Pyxis Tankers Inc. (NASDAQ:PXS) Q2 2022 Earnings Conference Call August 8, 2022 8:30 AM ET
Company Participants
Eddie Valentis – Chairman, Chief Executive Officer
Henry Williams – Chief Financial Officer, Treasurer
Conference Call Participants
Operator
Good day and welcome to the Pyxis Tankers conference call to discuss the financial results for the second 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 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. Please go ahead, sir.
Eddie Valentis
Good morning everyone and thank you for joining our call for results of the three months ended June 30, 2022.
The Russian invasion of 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 now battling high inflation and a slowdown in economic activity; however, the product tanker sector has been positively affected since early spring with rising charter activity and rapidly increasing asset values. At Pyxis, we continue to successfully navigate through these unprecedented times.
Before starting, please let me draw your attention to some important legal notifications on Slide 2 that we recommend you read, including in our presentation today, which will include forward-looking statements. Thank you.
Turning to Slide 3, our most recent quarterly results reflected record financial performance in revenue growth and profitability. In the second quarter ended June 30, we generated consolidated time charter equivalent revenues – TCE of $11.3 million, 173% higher than the same period in 2021. Charter rates accelerated through the quarter, especially in the spot market. Our daily TCE for Q2 2022 for our five Eco MRs was $26,270 per day, more than double results in the same period last year. Moreover, we reported net income of $4.6 million or $0.43 basic EPS for the most recent period versus losses in 2021. Our adjusted EBITDA in Q2 climbed to $7.3 million.
Over the course of the second quarter, the product tanker chartering environment continued to strengthen as greater economic activity was met with increased mobility, which amplified demand for transportation fuels. The ongoing Russian invasion of Ukraine has resulted in tightening of product inventories which continued to be below five-year averages, changing trading patterns, expansion of [indiscernible], dislocation to end markets creating arbitrage opportunities, and higher transportation costs; however, as higher inflation unfolded and petroleum product prices, such as gasoline and diesel, hit records, consumption softened as the quarter closed and prices have subsequently declined by a modest percentage.
Notwithstanding, refinery activity continues to be very strong, reflecting solid global demand. These developments have translated in robust product tanker charter rates in the spot market. Our bookings rate for Q3 is now 16% higher than we reported for Q2. As of August 5, almost 67% of our available days for Q3 are booked at an average TCE of $30,500 per day. In this context, we are maintaining our mixed chartering strategy of certain time and sport charters with a focus on diversification by customer and duration.
Please turn to Slide 4 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 time charters. For the Q3 bookings, the average spot charter rate is $43,900 per day with an average time charter rate of $25,000. 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 6 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 amplified by the impact of the war and other geopolitical events. The advent of increasing and severe sanctions against Russian exports of petroleum products has been met with low inventories in many locations, especially Europe. As previously highlighted, tight supplies for gas, oil and diesel are changing trade routes and adding ton miles to voyages by increasing exports from the refiners located in the Middle East, U.S., and certain parts of Asia. Increasing travel activity, especially during the summer, only compounds the difficulties in replenishing gasoline and jet fuel inventories. Unanticipated events such as the voluntary 50% cutback in natural gas consumption by the EU starting this month has been immediately met by Russia’s 80% reduction in deliveries from the major pipeline, Nordstream 1. Surging natural gas prices and market chaos should force some European utilities to switch to alternatives such as fuel oil for power generation. Reliable, secure energy sources will continue to be a major priority.
Please turn to Slide to review macroeconomic considerations.
Historically, seaborne trade of refined products has been relatively correlated to global GDP growth. In its July update, the IMF lowered its GDP estimate final increases of 3.2% for this year and 2.9% for 2023. Recently, two leading research firms estimated the seaborne trade in tons for refined products would grow 3% or more in 2022. Even with the orchestrated release of crude from the strategic petroleum reserves of certain IEA members, current consumption outweighs supply. Scheduled production increase from OPEC class, including its revised 100,000 barrels per day increase for September, and to a minor extent U.S. shale oil will add supply as the year progresses; however, even with slowing global economic activity, the imbalance should continue with tight inventories and high oil prices. In order to combat record high inflation, the implementation of stricter governmental monetary policies led by the Fed should accelerate this slowdown of economic growth.
