NASDAQ PXS 0.91 -0.03 -2.84%
Volume: 60,669 December 1, 2020

We at Pyxis believe that our quality vessels, operated safely and well maintained by our managers, lead to attractive chartering arrangements and cost-effective return on capital for the benefit of our shareholders.

Primarily, we address the worldwide market for the marine transportation of refined products, which is driven in turn by demand for transportation fuels, including gasoline, diesel/gas oil, jet/kerosene and naphtha. We believe that fundamental population growth combined with increasing per capita incomes and further industrialization will lead to long-term demand growth globally for transportation fuels. However, the outbreak of the pandemic COVID-19 in early 2020 has negatively affected global economic conditions and contributed to a significant decline in the prices of crude oil and refined petroleum products. The resurgence this fall of the pandemic in many parts of the Northern Hemisphere has hampered a return in demand for transportation fuels. According to the IEA (11/12/20), global energy demand in 2020 is expected to decline 8.8 million barrels per day from the prior year, but rebound 5.8Mb/d in 2021, and the impact on demand from a successful distribution of an effective vaccine would be difficult to quantify until well into next year. Consequently, the situation continues to be very fluid and uncertain. This outlook will ultimately depend on how quickly and successfully governments contain the virus as a matter of public policy as well as gradual global economic recovery supported by record setting monetary and fiscal stimulus programs of leading governments and central banks which were recently estimated to be over $19 trillion by the IMF. In contrast, the vessel supply picture looks more positive since the beginning of the year due to the ripple effect of the pandemic to shipyards and marine equipment suppliers, especially in Asia, as well as extremely low new orders. Consequently, the earlier view of a sustainable period for improvement in product tanker charter rates has been interrupted and significant volatility may continue through 1H 2021.

The United States, Europe, China, India and Middle East are the largest exporters of refined products, accounting for over half of total exports. Refining capacity, domestic demand and worldwide arbitrage opportunities can influence the movements within these regions. In the past, global shifts in refining capacity and the increase in U.S. crude oil production, led by the rapid expansion of shale-based oil, have been positives for demand of product tankers. According to a leading industry source, since 2010 U.S. exports of refined products have grown to 5.1Mb/d by 2019, representing a Compound Annual Growth Rate (CAGR) of 10.6%. However, the effects of the pandemic since this past spring have depressed demand and help reduce commodity prices. U.S. crude oil production has declined from a record 12.9Mb/d in November, 2019 to a low of 10Mb/d by May, 2020 with an uptick to 10.6Mb/d in August. On November 11th, the EIA forecasted that on an average annual basis US crude oil production should be 11.4Mb/d for 2020 with a slight decline to 11.1Mb/d in 2021 (excluding the positive economic effects of a successful vaccine). In addition to meeting its growing internal needs, China has become a sizeable exporter of refined products, and according to Platts (9/19/20), government approved export quotas has been slightly increased to 56M metric tons. Changes in refinery locations have also led to further ton-mile demand for product tankers. The emergence of export-oriented, highly efficient mega-refineries located near the well-head, e.g., the Middle East, and the reduction of OECD (namely in Europe, Japan and Australia) refining capacity are examples of factors that influence locations of refineries. The IEA recently reported that 1.7Mb/d of refining capacity had been announced for closure, principally within the OECD. Non-OECD refineries accounted for over 53.4% of global capacity in 2019. Overall, seaborne trade in products has grown at a CAGR of 2.8% between 2010 and 2019, rising to 1,033 million tons, while ton mile demand over the same period had a CAGR of 2.9%. Seaborne trade of products has been reasonably correlated with historical global GDP growth according to leading industry research firm. On October 14, 2020, the IMF updated its global GDP forecast for 2021 for growth of 5.2% with a medium term (to 2025) outlook of 3.5%/yr.

Product tankers are differentiated by their coated cargo tanks, predominately epoxy-based paint, which minimize any corrosion from refined petroleum products and facilitate the rapid cleaning of cargo holds. Based on carrying capacity, the worldwide product tanker fleet ranges from small tankers under 10,000 deadweight tons (or dwt) carrying capacity to 120,000 dwt. A main group of vessels transporting the majority of cargoes consists of over 2,884 product tankers which range from 10,000 to 80,000+ dwt and aggregate over 157.2 million dwt as of June 30, 2020. Our area of focus, the Medium Range (or MR2) category, typically 37,000-55,000 dwt, consists of 1,768 tankers, representing almost 53% of total product tanker carrying capacity. MRs are considered the workhorse and usually operate in the Atlantic and Pacific basins. Customers include major integrated and national oil companies and international commodity trading firms. The growth in the supply of product tankers is primarily related to new build orders, usually placed at Asian shipyards, and demolition of older tonnage.

The placement of orders for new builds is primarily a function of a shipowner's outlook for demand for such vessels (i.e., future charter rates), construction availability at the yard, age of the existing fleet as well as cost and availability of funding. Product tankers have an expected operating life of 25 years, but certain major charterers have lower age restrictions. A leading industry consultant estimated that MR2 orderbook was 6.1% (108 vessels) of the worldwide fleet as of June 30, 2020 and that only one MR2 was ordered during the first six months of 2020. It also estimated 6.2% (or 110) of MR2s were 20 years or older. Product tanker demolition has not been significant over the last couple of years (e.g. only 4 MR2s in 1H 2020). However, new restrictive and ever expanding environmental regulations and the current depressed chartering environment should increase scrapping in the near term. We estimate that fleet growth for 2020-21, net of vessel scrapping and delays in MR2 newbuild deliveries, to be approximately 2.5%/yr.

Tanker operations and vessels are significantly regulated by international conventions, such as SOLAS and MARPOL, class requirements, various governmental health, safety and environmental laws and regulations, including OPA and CERLA, IMO regulations and by other jurisdictions. The independent classification societies certify that a vessel has been built and maintained in accordance with established rules and regulations, including periodic inspections and surveys of the vessel. In addition, many charterers have established certain standards to employ vessels carrying refined products guaranteed by strict vetting processes. Consequently, quality vessels and flawless operations are paramount within the product tanker industry.