Earnings Call Transcript - IMPP Q1 2023

Operator, Operator

Good day, and thank you for standing by. Welcome to the Q1 2023 Imperial Petroleum Results Call. At this time, all participants are in listen-only mode. After the speakers' presentations, there will be a question-and-answer session. Please note that today's conference is being recorded. I would now like to hand the conference over to you, speaker Mr. Harry Vafias, CEO of Imperial Petroleum. Please go ahead, sir.

Harry Vafias, CEO

Good morning, everybody, and thank you for joining us for the first quarter 2023 conference call of Imperial Petroleum. I'm Harry Vafias, the CEO, and with me today is Ms. Sakellari, our Interim CFO, who will be discussing our financial performance. Before we commence our discussion, we'd like you all to read the safe harbor disclaimer in slide number two of our presentation. In essence, it is made clear that this presentation may contain some forward-looking statements as defined by the Private Securities Litigation Reform Act. We raise the attention of our investors to the fact that such forward-looking statements involve risks and uncertainties that may potentially affect our company's performance. In addition, we'd like to state that during this call, we will quote monetary amounts unless explicitly stated otherwise are all denominated in U.S. dollars. Starting from slide three is a summary of our company's performance highlights. The first quarter of 2023 had the best turnout possible for Imperial Petroleum, as we ended the period with a record net income of almost $36 million, an outstanding performance for a fleet of our size. Our earnings per share or EPS came in at $2.31, which is close to our current share price. In conjunction with our past quarters, we generated an annual return on equity in the region of 19% based on the trailing 12 months to March 2023, a return that cannot be left unnoticed. Setting aside our short performance, year 2023 commenced with a busy agenda for Imperial Petroleum from a strategic standpoint. We deployed about $70 million of cash in order to pay all of our outstanding debt. Imperial Petroleum is now a debt-free company with a flexible capital structure. Striving for growth, we acquired two more handysize bulk carriers, reaching a fleet total of 12 ships. Furthermore, we proposed the spin-off of two of our dry bulk carriers, a separate company called CCIS. Finally, on April 28, 2023, we affected the 15-for-1 reverse stock split in order to regain compliance with the NASDAQ minimum bid price requirement. Our strategic initiatives allow us to enjoy a company that is thriving in terms of financial performance, owns a debt-free capital structure with an unencumbered fleet, which has granted flexibility to our shareholders. The spin-off will expand, and perhaps diversify their investment and has taken action in order to regain compliance with NASDAQ, just to provide more assurance to our shareholders. We continue to trade at a deep discount to NAV but remain positive that our solid profitability will assist our share price to recover and realistically reflect the true valuation of the company. On slide four, we provide a summary of our fleet employment, as evident all of our dry bulk carriers are under time charter employment. As for our tankers, following the conclusion of Magic Wand's legacy ten charters, they are all operating on the spot market. Indeed, the spot market for all tankers, product Aframax, and Suezmax tankers continues to be strong, particularly when compared to rates prevailing a year ago. This upward trend in rates is reflected in our performance as well. Our daily time charter equivalent in Q1 ‘22 was $12,600 and climbed in