Imperial Petroleum: Downgrading On Aggressive Move Into Dry Bulk - Hold

seekingalpha10-04

In a bold move, Imperial Petroleum has agreed to acquire seven dry bulk carriers from related party Brave Maritime for $129 million.While the transaction was done at a slight premium to market prices,...

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(NASDAQ:IMPP) previously, so investors should view this as an update to my earlier articles on the company. Two weeks ago, Imperial Petroleum disclosed its largest related-party dealing so far in a short SEC-filing (emphasis added by author):  Imperial Petroleum Inc. (the \"Company\") has entered into agreements to acquire seven Japanese built bulkers (5 supramaxes and 2 kamsarmaxes) for an aggregate purchase price of $129 million, from entities affiliated with Brave Maritime Corp Inc. The transaction with Brave Maritime, which is affiliated with members of the Vafias family, was approved by the independent directors of the Company, which obtained independent valuations of the vessels. The vessels are expected to be delivered between December 2024 and May 2025. The Company expects to finance the purchase price for each vessel with cash-on-hand and has the option to pay for the vessels latest by one year from each respective purchase agreement. Following these vessel deliveries, and assuming no further acquisitions or dispositions, the Company's fleet will total 19 vessels.  After doing some research on Brave Maritime's fleet, the acquired vessels seem to be: MagicPort Not surprisingly, Imperial Petroleum has been charged a price above the market value of the vessels. However, the premium appears to be just 2.5% which almost looks like a bargain when compared to some of the company's past related-party dealings. In addition, the company has been provided very generous payment terms of up to 12 months. The company expects to take delivery of the vessels between December 2024 and May 2025 which tends to be a seasonally weaker period. The transaction will increase Imperial Petroleum's fleet to 19 vessels with an estimated value of $434 million: Regulatory Filings / MagicPort The addition of seven dry bulk carriers will change the company's fleet profile quite meaningfully and is likely to result in Imperial Petroleum's reported average daily time charter equivalent (\"TCE\") rates decreasing materially next year. With charter rates for mid-size bulkers not as strong as in the larger Capesize segment, cash provided by the new vessels is likely to be limited in the near-term and might even be negative in the seasonally weak first quarter. Based on current forward freight agreement (\"FFA\") rates, 2025 is not expected to be a stellar year for dry bulk carriers: Braemar Atlantic Securities Please note that FFA rates reflect market participants' future expectations as of today and might change significantly going forward. For my part, I don't like the massive expansion of the dry bulk fleet, as near-term earnings prospects don't look great. In addition, the transaction will result in the Vafias family extracting the majority of the company's cash balances. From a net asset value (\"NAV\") perspective, the acquisition will have limited impact. However, second hand vessel values have decreased in recent weeks. As a result, the company's net asset value per share is down from my last article: Regulatory Filings / Value Investor's Edge While the stock is still changing hands at an almost 65% discount to diluted NAV, the company's aggressive move into dry bulk is unlikely to be a short-term winner. On a different note, Imperial Petroleum was reportedly highlighted as a negative example in the 2024 Webber Research & Advisory report on environmental, social and governance (\"ESG\") standards which ranks 64 publicly listed shipowners globally.  (...) This year it is Harry Vafias' Imperial Petroleum that makes its debut in last place. (...) The Webber report attributed its last-place ranking to \"multiple related party arrangements, low board independence and lack of carbon disclosures\". Rounding out the bottom five are Cyprus-based Castor Maritime - a previous last-place finisher - Castor spin-off Toro Corp, Top Ships and StealthGas. Webber's report came with a rationale that he has repeated over the years. \"We believe there is no longer a place in the public shipping markets for companies that do not prioritize strong corporate governance and capital stewardship,\" he wrote.  Bottom Line Imperial Petroleum disclosed its biggest related-party dealing so far with the company adding seven dry bulk carriers from Brave Maritime at a moderate premium to market value which is more than offset by very generous payment terms. As market participants tend to prefer pure plays to diversified shipping companies, the transaction is not likely to attract new investors to the stock.  Given limited near-term earnings prospects for mid-size dry bulk carriers and considering the fact that the acquisition will result in the Vafias family extracting the majority of the company's cash balances, I am downgrading Imperial Petroleum's common shares from \"Buy\" to \"Hold\".","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2472937864"}