NASDAQ PXS 3.82 +0.05 +1.33%
Volume: 54,201 September 27, 2022

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 negatively affected global economic conditions and contributed to a significant decline in the prices of crude oil and refined petroleum products. Starting the fall, 2020, we saw a gradual global economic recovery which was supported by record setting monetary and fiscal stimulus programs of leading governments and central banks. Moreover, the roll-out of multiple vaccine started in late 2020 which led to robust economic activities and mobility, primarily in developed countries. However, the introduction of the Omicron variant in late 2021 resulted in a further delay for better chartering conditions of product tankers due new government restrictions, which hurt demand for transportation fuels, a major source of cargoes. The invasion of Ukraine by Russia in late February, 2022 shocked the global energy markets. As a member of OPEC+, Russia is a major producer of crude oil at 11.4Mb/d as of February 2022 of which ~8Mb/d were exported. Russia exports 2.85Mb/d of refined petroleum products of which 1.5Mb/d goes to Europe. As a result of this war, many countries have introduced a broad range of sanctions on Russian goods and commodities, including petroleum products, which has started to affect global trade and relationships. Further, the EU embargo of refined products is scheduled to go into effect in early February, 2023. The Ukrainian war combined with the rapid increase of inflation, continued supply chain disruptions and the China’s prolonged battle with Covid and its real estate woes, should result in slower economic activity for most of 2022. However, the situation continues to be very fluid, complex and uncertain. The outlook in the short-term will be dependent of the impact of geo-political events, macro-economic conditions and, to a lesser extent, new variants of Covid, including vaccination rates and possible government restrictions/lockdowns.

The United States, Asia 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. On July 31, 2022, a leading industry research source estimated that growth in the seaborne trade of refined products in tons would increase 3.8% per annum between 2021 and 2025. In mid-September, another leading research firm estimated the upcoming EU ban on Russian refined products would result in an incremental boost in demand by 8% due to change trade routes, ton-mile expansion and fuel switching this winter.

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. In September 2022, Drewry estimated that 4.92Mb/d of new capacity(net) is scheduled to come on line between 2022-2026, substantially all non-OECD. According to Poten, a well-respected industry research/brokering firm, since January 2020, 1 Mb/d of refinery capacity has been shut-down or converted in the U.S. and an aggregated 0.8 Mb/d of capacity permanently off-line in Europe. The war has only compounded the situation in the EU with greater importing of refined products into these mature large markets and increased ton-miles, including shifting of Russian cargoes to other markets.

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 3,030 product tankers which range from 10,000 to 80,000+ dwt and aggregate over 167.2 million dwt as of August 31, 2022. Our area of focus, the Medium Range (or MR2) category, typically 40,000-55,000 dwt, consists of 1,638 tankers, representing 47.3% of total product tanker carrying capacity at that date.. MRs are considered the workhorse and usually operate in the Atlantic and Pacific basins. Customers include major integrated and national oil companies, international commodity trading firms and refiners.

The vessel supply picture continues to look very positive with low new ordering and increased tanker demolition. 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. Aggressive new orders of dry bulk and containerships have resulted in delivery slots for new tanker orders being pushed into 2024.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 costs and availability at the yard, age of the existing fleet as well as cost and availability of funding. Other decision-making factors for an owner include developments in ship and engine design, scrubbers, stricter environmental regulations, as well as the availability and pricing of alternative low-carbon fuels. Product tankers have an expected operating life of 25 years, but certain major charterers have lower age restrictions.

Drewry estimated the MR2 orderbook was 6.5% (106 vessels) of the worldwide fleet as of September 1, 2022. Only 37 MR2 were ordered during 2021 and 22 units in the first eight months of 2022. Slippage in new build deliveries has averaged 17.6 tankers/year during 2017-21. It also estimated 7.1% (or 117) of MR2s were 20 years or older. Due to a tough chartering environment in 2021, product tanker demolition increased significantly to 33 MR2, but market conditions and lower scrap metal prices have slowed this activity in 2022. Ever-expanding environmental regulations, current high bunker fuel prices, greater running costs, reasonable scrap prices and the vessel age should result in more demolitions of older tankers over the long term. We estimate that annual fleet growth for 2022 and 2023, net of vessel scrapping and delays in MR2 newbuild deliveries, to be approximately 2%.

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. New IMO regulations governing CO2 emissions, including Energy Efficiency Existing Index (EEXI) and Carbon Intensity Indicator (CII), may lead to a reduction /limitation of available vessels, including slower speeds starting 2023. 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.