Q1 ‘23 to $53,750 per day, marking a rise of about 330%. Changes in trade partners following the Russian-Ukrainian conflict have made voyages longer haul. This, along with firm oil demand, maintains rates at high levels, which are evidently favorable for the owners. On slide five, we're reviewing the tanker market. In spite of the global economic recession and the recent Western Banking crisis that has caused some volatility in the market, global oil demand is forecasted to grow by about 2 million barrels per day this year. This growth will be facilitated mostly by China, which is no longer held back by COVID restrictions. This will give rise to domestic demand. Additionally, intensified refinery activity in China is expected to support crude imports, which will hit a record in the second half of 2023. In the beginning of April 2023, Saudi Arabia and other OPEC+ members announced voluntary production cuts from May till the end of the year as a precautionary measure supporting stability in the oil market. This has had an impact on rates in the short run. However, based on little fleet growth along with trade flow changes and the Atlantic-East arbitrage, we do not expect to see noticeable and long-lasting weakness in the market. The evident global tanker market is impacted by various events, and it is difficult to make predictions as to future performance. However, firm demand and high utilization present favorable conditions for a continuation of high freight rates and perhaps some volatility in the periods ahead. Since 2020, oil demand has grown by about 9%, while oil exports have followed a slower pace of 6% growth. In other words, there's a supply shortfall in the market. Overall, global oil demand is anticipated to have a very long tail and to peak in the late 2030s, creating a positive outlook for the broader tanker market. On slide six, we're focusing on the product tanker market. We expect the outlook for this segment to remain positive for this year and beyond due to the small order book and longer haul seaborne trading patterns. Product tanker fleet growth will be 2% this year, while product tanker demand growth will exceed 10%. The Suezmax and Aframax tanker market have been supported mostly by the Intra-Atlantic basin crude tanker demand. Briefly to comment on market rates and trade patterns during the first quarter, the tanker markets show an extremely strong start to the year, especially on the dirty side, but also the clean tankers enjoyed healthy freight levels too. The significant changes in oil and oil product trade flows resulting from sanctions imposed on Russian cargoes continue to be the main driver behind the strong markets. India continues to buy large quantities of Russian oil, and China, coming out of the recovery lockdown, has started to increase their imports of oil. Additionally, the G7 nations imposed a cap on restrictions on Russian oil products that came into effect as of February 5, which led to both Russian dirty and clean oil products having to find new buyers. Except for Turkey, the majority of these outlets are resulting in major increases in ton miles. On the dirty side, the Atlantic saw the highest rates, and especially the Aframax segment had a very solid Q1 with historically high levels paid on both sides of the Atlantic. East of Suez, a dirty market trade did not see the kind of uptick that the Atlantic market experienced, but the owners enjoyed a relatively stable and strong market there as well. On the clean side, we saw more volatility West of Suez than East of Suez, but the outcomes for the quarter turned out quite similar. I’ll now pass you on to Ms. Sakellari, who will provide a summary of our financial performance.

