PGAS – Between hell(ennia) and the deep blue sea

Petrogress Inc. is a vertically integrated oil company, active in the business of trading, shipping, and distributing petroleum products. Its headquarters is in the Hellenic republic, which turns out to be Greece (had to look that one up). It seems that my skill in geography is not what I thought it was. Let’s hope my investing is.

Despite what the title says, the business isn’t in real terrible shape. There are significant risks, however, and the upside to the business is very cloudy. Moreover, the stock is arguably not sufficiently cheap at the moment. So while I think this is an interesting company to explore, this might not be the best time to purchase shares.

Petrogress, according to their own words, can be roughly divided in four operating segments: Upstream, Midstream, Downstream, and Marketing. They own a number of subsidiaries, which run independently, but there seems to be some overlap between the subsidiary businesses and the operating segments.

The business started out as “800 Commerce Inc.”.
In 2016, current Petrogress CEO Christos Traios entered 800 Commerce and initiated a reverse merger. He provided the company with capital and kept doing so in the years that followed. Traios previously owned several companies, including Petrogres Inc. and Petrogres Africa Co. These companies were acquired from Traios, a transportation subsidiary called Petronav Carriers was established, and Petrogress Inc. in its current form was born.

The sales mix of the business is summarised in the table below. The majority of sales originate from crude oil sales to a refinery the company has partnered with.

Sales mix. Source: PGAS 2019 10K

Revenue and profits tend to swing, and the past few years have not brought much prosperity. It’s probably safe to assume that low oil prices did not help.

Revenues and profits
Source: tikr.com (thanks to David @ Elementary Value for pointing this website out, it saved me quite some time.

The company structure with all its subsidiaries is quite confusing, therefore I’ll continue by focussing on the business segments rather than the individual subsidiaries. I took most of the information from the 2019 10K, while I used both the 10K the latest 10Q for financials.

Upstream. This is the business of extracting and trading oil. As far as I have found, the company is doing the latter and is not actually extracting any oil at the moment, but is planning to bid on oil field licences and purchase platforms in the future. There are plans to lease an oil rig-platform near the coast of Ghana, called APG-1. It’s an older platform that is in need of repair and maintenance. I haven’t found sings of actual production yet. The necessary investment to get the platform running is $ 15 million according to the website. The platform should yield 300-500 barrels of oil per day, which translates to around $ 6 mln in annual revenue at current oil prices.

Midstream. This is the company’s shipping business. The current fleet comprises of 5 ships with a sixth one in the pipeline. These are neither modern nor large ships, and they come with the inherent risk of calamities, breakdowns, and high maintenance costs. For the year 2019, losses of around $ 2 million were recorded due to hijacking of one of the ships, maintenance costs and idle times. In March 2020, one of the ships collided with a wreck that was sitting on the ocean floor. It’s safe to assume that operating expenses over 2020 will be high as well. The company recently announced that they have entered into a partnership agreement involving the monthly sea-carriage of 600.000 barrels of crude oil and petroleum products. This volume seems to be comparable to what the company has shipped and delivered in previous years. According to a quick google conversion, the monthly amount translates to about 95.000 cubic metres of oil.

Source: 2019 10K

To put things in perspecive, this could mean that the three largest vessels of the fleet would each carry approximately 7 loads each month. I’m not sure if this is in any way accurate, however the deal should keep the fleet utilised for the three year period.

Four of the ships can be tracked using Marinetraffic.com. I sometimes use this website in my day job, to track large container ships, who’s location can be tracked in real time. This does not work for the small Petronav ships, probably due to a lack of (sophisticated) tracking equipment. I expect that the ships will pop up in some port every now and then. I will monitor this in the coming time to try and get a sense of the shipping activity.

Downstream. Petrogress operates two storage tank farms in Nigeria and Ghana. The company has partnered with a Ghanian oil refinery called Platon Gas Oil Ghana Limited, with a monthly refining capacity of 10.000 tons. Basically, Petrogress supplies the refinery with crude oil, and profits are split 50/50. This is a major aspect of the business, from which 87 and 88% of total revenues in 2018 and 2019 were derived, respectively. In Cyprus, the company is currently taking part in a tender for development of a Liquified Natural Gas terminal at the port of Vassiliko.

Other business/Marketing. The company is launching a petrol station business in mainland Greece under the “PG Oil” brand. Currently there are three stations which have been refurbished and should be in operation as of this time.

Management. The management team comprises of three officers. Remunerations don’t seem to be on the high side, with a yearly salary of $ 110.000 for the CEO and $ 20.000 for the CFO. There’s not much information on the management team. CEO Traios seems to be an experienced man in the oil industry. When he entered Petrogress in 2016, he awarded himself 100 preferred shares, which is the total number of this asset class outstanding. Because of this, he has basically absolute power over the company and the ability to veto any decision by others, as far as I can see.

Common share issuance. The Executive vice president is rewarded 250 shares per month of service. CEO Traios’s salary is paid in shares (at least management still has some skin in the game). Creditors are paid in shares. Over the course of 2019, over 600.000 shares were issued to pay the bills. When we add the most recent 10Q into the mix, things are getting worse. Up until the third quarter of 2020, an extra 26.700.000 shares were issued based on convertible notes and for liabilities settlements. While debt is low and the company has an OK current ratio, the dilution is serious. Conveniently, all of this is easily visualised by the price chart.

Source: Tradingview.com

To speak of a depressed stock would be an understatement. A heavily diluted stock is what it is. The price action picked up a bit in recent months, as has been the case with several nanocap stocks in my portfolio lately. The free float is large and there is ample liquidity. For the savvy value investor, this is probably not a good thing.

Valuation. Let’s try and keep this simple.
Profits: At or below break even, on average
Market cap: $ 3.5 million
Non-current Debt: $ 0.6 million
Cash: $ 0.2 million
Short term receivables and payables more or less cancel each other out.
The fixed assets mainly comprise of vessels, installations, and petrol station furnishings (the land is not owned). There are some intangibles in the form of licenses and permits. Based on these numbers, the company is likely forced to issue more shares or take on debt in the years to come.

So, what would make this an attractive investment? I like oil, at the moment. While ESG is a hot topic, oil will definitely have a place in the future to come. The regions where Petrogress is most active, being Western- and Central Africa and Southern Europe, are depending on petroleum products to run their economies. However, I think the future of the company is conditional. The new shipping contract should bring revenue growth. Vessel breakdowns, calamities, and maintenance cost should be kept to a minimum. The expansion of the greek petrol station venture should go as planned. Maybe the company wins the tender for constructing the LNG terminal in the Cypriot port of Vassiliko. I don’t even dare to speculate about the prospective oil production platform. A lot of if’s and should’s. In addition, the scope of the company’s operations seems extensive for such a small management team. Imagine running a refining, trading, shipping and marketing business all at the same time, with limited resources. Throw in a few petrol stations with mini markets and restaurants, for good measure. I’m sure the management team outsources to certain a degree, but it still seems to be a complex business as a whole.

I was able to buy some shares at a price of around $ 0,05, back when the price chart was still resting on its base. Since then the stock has been more than doubling and considering the risks, I’m not sure if this is the stock to buy at this moment. I like to read about the company though, I think it’s unusual and interesting. For that reason I will continue to follow it and maybe buy some more at a lower price in the future. Let’s see how the coming years unfold. The latest annual report should surface within a few months time. I don’t expect it to be pretty, but it will provide some insights on the path ahead.

Thank you for reading.
Regards,
Thijs

Disclaimer: Long PGAS

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