Is it Time to Buy Dry Bulk Shippers?

The dry bulk industry may be on the decline with lower asset valuations and tumbling freight prices, but some investors believe that the record-low valuations may spur some positive action. Dry bulk shipping rates have plummeted more than 90 percent since last summery while the net asset values of the ships have dropped 70 percent in some cases. The result has been record low valuations for the owners of those ships – those companies operating in the dry bulk industry.

The Baltic Dry Index, which measures day rates for dry shipments, recently moved below 800, signaling the worst pricing since around 2002. These lower day rates are the result of reduced demand due to slowing economies around the world. Less iron ore shipments need to be made given the slower construction in both the United States and growing economies like China. However, many important players in the market are predicting a recovery.

DryShips (DRYS) is one stock that has nearly tripled from its 52-week lows on speculation that things will improve. Chief executive and 34% owner George Economou believes that the company will be able to weather the storm over the long-term. These sentiments have even led to speculation that the billionaire shipping mogul would take the firm private at its cheap valuation and take it public in a few years to yield several times the return.

Many experts believe that the current Chinese iron ore negotiations are moving in favor of dry bulk shippers. Jefferies & Co. said in a research note that a successful downward adjustment to iron ore prices in China could spur demand for the dry bulk market by increasing the number of shipments. Meanwhile, much of the capacity expected to go online has been canceled and fuel / labor prices have also decreased over the past several months.

Unfortunately, many dry shippers are highly leveraged. The risk is that dry bulk owners will simply default on their payments, go into bankruptcy, and emerge under a new name after cleaning out shareholders. It wouldn’t be anything new for DryShips, which was created from the bankruptcy of predecessor Alpha Shipping. That entity was also owned by Economou and went bankrupt in 1998 and resulted in 37 cents on the dollar being paid to creditors and most of the fleet under his ownership.

Safe bets within the sector may be those dry bulk carriers with low debt, few new builds, and limited spot market exposure. These companies include names like Eagle Bulk Shipping (EGLE), Genco Shipping & Trading (GNK), and Star Bulk Carriers (SBLK). Unfortunately, even some of these companies are struggling with Star Bulk already defaulting on a $106,500 a day long-term contract after its client filed for bankruptcy and killed the contract.

So, how can investors get involved with these companies with limited risk? One way may be through long-term options call LEAPS – or long-term equity anticipation securities. These options provide investors with the upside of stock ownership without the risk of owning the stock. Investors can purchase the right to a set number of shares at a fraction of the cost of owning the underlying shares.

Disclosure: no positions

Comments

[catlex:]

....since last "summery"?

2008 Dec 29 08:11 AM

[long_on_oil:]

Good article. I own DRYS and wish I didn't after reading so much about George. I just keep crossing my fingers and hoping this stock will eventually rebound to $30. Wish in one hand and crap in the other and see which one fills first...lol

2008 Dec 29 08:48 AM

[andyn:]

DRYS looks appetizing here in single digits, from its peak of $100+ say 6 mths back, but remember it has tripled from its lows of $3 or so.
The issue is whether all of these firms will "survive" the slowdown, which looks to be well into 2011.
So be very careful and only buy debt free companies which have good contracts locked in and not the day-rate companies.
Rather than dry-bulk shippers, a better bet would be mining/infrastructure plays which should recover from their low commodities. Like BHP, FCX and SLT.

2008 Dec 29 09:16 AM

[CT Programmer:]

Nice summary for investors who knows nothing about shipping. Otherwise, there's nothing new here. In a year or two, people will look back at today as a golden buying opportunity because ALL stocks are so undervalued (not just dry bulk shipping). The trick is buying companies that will survive the shakedown. Long-term contracts are good now, but they will expire in the near future as well and they'll lock in low long-term contracts, which when the shipping rates rebound will turn around and be considered a negative. I'm long GNK, and while I don't expect the current dividend to last, I think they'll survive the shakeout. When I say long, I mean 20+ years.

2008 Dec 29 09:28 AM

[oldfolkdancer:]

Good article but I would add Diana Shipping DSX as one of the best shipping companies. The intelligent and well seasoned management communicates well with analysts and stockholders in quarterly conference calls. The fleet is young and the crews are well trained enabling the company to secure good contracts with quality shippers. The dividends were very generous up until now when the company made the decision to stop issuing a dividend in order to preserve capital for any great opportunity that would come their way because of the downturn.

2008 Dec 29 10:48 AM

[elliot_mllr:]

A new entrant, Safe Bulkers, which went public earlier this year and is traded on the NYSE under SB, appears to have its dividends safe at least through 2009 and possibly into 2010.
I think that the highest quality shipping company stock is not a dry bulk company but a container owner and charterer: Sea Span Corp. Sea Span has 35 ships in the water, all chartered, with a average length of seven years left to go, and its first charter doesn't expire for about 5 years.Its most recent ship, acquired this month, is chartered for 12 years. Its fleet is modern and new. It has 33 newbuilds under construction each of which is chartered for 11 or 12 years starting with delivery, which will occur in stages through 2011. Its charterers are of the highest quality. Two are Chinese state-controlled lines, and others such as Maersk and Happag-Lloud have been around for about 100 years, though the Great Depression and two world wars. The only issue is that the company will need between $600-$900 million to pay for all of its newbuilds, and it has said that it will not raise new equity for two years. It has options, however, since about 15 of its vessels are now unencumbered, and it can consider sales-leasebacks, joint ventures, or raising money privately possibly from insiders, on common stock the dividends on which are subordinated to the publicly traded common stock dividends. The stock pays $1.90 in dividends now.