Ifigeneia Sakellari, Interim CFO

Thank you, Harry, and good morning to everyone. In the first quarter of ‘23, our revenue and profitability took off. The fact that the fleet of 12 vessels managed to generate about $36 million in net income is impressive and encouraging for the quarters to follow. We ended the quarter with an operational utilization of 85% with six days of technical off-hire and 495 days, or 54%, of our fleet days dedicated to spot activity. Both conditions and dates favor spot market operations, and evidently, this proved to be a sound and very profitable decision. Looking at our income statement for Q1 ‘23 on slide seven, compared to Q1 ‘22, revenues came in at $65.4 million, up by $60.3 million compared to the first quarter of ’22 due to a further increase in market rates and the increase of our fleet by an average of six vessels. Voyage costs increased by $16.4 million due to the increase in spot days by 468% and the rise in daily bunker cost by $5,200 compared to Q1 ‘22. Our running costs decreased by $5.2 million solely attributed to our fleet expansion; compared to the fourth quarter of ‘22 when we had a similar number of vessels, our daily OpEx remains stable. We do expect a rise in OpEx in the second quarter of ‘22 as the two drybulk handysize carriers joined our fleet towards the end of Q1 ’23 and therefore, the cost of operation was not fully reflected in our results. Basically, above, we generated a strong EBITDA of $40 million that is $37.3 million or 1,435% higher than in Q1 ‘22. Our net profit of $35.7 million was an all-time high result corresponding to an EPS of $2.31 based on the number of shares outstanding as adjusted for the reverse split effective on April 28, 2023. Our profit margin for the quarter was in the order of 55%. Moving on to slide eight, let us take a look at the balance sheet for the three months of 2023. As of March 31, 2023, we had the free cash base of about $115 million including time deposits. Within March, we utilized $23 million to repay one of our outstanding loans, while in April, we further deployed another $46 million to repay earlier in full; all of our debt. Imperial Petroleum is now a debt-free company with unencumbered assets and zero cash flow obligations stemming from financing. Our operating cash flow for the quarter was $31 million, so in a single quarter, we generated from our fleet operation nearly as much as our market capitalization. To date, our cash stands in the region of $70 million. We will continue to utilize the high-interest rate environment and commit our excess cash on time deposits. Yields are high. Only in Q1 ‘23, we generated close to $1.3 million of interest income, fully hedging against finance costs for the period. In slide nine, we present the financial snapshot placing efforts on our solid financial position. Going forward, as mentioned earlier, our cash balance is high in the region of $70 million and we are poised to expand our fleet further. Full debt repayment will lead to annual cash flow savings of almost $15 million in principal and interest funds that may be directed to asset investments. We enjoy both healthy liquidity and a good financial outlook. Looking at profitability Q1 ‘23, our daily time charter equivalent per vessel came in the order of $53,750. What is most impressive and the mathematical proof that our strong results may continue is that following our full debt repayment, our daily cash flow breakeven provision is about $9,000. Imperial Petroleum proved to be a company capable of growing fast and producing impressive returns. A return on equity basis trailing the last 12 months is reaching 19%. Our considerations going forward stem mostly from how market conditions will play out and affect our segment. One question is the duration of the global recession and the recent banking crisis and the extent to which this will affect the oil market. Moreover, based on strong oil demand, OPEC may increase supply in the second half of 2023, but this is still uncertain. Moving on to company-specific matters, our only capital obligations going forward are five drydocking scheduled to take place in the remainder of 2023. Concluding our presentation with slide 10, we simply outlined once more the strong budget points that make Imperial Petroleum a company that has a short but impressive track record of successful fleet expansion, which should yield immediate returns. We hope that our company's worth will finally be reflected in our share price. At this stage, our CEO Mr. Harry Vafias will summarize our concluding remarks for the period examined.

Harry Vafias, CEO

Our performance in the first quarter of 2023 resulted in record revenues and profitability. We are extremely pleased that our strategies are paying off. Commercially, we capitalize on the strong tanker market and efficiently utilized an average fleet of about 10 ships to produce in a single quarter net income of $36 million marking a 17,750% increase compared to the net income generated in the first quarter of 2022, and an EBITDA of about $40 million, 1,435% higher than the same period of last year. Strategically, we proposed a spin-off of two of our dry vessels to a separate company called CCIS. About our financial strategy, we paid down all our debt and have stopped issuing new shares. Without a doubt, we are well positioned to benefit from the good market conditions that seem to last going forward. We have now reached the end of the presentation and would like to open the floor for your questions. So operator, please open the floor.

Operator, Operator

Thank you, sir. Please note that we will take a total of 10 questions, not more. We are now going to proceed with our first question. The question comes from the line of Jason. Please ask your question.

Unidentified Analyst, Analyst

Hello, hi. Can you hear me? Hello?

Harry Vafias, CEO

Hi, Jason.

Unidentified Analyst, Analyst

Hi, good afternoon or evening, wherever you are. So I guess I've been an investor here for about a year since you guys started. It’s been a bit of a ride. Here in the United States and probably elsewhere in the world, social media, online, websites, and stuff give commentary about certain stocks that are more prevalent than ever; Reddit, Yahoo Marketplace, etc. Perception has been really negative about the company, about trusting the future of your management style in reassurance to investors? What I really want to know and what the investment community wants to hear from you is that dilution is over, I guess, to some degree, a definitive statement. We really want to see management invested in common shares.

