Description

Summary

Illiquid microcap more suited as a PA play on tanker rates. Pyxis Tankers is a ~$50m market cap owner/operator of 3 charter tankers and 2 dry bulk vessels. The company trades at a significant discount to replacement value (~40% of the liquidation value of their vessels) and at ~3x EV/FCF on our CY2024 estimates trades ~3 turns below peers. They have an undercapitalized debt structure with only ~$5m of net debt that should provide countercyclical expansion opportunity for up to 3-4 additional vessels if tanker prices return to more normalized levels. Management has shown good discipline around capital allocation with significant inside ownership (CEO owns ~55% of the company). The bull thesis is essentially an industry bull case on tanker rates remaining elevated in the near term, but at a ~33% NTM FCF yield PXS is more of a pure play on short term tanker supply/demand than peers. 

Company background

PXS fully owns 3 charter tankers with two on longer-term fixed charters and one on spot employment. They fully own one dry bulk vessel and own 60% of another (Konkar Ormi) through a joint venture. Both dry bulk vessels were purchased in the second half of 2023 and have so far been signed on short term charters of 1-3 months.  

The company sporadically buys/sells vessels and recently sold two charter tankers in 2023 to capitalize on rising tanker values at a significant profit (~$25m combined) which was somewhat offset by purchases of the two lower priced dry bulk carriers. This has left them with a very healthy balance sheet with ~$61m of bank debt offset by ~$56m in cash/short term deposits for ~$5m of net debt and only ~$2m in net interest each year. This gives them substantial countercyclical optionality to purchase new charter tankers once the cycle turns and when asset prices fall.

Management indicated on their last earnings call that they don’t intend to purchase overpriced vessels and plan to use cash flow to improve their balance sheet (ie. delever) and for further share buybacks.

Tanker Industry background

The tanker industry has been widely discussed on VIC and I would refer to a recent writeup by katana on STNG or helopilot on TDW for a more comprehensive background on the industry history. PXY owns 3 M2 charter tankers which is ~80% of their revenue base.

The tanker industry is very cyclical with tanker day rates highly levered to the supply/demand balance in the industry and to global shipping volumes of refined products. Trade is fairly correlated to global GDP growth. The mid 2000’s-2010’s featured oversupply, which kept day-rates low through the COVID pandemic. Since late 2021, we’ve seen day-rates and tanker prices steadily climb to above average levels. Tanker stocks as well as broader oil/gas infrastructure has rallied in the last 6 months with PXY lagging share gains given it’s a microcap with almost no following. We think that day rates should remain stable to higher over at least the next 12-18 months given several constructive sector fundamentals:

1. Growing share of non-OPEC refining capacity provides a longer-term boost to ton-miles (and hence tanker demand). Excluding current war related trade disruptions, ton miles are up 7% since 2019
2. Current trade disruptions from the Russia/Ukraine and Middle East conflicts create significant short-term tailwinds to ton-miles with ton-miles increasing ~70% if vessels are forced to divert around the horn of Africa as opposed to using the Suez Canal
3. Supply growth should remain very limited in the near term.
   1. Retirements/scrapping is expected to accelerate over the next 3-5 years with 187 MR2 tankers (11% of global fleet) over 20+ years old and an expected useful life of ~25 years
   2. We’ve seen a recent lack of retirements due to rising tanker values and a strong chartering market with only 4 MR2s retired in CY2023. 103 MR2 tankers are scheduled for delivery over the next 22 months which should lead to low single digit supply growth in 2024

Most tanker companies have provided commentary on the near term supply/demand balance.

1. STNG expects fleet growth of just 0.9% in 2024 vs. ton milage growing 7.3%. They expect more balance in 2025E with 2.5% fleet growth vs. ~1.1% ton-mile growth on expectations of fading war impact.
2. TNK expects almost no fleet growth in 2024 vs. ton-miles growing ~4.5%. They’re more bullish on 2025E retirements with 1% fleet growth vs. 2.8% ton-mile growth.

There’s a certain amount of “this time is different” talk floating around the tanker industry which I don’t necessarily agree with, but supply/demand seems favorable over the next 2-3 years baring a major recession, which is arguably all you need at a company trading 3x FCF.

Dry Bulk Industry

Pyxis entered the dry-bulk industry in September 2023 and now owns 1.6 eco efficient dry bulk carriers with one owned in a joint venture. Their dry bulk cargoes are typically coal, iron ore, grains, fertilizers, and aggregates. Demand is generally correlated to GDP growth with weighting towards Chinese raw product demand. Supply/demand dynamics seem more balanced in dry bulk compared to tankers, but there’s still some tailwinds to supply and rates:

1. Similarly aging fleet with 18% of the global fleet 15+ years old and 8% 20+ years old. Current orderbooks set to deliver ~3% of the total fleet amount in 2024 and 2025. The current orderbook is a record low as a % of fleet. Net supply should grow ~2.5% in each of the next two years

2. Panama Canal trade disruption from low water levels is a more significant tailwind to dry-bulk given it heavily impacts dry-bulk exports from Brazil to China.
3. Port congestion has eased, but risk is to the upside on any short-term fluctuations

Shipping company commentary seems to indicate a slightly under supplied to balanced market over the next two years on their March earnings calls

1. GNK estimates dry bulk freight ton-miles 4.6% in 2024 vs 2.5% vessel growth and freight increasing ~1% in 2025 vs ~2% increase in vessel growth.
2. DSX expects ~3% ton-mile growth in 2024 vs. 2% vessel growth
3. NMM expects dry bulk freight ton-miles to increase 1.6% vs 2.3% fleet growth in 2024
4. A major research firm recently released estimates this month for 5% ton-mile growth in 2024 given increased trade disruptions in the Red Sea

Valuation

Base case, in 2024 PXS should be able to do ~$48m in revenue with their current assets. This assumes a slight uptick in dry freight rates when they resign their dry freight vessels in late March consistent with market rates since then, and ~$45k in day-rates on their one spot-rate vessel. Two of their Tankers are fixed rate until the end of August with options until year end which we assume will be used. This should translate to ~$24.5m in EBITDA and ~$22m in FCF for 2024.

Trying to estimate tanker rates out to 2025 isn’t super productive and the fleet will likely change in the interim, but for illustration of the opportunity, if you assume that rates remain steady in 2025 and that their longer-term charter tankers get renewed at a slightly higher rate at the end of 2024, you get to ~$23.5m in FCF. Between the next two years, that would be ~70% of their EV generated in cash.

Tanker stocks are generally trading at 5-8x CY2024 EV/FCF with dry bulk/shipping companies in the 4-7x CY2024 EV/FCF range. 4.5x CY2024 EV/FCF seems fair for PXY given it’s a small cap with some bulk freight exposure. This gets you to ~$8/share.

Risks

 - Limited fleet size leaves them more at risk for any unseen maintenance or damanges 

 - Highly cyclical industry with global recession fears

 - Liquidity in the stock

Catalyst

 - Continued elevation in tanker day-rates

 - Escalations in the Middle East

 - Proof of strong cash generation over the next 12 months