2008 Dec 29 12:03 PM

[Bartx:]

I have one BIG question about Dryships: I am an (unfortunate) shareholder of DRYS and over the passed couple of weeks, I've been reading the (dirty) tricks and the "me and my family and private company Cardiff come first" type of management style that Economou has been employing with respect to DRYS.
So, the question: What IF he takes DRYS private? Do shareholders loose their money or do we remain shareholders of the private company?

2008 Dec 29 12:42 PM

[coprophagous:]

The dry bulk markets are grossly overtonnaged and this will only get worse as the new ships that cannot be cancelled deliver in 2009 and 1st half of 2010.
Period rates barely cover operating expenses and leave little or nothing for debt service.
The yield returns have completely disappeared and asset values are below debt in most cases.
There is no reason to expect any recovery for at least the next three years as China tries to contain its own economic meltdown and reduces its manufacturing capacity in line with the drop in demand from its main customers, the US and Europe.
Expect a raft of banruptcies in the 1st half of 2009, and remember that the surplus ships will be sold at deep discounts to their cost and then chartered at much lower levels reflecting their revised capital costs.
This will further prolong the market downturn.

2008 Dec 29 03:00 PM

[coprophagous:]

The bigger question is:- will G.E. cancel the contracts for the capesizes he bought 2 months ago from his "Family company' and pay a $400m cancellation fee to that company inline with the $150m+ that he paid 2 weeks ago when he cancelled the panamax ships.
If so he could simply let Dryships go until its cash runs out and he does not need to but it.


On Dec 29 12:42 PM User 327482 wrote:

> I have one BIG question about Dryships: I am an (unfortunate) shareholder
> of DRYS and over the passed couple of weeks, I've been reading the
> (dirty) tricks and the "me and my family and private company Cardiff
> come first" type of management style that Economou has been employing
> with respect to DRYS.
> So, the question: What IF he takes DRYS private? Do shareholders
> loose their money or do we remain shareholders of the private company?
>

2008 Dec 29 03:08 PM

[poor&unempl...:]

Dry dulk companies are like communism. They are intoxicating to weak and opportunity for the power hungry.

Unless you are a trader - flush your money down the toilet. DRYS, EGLE, GNK, SBLK or EXM They are all same. Out of USA.

About that turn around - I am waiting for my QQQQ to get back to $50 for a very long time now. At least they will not (I hope) go under.

2008 Dec 29 03:54 PM

[auto44:]

It seems to me that this George fellow is no one to have for a business partner. Follow Warren Buffett"s advise, don' go into business with some one you don't like or cant trust.................

2008 Dec 30 01:21 AM

[Trace Mayer:]

I wouldn't touch the dry bulk shippers at all. Too much debt, over supply, empty ships as the world economy slows into stasis. They will probably reorganize through bankruptcy like you hint at.

2008 Dec 30 01:31 AM

[jimmy46:]

There has been some talk that Chief executive and 34% owner George Economou
will do a buyout of the company at its current low price.

given that he looks after his own interest and not the public shareholders,
what is the risk here?

2008 Dec 30 02:27 PM

[David White:]

Good Article. Along with the iron will likely come coal. This should add further to the push up. They do have to make steel after all. Plus it is winter now, so there is going to be more need for heat and energy generation. Some of the other shipping stocks which may do well are EXM (has big ships) -- highly leveraged along with DRYS, NM (has a new fleet in South America which will add to earingings completely for the first time in Q4 of this year) -- not as highly leveraged, TBSI -- not as highly leveraged, and DSX -- probably the safest bet not to have problems in a recessionary environment.

2008 Dec 30 04:17 PM

[H Moura:]

They will all sink... :)

Tough sector, but things will probably improve.

2008 Dec 30 08:56 PM

[evsteve:]

DRYS is going under, no doubt about it. Company's balance sheet is swamped with debt, and there are defaults and companies continue to go bust throughout the sector. Many of these bankrupcies are not in the news as the companies going under are private and do not carry a high profile. It's very possible, and even probable, that many of Dryships' current time charter contracts will be defaulted on. Shipping is a demand-driven business. Despite the recent cancellation of many newbuildings, the market remains depressed due to massive oversupply already. The shipping market is going to drag along the bottom for at least another 18 months. DRYS can't survive for that long. Given current vessel valuations, and the huge amount of debt for each vessel, shareholders pretty much left with negative equity in the company. Economou, true to form, will leave the shareholders holding the bag.

Sorry to be so pessimistic, but facts are facts.

On Dec 29 09:16 AM andyn wrote:

> DRYS looks appetizing here in single digits, from its peak of $100+
> say 6 mths back, but remember it has tripled from its lows of $3
> or so.
> The issue is whether all of these firms will "survive" the slowdown,
> which looks to be well into 2011.
> So be very careful and only buy debt free companies which have good
> contracts locked in and not the day-rate companies.
> Rather than dry-bulk shippers, a better bet would be mining/infrastructure
> plays which should recover from their low commodities. Like BHP,
> FCX and SLT.

2008 Dec 31 05:51 AM