Imperial Petroleum Inc (IMPP)

[sharky]

Imperial Petroleum: Global Macros Driving Company's Rapid Expansion:

https://seekingalpha.com/article/4517776-imperial-petroleum-global-macros-driving-companys-rapid-expansion

Imperial Petroleum (IMPP) is a Greek company specializes in the transportation of various petroleum and petrochemical products in liquefied form. Imperial is a small company that has recently doubled the size of its petroleum and petrochemical tanker fleet from four ships to eight, while increasing shipping capacity by over 120%. Plans for further expansion of the tanker fleet have been discussed by the company's CEO.

Elevated shipping rates, combined with what Imperial believes to be a coming scarcity of tankers, may make this an opportune time to acquire shipping tankers as assets. Perhaps most importantly is that Imperial's revenues may increase sharply from the key factors of elevated shipping rates and an increasing number of tankers in Imperial's fleet. This combination of factors, along with a stock trading near the bottom of its 52-week trading range, presents what seems to be a compelling bull thesis for the long trade in Imperial's shares.

Energy has been a leading sector achieving superior performance in the current market. All 10 of the top-returning sector ETFs this year are in the energy sector, says Morningstar Direct. The chart below illustrates the decline of the S&P 500 during this approach toward a bear market decline in value. In contrast, the oil services sector ETF is a top performer up 42% YTD. Energy prices are likely to remain high for the foreseeable future. Energy companies may benefit from these increasing inflows of cash. Imperial appears to be a small company in the energy sector that has improving fundamentals and an attractive valuation.

VanEck Oil services ETF price
Data by YCharts
Imperial is in growth mode within a growth market. The need for petroleum tankers and petrochemical tankers is increasing to meet growing global demand and to assist in the changing structure of global supply routes. Growth companies within growth industries are often highly attractive investments. Finding these ideas early in their revenue growth is key to achieving an optimal entry point.

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Shipping rates have recently become elevated in Q1 2022, at the same time that Imperial has begun expanding its fleet of tankers. The lackluster performance of Imperial in 2021 has contributed to the trade lower in the price of its stock. 2022 may prove to be a sharp turnaround in the performance of Imperial with the tailwinds of a global macro of rising shipping costs. This combined with Imperial's company-specific fleet expansion are likely to deliver much improved results in 2022. The first quarterly report of these improving results for Imperial are scheduled to be delivered next Tuesday on 6/14/22 in the Q1 2022 earnings report.

Imperial ER
Imperial Petroleum's Q1 2022 ER and guidance may be bullish. (Reuters News)

The following graphic is from the company's Q4 2021 earnings report's powerpoint presentation:

Imperial Petroleum
Global macros, plus fleet expansion may be bullish for Imperial Petroleum. (Imperial's quarterly presentation.)

With Imperial's 143M shares outstanding, increasing revenues could help this microcap stock to improve its status to the small-cap stock classification. This move above the $300M market cap into the small-cap league would require Imperial's share price to trade above roughly $2.20 per share. The upcoming Q1 2022 report may contribute the guidance from Imperial that the market wants to see for a move higher in the share price. Currently, Imperial is trading just below .80 cents as shown on the daily below:

IMPP
IMPP Daily chart. (IBKR)

Imperial's business model might see its share price and market cap raised from its recent moves to expand its fleet of tankers. Seaborne shipping rates have soared since the beginning of 2022, and Imperial is aggressively seeking to capitalize upon this global macro.

Here's an important link from Imperial's website regarding the expansion of the company's fleet of tankers. Here is the relevant text excerpted below:

IMPERIAL PETROLEUM ANNOUNCES AGREEMENT TO ACQUIRE TWO SUEZMAX TANKERS
Athens, Greece, May 27, 2022 – Imperial Petroleum Inc. (Nasdaq: IMPP) (the “Company”) announced today that it has entered into an agreement to acquire two suezmax tankers, built at Hyundai Samho in 2007 and at Samsung Heavy Industries in 2008, with an aggregate capacity of approximately 320,000 dwt, from an unaffiliated third party for an aggregate purchase price of $46.8 million, with delivery expected by mid- June 2022. The Company expects to finance the purchase price with cash-on-hand and new senior secured bank debt. This transaction is indicative of the Company’s substantial financial resources to consummate new vessel acquisitions due to its high level of available cash raised from its recently completed public offerings. This agreement is consistent with the company’s plan to continue its fleet expansion.

Please note that the company's shipping capacity will more than double from 305,804 dwt to about 682,000 dwt as these mid June 2022 deliveries of new tankers are received.