Harry Vafias, CEO

We received a lot of criticism over the last year and fairly, I would say. The company grew in just a year from four ships to 12. The company grew from a really small company with very few assets and debt to a debt-free company with over $400 million in assets. We just stated in the press release that we don't need to issue any more shares for now; we have plenty of money and no debt. All of our fleet is unencumbered, so if this doesn't give any comfort to shareholders, I don’t know what will.

Unidentified Analyst, Analyst

What we’ve been waiting for, sir. We've been waiting for kind of a verbal declaration from you of just that, and I think that will move the market. In the future, I would like to see management being compensated with common shares. I don't know whether there's some sort of performance compensation or whatnot, but I think it would have a good impact when management starts to actually align with shareholders in the company?

Harry Vafias, CEO

Thank you, Jason. I think that the board is discussing exactly that as we speak.

Unidentified Analyst, Analyst

Excellent, sir. I believe you all have done a fantastic job overall. These numbers are extremely impressive, so keep it up.

Harry Vafias, CEO

Thank you.

Operator, Operator

We are now going to proceed with our next question. The question comes from the line of Edward Humphreys. Please ask your question.

Unidentified Analyst, Analyst

Hello?

Harry Vafias, CEO

Hi, Edward.

Unidentified Analyst, Analyst

Hi, Harry. Thanks for taking the question. I just want to start off by saying it's really impressive how much you've grown the company and how healthy the balance sheet and all the operations are to date. I don't want that to be undervalued or diluted by a lot of hearsay that you hear here and there. I think you guys have been doing a phenomenal job taking advantage of both the public markets and the unique global situation. It's very commendable. I just want to kind of piggyback off of what Jason just said there. I think everyone is just thinking the same. We're very impressed with the revenues, the profits. Even if management or the company itself put 50% of one quarter's profits into a common share buyback, you could get about 5 million shares or so at this price point. If you guys were to resell those shares closer to the net asset value, which of course you've reiterated multiple times is close to the $20 region, that would generate substantial returns for the company and could be put towards growing the fleet and continuing this terrific job. I kind of just wanted to get on and reiterate that. I think you guys have a tremendous opportunity with the clear difference in what the company is truly valuing and what the market has it at here. If management could take advantage of that price arbitrage, I think we could definitely benefit the company and shareholders.

Harry Vafias, CEO

Thank you, Edward. It will definitely be discussed at our next board meeting with all the members of the board. Thank you, it's appreciated.

Unidentified Analyst, Analyst

Thank you, Harry. Take care.

Operator, Operator

We are now going to proceed with our next question. The question comes from the line of Thomas Randall from Tribco Partners. Please ask your question.

Thomas Randall, Analyst

Hello. Can you hear me?

Harry Vafias, CEO

Hi, Thomas.

Thomas Randall, Analyst

First of all, congratulations to you and your management team on a spectacular quarter. I just want to note that the amount of profit you reported in your first quarter was the equivalent of the market capitalization on Friday. I'm an investment banker of 40 years, I'm semi-retired; I have never seen the degree of undervaluation of a publicly held company. My only suggestion to the company is to retain a good Investor Relations firm that will help present this compelling story to smaller hedge funds and investor clubs because what you have is an incredibly compelling story. I'm sure all of you are aware of that for your operations, and you do a tremendous job of operating the company. I believe that most of the issues going on in the marketplace are naked short sellers, and they can be very vicious, as we all know. The other suggestion about a buyback is something I know you're going to consider, and that would certainly put a floor on the stock. But you're managing the company for the long term, and as long as you convince shareholders of that, number one, you have a good firm to present this to the investment community. I think this company will do just fine. Again, many congratulations on what you've done with this company.

Harry Vafias, CEO

Thank you very much, Thomas. Your experience really counts. We are doing exactly that through selective interviews that go on YouTube and so on to spread the story. In one-on-one calls with larger investors, everybody has now realized, better late than never, how solid the company is and how undervalued it is. We hope that the gap between real value and the value of the stock will narrow going ahead. But thank you.

Thomas Randall, Analyst

Thank you very much.