Moving to Slide 8, U.S. refineries are currently achieving high utilization and healthy crack spreads in order to meet strong product demand from the U.S., Europe and Latin America. 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. IEA estimated that over 4.3 million barrels per day of new refinery capacity is scheduled to come online by 2025, virtually all of which is outside the OECD.
Planned shutdowns are likely to slow, but over the long run may further contribute to the importing of refined product into mature large OECD markets and provide additional tone-mile expansion. Unforeseen events such as hurricanes could lead to additional price spikes for products and temporary shortages in various locations and create arbitrage opportunities in the spot market. Of course, a possible wildcard is another variant of COVID-19, which would likely have a negative effect on demand.
Let’s move onto Slide 9.
The product tanker supply picture is much clearer as the outlook for MR2s continues to look very promising. The order book continues to drift lower and recently a leading brokering house estimated overall MR2 order book at 7.2% of the worldwide fleet of 1,753 vessels. New ordering has been subdued as 35 MRs were ordered last year with 25 year-to-date 2022. Forty-six MRs are scheduled for delivery during the remainder of this year with an equal number for 2023. Due to the recent surge in ordering of new containerships, gas carriers and dry bulk vessels, many Asian yards don’t have available construction slots with deliveries until the second half of 2024 or later. Over the five-year period ending 2021, delays in delivery of new build MRs ran at 13.4% per year. Slippage is likely to continue at an unpredictable level.
An owner’s decision making process for tanker new ordering is further complicated by ongoing developments in ship and engine designs, stricter environmental regulations, rapidly escalating shipbuilding costs, and involve a still unclear selection and availability of lower carbon fuels. Due to the strong chartering market and moderating scrap prices, demolitions have slowed in 2022; however, given that 164 vessels or 9.4% of the worldwide fleet of MRs is 20 years of age or older, demolition activity over the next five years should step up. Consequently, we continue to believe annual net fleet growth for MRs should be around 2% this year and next.
Turning to Slide 10, robust charter conditions have led to steep increases this year in asset prices across the board. New building prices now approach $43 million with delivery in two years or more. One leading research firm recently forecasted an additional 20% appreciation in secondhand prices by the middle of 2023. Stronger asset values and improving earnings power should lead to higher equity values.
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 June 30, 2022.
Our time charter equivalent revenues for 2Q22, which we define as revenues net minus voyage-related costs and commissions, accelerated to $11.3 million, an increase of 173% from the same period in 2021 due to higher charter rates, especially in the spot market where we incurred higher voyage-related costs and commissions, as well as the impact from changes to our fleet. In the past year, we’ve added two MRs and sold two small tankers. In the second quarter of ’22, the TCE rate for MRs was $26,270 per day, 107% higher than the comparable 2021 period.
Moving to Slide 13, we generated a net profit to common shareholders of $4.6 million for the three months ended June 30, 2022, or a $0.43 basic and $0.38 diluted EPS, compared to a net loss of $1.5 million or $0.16 basic and diluted loss per share in the same period in 2021. Simply, a substantial portion of the increase in TCE revenues during 2Q22 dropped to the bottom line. Adjusted EBITDA climbed to $7.3 million, an improvement of $6.9 million from the second quarter of last year.
Please turn to Slide 14, which reviews our recent MR fleet data as we operate one eco-modified vessel and four eco-efficient tankers. Given the size of our fleet, changes in these metrics related to a single vessel and one reporting period can have disproportionate effects on the total fleet’s operating results. Beyond this significant improvement in TCE for 2022, the key takeaway here is the relative stability of vessel operating expenses despite cost pressures, such as crewing and loops.
Now turn to Slide 15 to review our capitalization at June 30, 2022.
At quarter close, our consolidated leverage ratio of net funded debt stood at approximately 55% of total capitalization. We continue to be in full compliance with our loan agreements. Our weighted average interest rate was 4.6% for the most recent quarter, and the next bank loan maturity is July of 2025. We have interest rate protection covering 14% of our current outstanding LIBOR-based bank debt.
With that, I would like to turn the call back over to Eddie to conclude our presentation.
Eddie Valentis
Thanks Henry.
The impact of recent global events and low product inventories in many parts of the world have been considerably beneficial to our sector. For the near term, we are cautiously optimistic about the prospects of the chartering environment. Over the longer term, we find solace in the positive supply-demand fundamentals of the product tanker sector.
While we continue to take advantage of some interesting opportunities in the spot market, we will likely abide by our mixed chartering strategy complemented by short term 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 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
End of Q&A
Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.
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