The graphic below is notable due to both the aging of the petroleum tanker fleet globally, and even more so due to the low number of new ship builds on the global order book. At a time when the world needs more petroleum and petro-chemical tankers, the existing fleet is aging, and the orders for new ship building are sharply lower. This dynamic points to a scarcity of tankers for the global energy needs in the near term. Imperial is making acquisitions of these increasingly valuable assets currently. Daily rates for shipping have risen sharply, and may still go much higher.

Imperial petro
New ship building's order book indicates future scarcity of tankers. (Imperial Petroleum's presentation.)

Here are Imperial's SEC filings. 2021 financial results combined with Imperial's equity and debt offerings have depressed the price of shares until recently. The weak performance of this company and the recent offerings may have created an attractive entry point into this trade. Page 8 of the Q4 2021 presentation displays a summary of the sub-par financial results below:

Imperial petroleum
Guidance for future revenues is likely to be raised. (Imperial's quarterly presentation.)

Now the market has discovered Imperial's efforts to capitalize upon the sharp increase in shipping rates for its products. The acquisition of new tankers that will increase dwt shipping capacity by well over 100% is combining with the global macro for higher shipping rates to lift forward guidance during the remainder of 2022 and beyond. The graphic below illustrates the sharp increase in volatility and higher prices for shipping rates above the levels seen at the start of 2022:

Higher shipping rates.
Volatile shipping rates have increased from 200% to 700%. (Simpson, Spence, Young, LLC)

Here is a YouTube of the company's CEO Harry Vafias discussing the "500% to 700% increase in global shipping rates for Imperial's tankers" in 2022. This means this benefit for Imperial started in Q1 2022 has grown in Q2 2022, and promises to extend into the future. The financial benefits from these higher rates have not yet been reported by Imperial. I would expect these significantly stronger results to be well received by the marketplace. In fact, the market is now revaluing Imperial shares higher.

Please note that CEO Vafias discusses that Imperial's fleet has recently doubled from four to eight tankers and plans to expand further to 18 vessels. Tanker scarcity means higher daily rates for shipping, up from $10K per day to as much as $70K per day at the recent peak of rates. Those rates are now closer to $20K per day, still double the daily rate of 2021. It's possible that rates may stay elevated for an extended time period due to global macros.

IMPP
Energy prices may remain elevated for the foreseeable future. (CNBC.com PRO)

High Risk-Reward Trades

All stocks carry risk. Participation in the stock market requires the acknowledgement of risk. No stock is immune from risk. This current bear market has demonstrated that many stocks can trade lower than we might reasonably expect. For many stocks, the momentum trade to the downside has taken prices lower than what might be considered fair value.

The previous bull market is gone, but not forgotten. Stocks traded higher than many expected possible. In 2021 the momentum trade was powerful to the upside, taking many stock prices far above fair value. Market forces are often analogous to a pendulum that swings in a wide ranging arc, far from the center balance that markets might consider fair value. This momentum trade acts as a double-edged sword that cuts sharply in both directions. We have experienced a very strong bull market to the upside that topped out in Q4 2021. The downside since then has been brutal as the bear market has slashed stock prices.

Historically, the price volatility in nanocap stocks has been very high. Part of the attraction to these high-risk stocks is that they can also deliver high rewards. Traders seek high volatility since volatility is a prerequisite for trading. High volume volatility is what traders seek. This sharp price movement creates the opportunity for both risk and reward. As we acknowledge the ever-present risk of markets, we also want to balance this against any potential reward that may be possible for a trade. We assess the risk in a nanocap stock, such as Imperial Petroleum, with a keen awareness for the essential application of risk management that must accompany every trade.

Meme Stock Status = Potential Volatility

Imperial Petroleum had a sharply higher price spike to $9.70 in March of 2022. This social media-driven move higher combined the elements of a meme-stock trade with short-covering and momentum buying that proved to be a short-term event. Traders must acknowledge that this stock is very volatile with a 52-week high of $9.70 per share and a low of only .38 cents made just about two weeks ago on 5/25/22. The question for traders may be fairly based upon the fundamental developments occurring at Imperial, relative to the stock's valuation on the daily chart. Traders want to discern if the anticipated sharp rise in revenues that may develop for Imperial in the coming quarterly earnings reports will lift the price of the company's stock from current levels. This is the speculative bet that traders are considering in this high risk-reward trade.

Increasing the company's shipping capacity by about 120% into an environment of elevated shipping rates, combined with a scarcity of oil tankers to meet global demand for petroleum and petrochemicals, is a solid bull thesis for this trade. Additionally, the stock's valuation is near the bottom of the stock chart at this time. However, the market is rife with risks both foreseen and unforeseen. The bull thesis could break down, along with the price of Imperial's stock. We acknowledge the reward potential for this trade, along with the risks. This is the balanced view that veteran traders want to bring to any trade. Again, risk management is essential.

