Imperial Petroleum (IMPP) – Expensive Related-Party Dry Bulk Carrier Acquisition

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In February this year, I advised investors to steer clear of small oil tanker operator Imperial Petroleum (NASDAQ:IMPP, NASDAQ:IMPPP) after its recent spin-off from StealthGas (GASS) given the company’s stated intent to grow the fleet to the detriment of common equity holders.

Over the past six months, the company has diluted common shareholders relentlessly, raising approximately $156 million in new capital thus causing outstanding shares to increase by more than 3,500%.

The company has used the funds to double its tanker fleet from four to eight vessels with two MR product tankers having been acquired from related party Brave Maritime, a company controlled by the family of CEO Harry Vafias.

Last week, Imperial Petroleum reported less-than-stellar Q2 results and perplexed investors and analysts with the disclosure of an expensive related-party deal for a pair of small dry bulk carriers:

In July 2022, we entered into an agreement with an affiliated party to acquire two handysize dry bulk carriers, the Eco Bushfire (2011 built) and the Eco Angelbay (2009 built), for a total consideration of $39 million. Both vessels are Japanese built with an aggregate capacity of 64,000 dwt.

Once again, Vafias family-controlled Brave Maritime has been the seller. According to Tradewinds, the vessels were acquired earlier this year for an aggregate $27.5 million.

Based on data provided by VesselsValue, the current market value of the vessels appears closer to $34 million, so apparently Imperial Petroleum overpaid by almost 15% for two small bulkers that don’t really fit into the company’s portfolio.

By flipping the vessels to the company, Brave Maritime booked a whopping 40%+ gain while extracting almost $40 million of the funds just raised by Imperial Petroleum.

Remember also, that the Vafias family will be entitled to a 1% commission of the purchase price despite simply moving the vessels from one family-controlled entity to another one.

It should also be noted that dry bulk charter rates have recently taken a major hit across all vessel classes with the Baltic Dry Bulk Index (“BDI”) down by almost 30% over the past six weeks alone and close to 50% on a year-over-year basis.

On the conference call, CEO Harry Vafias pointed to a potential spin-off of the dry bulk vessels which would likely be the next Vafias family-controlled vehicle pursuing a growth strategy at the expense of common shareholders.

Valuation-wise, the company currently trades at an approximately 65% discount to estimated net asset value (“NAV”), still well above other relentless diluters like Top Ships (TOPS), Castor Maritime (CTRM), Performance Shipping (PSHG), OceanPal (OP), Globus Maritime (GLBS), Imperial Petroleum (IMPP) and United Maritime (USEA).

Quite frankly, there appear to be much better investment opportunities in the shipping space right now.

Over the weekend, I highlighted Navios Maritime Partners (NMM) after the company addressed the long-standing Navios Maritime Holdings (NM) overhang last week. While certainly not flawless, at a 70%+ discount to NAV and a new $100 million common unit buyback in place, the diversified shipping giant provides for a far superior risk / reward profile.

Bottom Line

Mediocre second quarter results and particularly an ugly related-party deal caused Imperial Petroleum’s common shares to sell off again.

Suffice to say, management’s interests do not appear to be aligned with common shareholders at this point.

While the company’s operating performance should see strong improvement in Q3, elevated risk of additional self-dealings and further, opportunistic capital raises should keep investors sidelined.

Also keep in mind that the company will likely be required to conduct a reverse stock split until December 14 to regain compliance with the Nasdaq’s $1 minimum bid price requirement

That said, the ongoing dilution has resulted in the company’s 8.75% Series A Preferred Shares (IMPPP) looking increasingly attractive as there’s virtually no near- and medium-term risk to the dividend payments anymore. At the current price, shares are offering investors a rather safe 12% annual yield.

Should the company indeed decide to make use of its right to redeem the preferred shares, investors would be rewarded with an approximately 40% short-term capital gain. Unfortunately, management’s commentary on the conference call makes me think that odds of an early redemption are thin at best at this point.

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