Imperial Petroleum Series A Preferred: Still Solid, Downgrading To ‘Hold’ After Rally

Note:

I have covered Imperial Petroleum Inc. (NASDAQ:IMPP)(NASDAQ:IMPPP) previously, so investors should view this as an update to my earlier articles on the company.

From a corporate governance perspective, Greece-based tanker and drybulk vessel operator Imperial Petroleum looks pretty bad as the company has diluted original shareholders by almost 10,000% since its spin-off from former parent StealthGas (GASS) in late 2021.

Imperial Petroleum remains controlled by CEO and Chairman Harry N. Vafias and has used the funds to significantly expand its fleet, with many of the vessels having been acquired from related parties well above prevailing market prices.

That said, the company has started to reverse course last year with sizeable share and warrant repurchases and the CEO converting his dilution-protected Series C Preferred Stock into new common shares.

As of today, the company owns eleven vessels with an estimated market value of more than $300 million:

According to press reports, Imperial Petroleum recently agreed to sell the Aframax tanker Gstaad Grace II for $41 million to Chinese buyers:

The relentless dilution has resulted in a pristine balance sheet with $124 million in cash and short-term investments as of the end of last year and no debt:

In 2023, the company generated almost $80 million in cash flow from operating activities, and both the tanker and dry bulk shipping markets continue to exhibit strength.

With strong cash flows and a best-in-class balance sheet, Imperial Petroleum’s 8.75% Series A Cumulative Redeemable Perpetual Preferred shares (IMPPP) are certainly worth a look for income-oriented investors.

However, following the recent price appreciation, the annualized yield has decreased to approximately 9%.

While shares are listed on Nasdaq, the average daily trading volume remains below 3,000 shares with large bid/ask spreads.

Please note that Imperial Petroleum has the option to redeem the preferred shares at any time at their liquidation preference of $25.00 per share, which would result in a small capital gain for investors and approximately $2.1 million in annual cash savings for the company.

With annual dividend obligations covered multiple times by Imperial Petroleum’s cash flows, the company’s preferred shares continue to look solid.

However, I wouldn’t chase the shares following the recent rally as an annualized yield of 9% is roughly in line with yields offered by a number of much larger players in the shipping space:

Bottom Line

Given the strength of the tanker and dry bulk shipping markets, Imperial Petroleum’s 8.75% Series A Cumulative Redeemable Perpetual Preferred Shares continue to look solid, but with the annual yield now comparable to several larger players in the shipping industry, I wouldn’t chase the shares aggressively anymore.

Consequently, I am downgrading Imperial Petroleum’s 8.75% Series A Cumulative Redeemable Perpetual Preferred Shares from “Buy” to “Hold“.