Energy Stocks Have Outperformed In This Bear Market

It's accurate that buying stocks near the bottom of bear markets has historically produced superior returns. It's also accurate that negative growth economic cycles, known as recessions, can compound upon themselves as a slowdown in spending occurs. Mild recessions can worsen to become deep recessions. Bear markets can trade lower than we expect, and last longer than we expect. For those of us who traded both the Dot.com boom and the following Dot.com bust, we know that it took 15 years for the Nasdaq to regain its previous all-time high. Many of the companies that existed during the all-time high of the Dot.com boom did not exist 15 years later. Markets deliver both risk and reward. Nobody should be in the stock market who does not completely acknowledge this fact.

Imperial Petroleum is in the best performing sector of the entire stock market for 2022 - energy. This nanocap's improving fundamentals have been largely under appreciated by the market until recently. The rapid growth of this small company is now being appreciated. This stock is being revalued higher to reflect that view for the near-term growth in revenues that is likely. This is evident during the last 10 trading sessions on the stock chart. It may be that this stock is early in its revaluation move higher. Spending on energy and demand for oil is likely to keep shipping rates elevated for some time in the current environment.

However, there's also likely to be a rising amount of demand destruction that occurs as economic spending slows globally. This could reduce shipping rate prices somewhat. The risks in this trade must be balanced against the potential rewards. Clearly, I'm bullish on this trade, but the risks are real and they must be acknowledged.

Financing Growth of Revenues

Expanding the size of Imperial's shipping fleet has required the issuance of additional equity that has taken the company's share count up to 143M shares. This is a reasonable capitalization that could possibly experience somewhere in the range of .50 cents to $1.50 per share in revenues during the forward-looking 12 months. This wide range of revenue estimates is due to the volatile nature of shipping rates.

Imperial's CEO has made it known that the company wants to continue expanding the size of its tanker fleet. The additional revenues that are anticipated from the expanding fleet into elevated shipping rates may provide a portion of the capital needed for future tanker purchases. The company has about $90M in cash, which also may contribute to new tanker purchases. It's likely that the company will continue to issue additional equity to finance the growth of the tanker fleet. While this activity will produce long term revenues, the market may trade lower in the short term upon these equity offering announcements. Financing the growth of revenue-producing activities can be expensive.

Imperial has recently issued more than $23M in long-term debt during Q4 2021. This capital raise has contributed to the purchasing costs for new tankers. Additional debt may be issued in the future to continue the purchase of other new tankers.

Increasing revenues from a rapidly expanding fleet of tankers is expected to be adequate to service debt. Future issuances of equity may result in the growth of revenues. This is the trade off for achieving growth by most emerging growth companies. Issuing equity is dilutive, but when the capital raised is effective in purchasing growth of revenues, then this is often bullish for the price of a stock.

Imperial's CEO believes that a scarcity of oil and petrochemical tankers is emerging globally. The speculation being made by Imperial may be that purchasing these assets now will not only generate significant revenues, but possibly also maintain value as demand for shipping continues to rise. In a rapidly-growing market, growth companies can become top performers receiving a premium valuation. In a market where there's a scarcity of tankers, competition becomes less relevant. This is the bull thesis for this trade.

Summary

Global macros have provided an opportunity for Imperial to capitalize upon the sharp increase in daily shipping rates for oil and petro-chemical products.
Imperial has raised capital via equity and debt offerings, and has purchased new tankers to more than double its shipping capacity.
This aggressive strategy seems to be well-timed to capitalize upon sharply higher daily shipping rates.
Forward guidance for Imperial's revenues will likely be lifted sharply higher as a result of the combination of higher daily rates, plus a doubling of the company's shipping capacity.
Conclusion

This microcap is very volatile and has a very high risk-reward ratio. The stock is vulnerable to multiple factors and is only suitable for aggressive traders with a high risk tolerance. Please use risk management.

Traders have been searching deep into the microcap and nanocap far reaches of the stock market to find under-followed ideas. Imperial Petroleum is an excellent find at a beaten down price. The current expansion of Imperial promises to deliver sharply higher revenues in the current and future quarters.

The stock price of Imperial Petroleum is now being revalued higher in anticipation of these increased revenues. It's possible that fair value for Imperial could find itself in the range of $5-$10 per share as current quarter revenues and future guidance combine with increased new tanker acquisitions.

I have begun building a long position in Imperial Petroleum.


$IMPP $oil