Operator, Operator

We are now going to proceed with our next question. The question comes from the line of Scott Shepherd from Black Castle. Please ask your question.

Scott Shepherd, Analyst

Yes, hello. Can you hear me?

Harry Vafias, CEO

Hello, Scott.

Scott Shepherd, Analyst

Congratulations on the quarter. I think it was phenomenal. I'm really impressed with what you guys have done with the company. Not to beat a dead horse, but my question is about dividends and stock buybacks. If the company is considering retaining that capital for other purposes besides stock buybacks or potential dividends, what uses might the company be exploring with that capital? Can you give us a little insight on that potentially? Thank you.

Harry Vafias, CEO

Yes. I mean in Q4 last year, we did not expect that we would be debt-free this quickly. Reducing our debt to zero was the first priority because the interest rates were going through the roof. Therefore, that was a viable action that management took. We haven't really explored the uses of the capital yet as there are differing opinions between the board on whether we should expand the fleet further or do a buyback or just wait and see if the market continues to be strong in Q2 and Q3. So there are two or three aspects that need further discussion. But I think we're all on the same page; we're not issuing any more shares. The company is debt-free, and it has become a cash-making machine. Within the next quarter or the following one, we will have more concrete news on which option we have all decided to pursue.

Scott Shepherd, Analyst

Great. Thank you.

Operator, Operator

We are now going to proceed with our next question. The next question comes from the line of Jeff Friedrich from Imperial Petroleum. Please ask your question.

Jeff Friedrich, Analyst

Yes. Hey, hi. In the SEC filing for the CCIS document, you mentioned a buyback of the shares that you put in for the IMPPP part that now IMPP owns. Of course, it was reduced by the amount of shares accordingly by the reverse split at 150% of the price; is that still going to happen?

Harry Vafias, CEO

Sorry, Jeff. I didn't understand the question. If it's possible, please send us an email with the specific question, and we can go through it with our accounting team, and we'll get back to you.

Jeff Friedrich, Analyst

All right. Well, okay. All right.

Harry Vafias, CEO

Just send an email, please. It's easier for us to understand what you're asking.

Jeff Friedrich, Analyst

Okay. Yes, yes, totally got it. Thank you.

Harry Vafias, CEO

Thank you, Jeff.

Operator, Operator

We are now going to proceed with our next question. The next question comes from the line of Ross Haberman from RLH Investments. Please ask your question.

Ross Haberman, Analyst

Good morning. Thanks for taking my call. Very nice quarter. I just wanted to ask a quick question. Could you give us a little rationale for the purchase of the bulk carrier ships, which you purchased a couple of months ago? Are these the same ones that are spinning off? Could you sort of give us the rationale for buying them? Because they were not oil tankers, but they're a different type of ship. Now why spin them off? Could you sort of give us the rationale? Thank you.

Harry Vafias, CEO

Yes. Thank you, Ross. I think it's quite simple because the tanker market is doing so well, the prices for tanker assets have skyrocketed. We are generating a lot of money, so instead of going and buying an asset that is currently very expensive, we tried to find an asset in a market that is not booming and therefore the valuation is not as high. By spinning these two ships out as a dividend to our shareholders, they can hold the stock if they believe in this new market of bulk carriers or sell it and make some money back if they don't believe in this market. It's a nice option for our shareholders.

Ross Haberman, Analyst

When is that new stock going to begin to trade if I may ask?

Harry Vafias, CEO

It's not finalized yet; we're waiting for the SEC on some legal proceedings. I think before it goes live, we should not have any unexpected delays. It should be in the beginning of June, so very soon, I guess.

Ross Haberman, Analyst

And just one follow-up question. Will you use the new cash generated, assuming your business continues positively as we saw this quarter? Will you use it possibly to buy other non-tanker ships like you just did, or are you sort of going to stick within the realm of oil tanker ships? I think that was one of the less positive aspects; that you veered off and went into a different type of ship purchasing, which surprised some of the shareholders. Thank you very much for taking the questions.

