Shares in Pyxis Tankers Inc (NASDAQ: PXS) surged nearly 63% Monday to $6.68 with no apparent trigger to account for the move.
The sudden surge above a price target of $ 3.00 attracted a comment from analyst James Jang at Maxim Group that the stock had gotten ahead of its fundamentals. Jang downgraded Pyxis from Buy to Hold.
Pyxis Tankers Inc (NASDAQ: PXS) plies a fleet of six product tankers that are engaged in the seaborne transportation of refined petroleum products and other bulk liquids. These tankers, which have an average age of 6.7 years, are deployed under a mix of short and medium-term time charters and spot charters. Four of these ships are medium-range, or MR product tankers, while two are short-range tankers sister ships. Pyxis Tankers went public in October 2015 using an unusual mechanism for a shipping company – merging with already listed, US-based software company LookSmart, whose shareholders were interested in products tankers.
In testimony to the difficult conditions prevailing in the industry, the company reported disappointing numbers for the three and nine months period ended the 30th September, 2017. Quarterly EPS of $ -0.07 missed estimates by $ 0.05, while revenue of $ 6.35 million (down 11.8% year-on-year) missed estimates by $ 0.25 million.
Pyxis Tankers Inc (NASDAQ: PXS) Recent Performance
For the nine months ended the 30th September the company reported a net loss of $ 3.8 million, a negative swing from a net income of $ 19,000 for the corresponding period in 2016.
The main reason for the decline in the net income was a reduction in the time charter equivalent revenues of $ 3.9 million, and an amount of $ 0.3 million related to the company’s equity offering in July 2017 which was booked under general and administrative expenses.
The company attributed the decline in revenues to lower spot charter activity.
The product tanker market has been under severe pressure through 2016-2017 due to the following factors:
- A relentless onslaught of new tonnage that has pressurised charter rates or demand-supply disequilibrium.
- Global refined product inventories reached a high in Q1 2016 and subsequently demand was satisfied more through drawdown of these stocks rather than tanker transportation.
- Disrupted trading patterns squeezed arbitrage opportunities.
But according to company veterans, the industry may be at an inflection point, and could look forward to better conditions in 2018. And this may be getting reflected in the share price of Pyxis.
Pyxis Tankers Inc (NASDAQ: PXS) Favourable Outlook
According to chief executive Valentios (Eddie) Valentis, stepping into 2018, the industry could see a boost from significantly lower scheduled deliveries of new building medium-range tankers as well as a resurgence in demand growth.
“Improving demand growth reduced high inventories of refined products in storage worldwide to levels below 2016 and increased voyage activity,” he said on the earnings release.
In view of the improved outlook, the company has been boosting its time charter coverage for its medium-range tankers, betting on an improvement in charter rates moving into 2018.
He foresees, “projected solid growth in consumption and increasing export-oriented petroleum refinery cargoes.”
According to a Reuters report in October, global inventories have started to rebalance, and the trend was noticeable across the US, Europe and now in Asia. “After two years of oversupply and sharply rising inventories, inventories may have peaked as supply and demand comes back into balance,” said Neil Beveridge of Bernstein Energy in that report.
In a situation where the market re-balances, the tanker industry can look forward to normalisation of trade flows and a resumption in arbitrage trading. If this resurgence in demand is able to outstrip new vessel builds, 2018 could be a turnaround year for the industry.
An industry upturn will particularly benefit Pyxis Tankers Inc (NASDAQ: PXS) which focuses on the MR product tanker – a workhorse of the industry that is most widely used across the globe and easily tradable. It’s a flexible vessel which can carry multiple types of cargoes. Because of its size it can operate in almost any part of the world, even at smaller and shallow ports.
Pyxis Tankers Inc (NASDAQ: PXS) What to Watch Out For
New regulations require the installation of ballast water treatment systems to manage their ballast water to remove, render harmless, or avoid the uptake or discharge of aquatic organisms and pathogens within ballast water and sediments.
By 2020, IMO regulations demand the use of marine gas oil (MGO) instead of much cheaper heavy fuel oil (HFO).
The two older units at Pyxis would need a full installation at an estimated cost of between $500,000 and $650,000, whereas the two younger units are “ballast water treatmentready”, with preinstalled fittings and pipes, according to Valentis.
However, the IMO regulations regarding MGO would inflict higher operating fuel costs of as much as $6,250 per day. The alternative is to instal fuel oil scrubbers, which can be prove to be highly expensive.