- Performance Shipping might be selling assets at the top of the market
- The deep discount to the stock issue is a puzzle as well
- Trading here could be interesting, investing less so
Performance Shipping (NASDAQ: PSHG) is not directly in the oil business, it's in the oil tanker business. Yet there's a grand similarity between the two as summed up in John Paul Getty's comment that “Sometimes it's cheaper to go drilling for oil on the stock exchange”. That lying in the way that both businesses are highly cyclical. One year assets – a tanker, an oil field – could be very highly valued, given high oil prices or charter rates. Another year – not normally the next but it can be – the stock market is valuing those assets at less than their replacement cost. Which is the point at which you go drilling on the stock exchange, buying oil companies for less than the amount of money they've spent on developing their oil fields. The conclusion to the trick is selling on the stock market when assets are highly valued there.
It might be unkind to say that this is what is happening at Performance Shipping but it's an opinion that it's possible to hold. Tanker rental and leasing rates are high at present – both high oil prices and the problems with Russian and Ukraine have done that. So, that's a good time to be selling such assets on the stock market. Which, in a way, is what Performance is doing.
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Performance Shipping stock was down 63% yesterday and is up 38% premarket this morning. This is as the market tried to absorb the news about the recent stock offering. Performance is raising $8 million or so in an underwritten offering at $1.05 per unit. Given that the stock price was $2 and change immediately before this that's a significant discount. It's also not entirely obvious why there needs to be an offering at any discount at all – the at the market program had been bringing in further capital if more was indeed needed.
The thing about this from our point of view, as outside potential shareholders, is that now might be the top of that tanker market. This is when to be selling tanker assets, not buying them. But of course from the point of view of the insiders this is the time to be selling tanker assets – which is what is being done by looking for more outside capital.
Performance has been trading at a 90% discount to net asset value. That's really just not the time to be issuing more equity. But, you know – and then there's how those insiders have been organising their own stakes. For they are switching out of the common equity into preferred stock (4% Series B cumulative preferred which will soon be transferable into 5% Series C cumulative preferred). This protects the income of the insiders from the dilution of the equity – that's the preferred status – and the Series C is also supervoting which protects their control.
If the insiders think this is a good time to be selling assets on the stock market then that's good information for us out here to think that it's not a good time to be buying such assets on the stock market. There may well be interesting volatility in Performance Shipping stock in the near future but as one analyst has put it “long-term investors shouldn't touch the shares with a ten-foot pole.”