Harry Vafias, CEO

Yes. I think that investors have a very short memory because last year when StealthGas, which was the parent company, spun out Imperial Petroleum, we got exactly the same comments: why did StealthGas, which is a gas company, buy tanker assets and why are they veering off their normal strategy? Of course, some people who took this Imperial Petroleum stock saw that their investment skyrocketed, multiplying five, six, or seven times. We are again facing the same point where Imperial Petroleum is now buying assets from a different class and will spin them out. I think you'll understand why we are doing it, and it's a very positive action because you will receive a separate share, which you can hold or sell. The power lies with the shareholders and not with us; this is a great decision for shareholders to either keep the free shares or sell them.

Ross Haberman, Analyst

Thank you.

Operator, Operator

We are now going to proceed with our next question. The question comes from the line of Lance Gad from the Gad Foundation. Please ask your question.

Lance Gad, Analyst

Yes, hello. When Imperial Petroleum was spun out of StealthGas before the reverse split, the basis allocated was $12.50, and now with the reverse split, those shares have a basis of $112.50. I was curious how that number came about and why it was so enormous.

Harry Vafias, CEO

I cannot answer that. This is a legal and accounting issue according to SEC rules. However, if we did not do the reverse split and the company continued to trade below $1, we would have faced delisting. The stock would have traded at very low levels, and the value could have gone to zero. The reverse split was the only route we could take to maintain compliance and ensure liquidity for our shareholders.

Lance Gad, Analyst

Right. The other question I had was before the reverse split, I believe it was announced that the NAV of the company was $1.38, yet we were selling shares in the market at about $0.20 to raise money to buy ships. I can't understand how that was a good thing to do.

Harry Vafias, CEO

You're absolutely right, Lance, and that's why we stopped doing it. With all the money raised, we not only bought ships, but we also repaid our debt to zero, which makes our company a strong one that can withstand any market conditions.

Lance Gad, Analyst

But we sold a lot of stock at a price even below today's price. It seemed to me to be absurd that we would do that.

Harry Vafias, CEO

Yes, we couldn't foresee the future; we couldn't know we would make so much money in Q1. All our ships were on the spot market; they were not under time charter contracts where you can forecast your earnings. Spot means that if the market is good, you can make a lot of money or if the market is not good, you can lose a lot of money. We took that risk, and it paid out, which is why we are thrilled. We don't need funds from anybody anymore; we are debt-free. The company is healthy, and we move ahead.

Operator, Operator

We are now going to proceed with our next question. The next question comes from the line of an unidentified analyst. Please ask your question.

Unidentified Analyst, Analyst

Hi, Harry. Can you hear me?

Harry Vafias, CEO

Yes.

Unidentified Analyst, Analyst

Hi there. I'm just curious, the main thing I'm trying to understand is with the share price so far below net asset value. If you believe there's so much opportunity in the marketplace, why do you or does management own any common shares?

Harry Vafias, CEO

Who told you that we don't own any common shares?

Unidentified Analyst, Analyst

It was in the SEC filings.

Harry Vafias, CEO

We do own common shares, my good friend. To be honest with you, when the stock was booming over a year ago, management did not sell a single share. This shows the commitment to the company. Everyone's aware that the stock is currently a good buy with today's fundamentals.

Unidentified Analyst, Analyst

Okay. Thank you, Harry.

Operator, Operator

Given the time constraints, we will end the question-and-answer session here. I will now hand back the conference to Mr. Harry Vafias for closing remarks. Thank you.

Harry Vafias, CEO

We'd like to thank you all for joining us at the conference call today and for your patience, interest, and trust in our company. We look forward to having you with us again at our next conference call for our second-quarter results. Thank you very much.

Operator, Operator

Ladies and gentlemen, that concludes today's conference call. Thank you for participating. You may now disconnect your lines. Thank you.