By Ahmed Ishtiaq
DryShips (DRYS) has a fleet of about 40 dry bulk carriers and is one of the biggest carriers in the industry. The company carries commodities such as iron ore, coal, and grain, as well as bauxite, fertilizers, and steel products. The fleet of the company has an overall capacity of more than 3.4 million deadweight tons (DWT). Vessels are chartered to shipping companies largely on the spot market, but also on long-term contracts. The company manages its dry bulk fleet between long-term and short-term time charters.
In a time charter contract, the vessel is chartered for a fixed period of time at a specified or floating daily rate and can last from a few days to several years. On the other hand, a spot charter refers to a voyage charter or a trip charter or a short-term time charter. Under a bareboat charter, the vessel is chartered for a stipulated period of time, which gives the charterer possession and control of the vessel, including the right to appoint the master and the crew.
Misery is expected to Continue in the Short Term
2012 was one of the most difficult years for the shipping industry. About 90% of the world trade is done through the sea lanes. However, global trade has been extremely slow, resulting in a miserable time for the shipping industry. Furthermore, fleet capacity has grown by more than the growth in demand, which has resulted in oversupply. At the moment, the rates are even below the breakeven rate and most of the carriers are operating at a loss. The problem of oversupply is expected to remain in 2013 due to a difference of 0.7% in the growth between fleet capacity and demand.
DryShips holds a majority stake in Ocean Rig (ORIG), the ultra-deep water driller. Positive performance of Ocean Rig has somewhat masked extremely poor performance of the dry bulk sector. Good performance of the ultra-deep water drilling has been offset by poor performance of the dry bulk segment. The company recently reported a quarterly loss of over $50 million and revenues fell by 47% from the dry bulk segment. I do not expect the company to report positive results from the dry bulk segment in the short term. I believe the sector will remain under pressure for at least the first few months of 2013.
Recently, an increase in demand for iron ore from China gave some hope to the industry; however, it did not last for long. Although the Chinese economy is expected to perform better in 2013, most of the European nations and Japan are expected to linger for at least one more year. Vale S.A. (VALE), the largest iron-ore producer, has announced a cut in production of about 1.9% during 2013. A cut in production from the biggest iron-ore supplier indicates that the demand many not be as high as expected by some.
When will the Turnaround Start?
I do not believe an investment in the dry bulk segment is a smart choice at the moment. However, it will be equally foolish to get out of DryShips now. Although I do not expect the turnaround to start for at least another six months, the company will have support from its ultra-deep water segment. Ultra-deep water drilling is on the rise at the moment, and it will keep plugging the gap created by a loss of revenues from the dry bulk segment. However, DryShips investors may not be able to enjoy gains for another six months. DryShips investors will have to be patient and wait for the turnaround to start.
I expect the company to start reporting positive figures by the end of 2013. A recovery in the dry bulk segment along with increased ultra-deep water drilling will put the company on the path to recovery. Some of the dry bulk carriers are considering demolishing ships, which may help in solving the problem of oversupply. Furthermore, DryShips have decided to decrease its capital expenditures, which is a wise decision in the current market conditions. A decrease in capital expenditures will help the cash position of the company and allow it to consolidate its operations.
Comparison with Peers
Debt to Equity
A look at the table indicates that the shipping industry is going through a turbulent time. Almost all of the participants have negative or poor margins. Diana Shipping is the only company with impressive margins and ROE. Looking at the debt-to-equity ratio, it is clear that the industry has a tradition of high levels of debt.
The shipping industry is expected to remain under pressure for at least six more months. I do not believe an investment in the sector is an attractive option at the moment. However, DryShips investors should hold their stocks and be patient. The company will make a comeback by the end of 2013, in my opinion. However, I believe new investment in DryShips should be avoided for another six months.