Pyxis Tankers Inc. Q2 FY2023 Earnings Call

Good morning, everyone, and thank you for joining our call for results of the 3 months ended June 30, 2023. The Russia-Ukraine conflict continues to affect global energy markets and disrupt economic and strategic priorities, as well as global relationships, with trade-restrictive monetary policies resulting in slowing economic activity and, most recently, a decrease in installation within many countries. In spite of this, the product tanker sector maintains solid chartering activity and high asset values. At Pyxis, we continue to successfully navigate through these uncertain times, and we are pleased to report good operating and financial results for the most recent period. Before starting, please let me draw your attention to some important notifications on Slide 2 that we recommend including our presentation today, which will include forward-looking statements. Thank you. Turning to Slide 3. Our most recent quarterly results reflected solid financial performance on revenues, operating cost growth, and profitability, despite operating challenges with vessels resulting from the 14-year-old Pyxis Malou being sold in late March. In the second quarter ended June 30, we generated consolidated time charter equivalent revenues of $8.6 million, a decrease of $2.7 million over the same period in 2022. Our daily TCE and margin Q2 2023 was approximately $25,000, which was down slightly from the same quarter last year due to less export chartering activity. We reported net income of $2.8 million or $0.25 basic EPS for the most recent period, which was down from last year. Our adjusted EBITDA in Q2 2023 was $5.2 million. Over the course of the second quarter, the product tanker environment experienced a great softness. Despite reasonable demand for transportation fuel worldwide, moderating economic activity was met with seasonal refinery maintenance programs. The ongoing Russia-Ukraine conflict continues to result in tight inventories of petroleum products, which are below 5-year averages in a number of locations around the world, changing trade partners, expanding ton-mile dislocations in the market, which create arbiter opportunities and higher transportation costs. For example, in the U.S., recent inventories of gasoline and diesel were up 7% and 14%, respectively, lower than 5-year averages. While product prices are significantly lower than a year ago, refinery activity continues to be solid with healthy spreads, reflecting good global demand. The developments support a constructive outlook for the product tanker sector. In light of this, we continue to consider the purchase of modeling acquisition demand – we are always looking for economically viable acquisitions and, in the meantime, to further improve our balance sheet and to the limited extent repurchase common shares. Most recently, our Board unanimously approved a $6.8 million equity investment in a joint venture for the acquisition of a 2016 Japanese-built dry bulk carrier, where we own 50% of the joint venture and the balance is held by an affiliate of our CEO and Chairman, Mr. Valentis. The $28.5 million vessel purchase is expected to be funded by $11.3 million of equity and $19 million in debt. We believe this scale cycle investment in a first-class eco vessel, which includes a scrubber and ballast water treatment system, should provide attractive returns to shareholders through a well-managed structure. Now for the anticipated closing of the transaction by late August, we expect to have significant dry docking opportunities for additional strategic investments. Please turn to Slide 4 for information on our existing fleet employment activities. We are continuing to prudently maintain our mixed charter strategy of time and spot charters with a focus on diversification by customer and trade routes. As you can see, after the sale of the Pyxis Malou, we now operate a fleet of 4 eco-efficient MRs, which has an average age of 8.6 years and is over 4 years younger than the industry average of 13 years. Three of our tankers can be contracted under short-term charters and one in the spot market. As of July 26, 55% of the available bank in Q3 were full, with an estimated TCE rate of approximately $27,800, which at this point represents an 11% sequential increase over our Q2 daily chartering results. Next, please turn to Slide 6 for a further update on the product tanker market. In addition to my prior comments about the market, the recent economic activity for most of the world has been affected by restrictive monetary policies and lower geopolitical events. The EU and G7 group ban on seaborne cargoes of Russian refined products, which started in February 2023, and subsequent price gaps have reduced revenues, created market dislocations, which has been compounded by lower inventories of refined petroleum products in many parts of the world. Product exports from the refineries located in the Middle East, the U.S., and certain parts of Asia are expanding. According to Drewry, an independent industry research firm, in 2022, second trade of oil products increased 1.7% to over 1 billion tons, while ton-miles rose 3.2% to almost 3.43%. According to another leading research firm, ton-mile demand is expected to increase 12% in 2023, cargo volumes grew 4%, and in 2024, a further 7% growth in ton-miles and another 4% increase in volumes is expected. Variation changes in trade routes can be seen in Slide 7. Please turn to Slide 8 to review several macroeconomic considerations which support fundamental sector demand. Historically, seaborne refined products have helped moderately correlate to global GDP growth. In July, the IMF revised its global GDP growth estimate upwards to 3% for this year due to resilient economic activity, primarily in the OECD, offset by the adverse effects of significantly higher interest rates and persistently high inflation. Recently, the IEA slightly revised its estimate of global oil consumption to increase 2 million barrels per day or 2.2% to an average of 102.1 million barrels per day in 2023. In continuation of the recent crude oil production cut by OPEC+, including a 0.5 million barrel per day reduction by Saudi Arabia in August, which is expected to result in tighter supply later this year. However, incremental production is expected from the U.S., Canada, Brazil, Norway, and other regions. Of course, these actions by Iran and Venezuela will supplement global oil supply. According to the EIA, the U.S. should increase average oil production in 2023 by 5.6% to almost 12.6 million barrels per day. Nevertheless, expectations of tighter supply and solid global demand have resulted in approximately a 10% increase in oil prices since the start of the summer. Now on to Slide 9. Over the longer-term, we expect demand for the product sector will be supported by refinery additions led by the Middle East and Asia. Delivery estimates indicate that 4.4 million barrels per day of refinery capacity is scheduled to come online by 2028, while the OECD is experiencing a decline. However, planned shutdowns may be delayed due to refinery economics, but over the longer run, closures are expected to further contribute to the importation of refined products into mature OECD markets and provide additional online expansion. Many refineries, including those in the U.S., continue to experience good utilization and profitable cash spreads in order to meet solid product demand. Processing cheaper raw materials has provided a recent margin advantage for refineries primarily located in India and China, supporting domestic supplies and simple excellence, especially for transportation fuels. Let’s move on to Slide 10. The product tanker supply picture is much clearer, with the outlook for MRs continuing to look very promising, while orders for the construction of new product tankers have picked up in 2023. The order book is still relatively low by historical standards. According to Drewry, as of June 30, 2023, the order book for MRs stood at 6.6% of the global fleet or another 11 vessels, of which 17 are scheduled for delivery in the second half of this year. Due to huge backlogs, many nations don’t have available construction slots for MRs and will delay deliveries until early 2026. Delays in newbuild deliveries continue to be a predictable factor, and much has run over 12% annually over the last 5 years. The decision-making process for budgeting orders has also been complicated by ongoing developments in ship and engine designs, stricter environmental regulations, rising shipbuilding costs, as well as the evolving selection of lower carbon fuels. As many as 144 vessels, or 8.5% of the global fleet, are over 20 years old, significantly more than the order book. Given this large number combined with the declining economics of operating older vessels, major scrapping should occur over the next 5 years. Thus, we estimate that net fleet growth for MRs will be less than 2% per year through 2024. Turning to Slide 11, good chartering conditions have led to steep increases in asset prices across the board. Values for second-generation vessels are still significantly above tender averages, but prices for older tankers have recently softened. Construction costs for new builds are approximately $47 million, exclusive of yard supervision and add-ons. Prices for the young eco-efficient MRs are currently near historical highs and attractive acquisitions are very much a focus for the business. 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.

