Note: I have covered Performance Shipping (NASDAQ:PSHG) previously, so investors should view this as an update to my earlier articles on the company.
After a couple of very weak quarters, the fallout from the Russian assault on Ukraine has resulted in tanker charter rates increasing materially.
Last month, small Greece-based Aframax tanker operator Performance Shipping managed to fix its vessel “Blue Moon” for up to six months at a gross charter rate of $37,750 per day, more than 300% above levels witnessed at the beginning of the year.
At this rate, I would estimate the vessel to generate up to $3.5 million in free cash flow over the charter term. While rates have retreated somewhat in recent weeks, the company should still generate healthy cash flows for the remainder of the year.
Before last week’s equity offering, Performance Shipping was trading at an eye-catching 90% discount to net asset value (“NAV”) but neither the disappointing share price performance nor the improved market environment stopped management from heavily diluting common equityholders at a tiny fraction of NAV:
Performance Shipping Inc., a global shipping company specializing in the ownership of tanker vessels, announced today the pricing of an underwritten public offering of 7,620,000 units at a price of $1.05 per unit. Each unit consists of one common share (or pre-funded warrant in lieu thereof) and one Class A warrant to purchase one common share, and will immediately separate upon issuance. The gross proceeds of the offering to the Company, before underwriting discounts and commissions and estimated offering expenses, are expected to be approximately $8.0 million.
Each Class A warrant is immediately exercisable for one common share at an exercise price of $1.05 per share and will expire five years from issuance. The offering is expected to close on or about June 1, 2022, subject to customary closing conditions.
Maxim Group LLC is acting as sole book-running manager in connection with the offering.
The Company has granted the underwriter a 45-day option to purchase up to an additional 1,143,000 common shares and/or prefunded warrants and/or 1,143,000 Class A warrants, at the public offering price less underwriting discounts and commissions.
Under normal circumstances one would have expected the board of directors to consider material common stock repurchases or the controlling shareholder making an outright offer for the company but, unfortunately, this is not how Greek shipping works.
Instead, controlling shareholder Aliki Paliou recently opted for converting her common shares into newly issued 4.0% Series B Convertible Cumulative Perpetual Preferred Stock (“the Series B Preferred Stock”) thus protecting her holdings against future dilution in the common equity.
Even better, owners of the Series B Preferred Stock will soon have the option to convert their holdings into newly issued supervoting 5.0% Series C Convertible Cumulative Perpetual Preferred Stock (“the Series C Preferred Stock”):
Each Series B Preferred Share is convertible, at the option of the holder and for additional cash consideration of $7.50 per converted Series B Preferred Share, into two shares of the Company’s Series C Convertible Cumulative Perpetual Preferred Stock (the “Series C Preferred Shares”), par value $0.01 per share and liquidation preference of $25.00 (the “Series B Conversion Right”)
While our common shares have one vote per share, each Series C Preferred Share shall be entitled to a number of votes equal to the number of Common Shares into which the share is then convertible multiplied by 10. Holders of the Series C Preferred Shares shall be entitled to vote with holders of Common Shares, voting together as a single class (with certain exceptions), with respect to all matters presented to the stockholders.
Even further massive dilution won’t have a major impact on her supervoting rights (emphasis added by author):
Each Series C Preferred Share will be convertible to Common Shares, at the option of the holder at any time and from time to time after 18 months from the date of issuance of such Series C Preferred Share, in whole or in part, at a conversion price equal to $5.50 per Common Share (adjusted for any stock splits, reverse stock splits or stock dividends). The conversion price shall be adjusted to the lowest price of issuance of common stock by the Company for any registered public offering following the original issuance of Series C Preferred Shares.
Last week’s offering as well as the recent utilization of the company’s at-the-market (“ATM”) offering program with H.C. Wainwright has reduced estimated net asset value per share from approximately $20 at the beginning of the year to slightly above $7 today:
After Friday’s 60%+ sell-off, the common shares continue to trade at an approximately 90% discount to NAV but apparently for good reason given management’s complete disregard for common equityholders.
Please keep in mind that exercise of the 7.6 million warrant sweeteners issued in last week’s offering would reduce NAV per share even further to slightly above $4.50.
In addition, the massive sell-off in the common shares will likely require the company to conduct another reverse stock split next year to regain compliance with the Nasdaq minimum bid price requirement.
To put things into perspective:
An orderly liquidation of the company could have resulted in proceeds north of $15 per common share.
But given management’s stated intent to double the company’s fleet within the next 12-24 months, common shareholders need to prepare for substantial, additional dilution in the not-too-distant future.
Last week’s offering proceeds in combination with a new $5.0 million credit facility provided by Aliki Paliou and cash flows from operations would be sufficient for acquiring another second-hand Aframax tanker but it would require at least another $70 million to double the fleet from currently 5 to 10 vessels without a substantial increase in the average vessel age:
Performance Shipping is joining peer Imperial Petroleum (IMPP, IMPPP) and sister company OceanPal (OP) in issuing new shares at a tiny fraction of net asset value for the sole purpose of growing the company at the expense of common equityholders.
My expectation is for the company to announce a new vessel acquisition sooner rather than later.
Further substantial dilution will be required to meet management’s stated target of doubling the fleet over the next 12 to 24 months.
Similar to Imperial Petroleum, Performance Shipping’s common stock might still provide some decent trading opportunities from time to time but long-term investors shouldn’t touch the shares with a ten-foot pole.