view, net income was $1.36 million and only $449,000 was needed to pay for the preferred shares.
Note that the net income of $1.36M includes a loss of $0.5M on the sale of vessels while the total interest cost was slightly higher at $1.8M and the rapid reduction in net debt should result in lower interest costs. In any case, based on a charter rate of just under $20,000/day, the Pyxis tankers only needed 25% of their net income (adjusted for the loss on the sale of the vessel) to cover the preferential dividend. It’s good enough for me.
Moving on to the asset coverage ratio, reducing net debt obviously helps protect preferred shareholder value.
As you can see in the image above, the equity value has increased to just under $50 million. The 449,673 preferred shares have a value of $11.2 million, which means that approximately $38.5 million in equity is ranked below the preferred shares. It’s also interesting to see that the ships have a book value of $117 million. In Henrik Alex’s May article, he estimated the value of the ships at around $114 million. While that was okay at the time, the recent increase in charter rates has also driven up the value of used ships. So based on the current market situation, I would say that the market value of the vessels is higher than the book value.
Just to give you an example. The recent purchase of a $32 million ship built in 2017 was rather expensive according to Alex’s article. WhoaHowever, recent quotes for a 5 year old MR sized tanker indicate a fair value of $37 million per vessel. A similar observation can be made for ships built in 2013. In May, these ships were worth $20.5-21 million. But right now a 10-year-old MR tanker (slightly older than these 2013-built ships) is changing hands for $25 million according to Compass Maritime (below) and Lloyd’s List.
This means that for these three vessels alone, the market value is approximately $13 million higher than the book value. And it provides additional (albeit hidden) protection for preferred shareholders.
The main question right now is how long will these good times last. Q2 was good, Q3 will probably be even better. But visibility remains relatively limited although longer term charter rates for MR vessels appear to be holding the rate at $20,000+ per day, but it remains to be seen what Pyxis can lock in for its vessels. So I’m enjoying cash flow while it lasts and I’m happy to see that just two quarters of strong cash flow will already make the balance sheet much safer.
I have a small speculative long position in common stock, but I have a larger long position in Pyxis preferred stock. Since these are superior to common stock, they are safer than common stock, but of course Pyxis needs to keep its balance sheet in good shape and keep reducing its net debt. I would be interested in buying more preferred shares of Pyxis, but it is imperative to keep an eye on charter rates and the value of used vessels.