Thanks, Eddie. On Slide 13, let’s review our unaudited results for the three months ended June 30, 2023. Our time charter equivalent revenues for Q2 of 2023, which we define as revenues net of voyage related costs and commissions, declined to $8.6 million, a decrease of $2.7 million from the same period in 2022, mainly due to lower charter rates primarily in the spot market, which was offset by higher utilization. More importantly, with the sale of our oldest vessel in March '23, we operate one pure MR in the most recent period. For the second quarter of '23, the TCE rate for our MRs was $25,000 per day, still a healthy rate, but down 5% from the comparable 2022 period. Moving to Slide 14, we generated net income for common shareholders of $2.8 million for the three months ended June 30, 2023, or $0.25 basic and $0.23 diluted EPS, compared to net income of $4.6 million or $0.43 basic and $0.38 diluted net income per share in the same period of '22. For accounting purposes, the fully diluted earnings calculation assumes the potential conversion of all the outstanding Series A convertible preferred stock into common shares and the elimination of the associated dividend. In Q2 '23, a significant portion of the decrease in TCE revenues flowed through the income statement, as adjusted EBITDA decreased $2 million to a respectable $5.2 million. Now let’s flip to Slide 15 to review our capitalization at June 30, 2023. Our consolidated leverage ratio of net funded debt stood at less than 19% of total capitalization. Due to increases in SOFR, our weighted average interest rate was about 8.2% for the most recent quarter, and the next bank loan maturity is in about 2 years. I should point out that at June 30, 2023, our total cash position was approaching $34.5 million. Most of our excess cash is invested in short-term money market instruments, which are currently earning an average of 5.2%. Lastly, the Pyxis tanker is scheduled to have her second special survey with ballast water treatment system installation later this summer at a cost of approximately $1.4 million and 25 days of off-hire. With that, I would like to turn the call back over to Eddie to conclude the presentation.

Thanks, Henry. Over the near term, fundamental demand is relatively in balance with supply. Macroeconomic headwinds and uncertainty from geopolitical conflict create challenges and opportunities for the Product Tanker segment. We continue to benefit from a combination of solid end market consumption, low refined product inventories in many parts of the world, changing trade patterns, and an expanding online. Scheduled developments in the refinery landscape only enhance the long-term outlook of our sector. We will effectively utilize our strong financial position of excess cash and low leverage as well as valuable industry relationships to seize investment opportunities that maximize shareholder value. We appreciate your interest and thank you for joining our call today. We look forward to reporting on future progress at Pyxis Tankers. Enjoy the summer and stay well.

And this concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.