Still Avoiding DryShips

Not a week goes by without emails from dedicated DryShips (Nasdaq:DRYS) investors, trying to persuade me that I got the story wrong and the stock is really headed back to $50. That wouldn’t be so strange if I wrote about DRYS frequently. However, prior to this I only wrote one article on DryShips, and that was over two months ago.

DryShips investors are dedicated, something CEO George Economou has always counted on. According to Kathryn Welling, whose Welling@Weeden newsletter is a must-read for institutional investors, during a road show for the DryShips IPO, Economou “actually said, basically, [he was able to pull off the IPO at such a rich price] ‘Because Americans are the dumbest investors around, and there’s lots of liquidity in this market.’”

Then there’s the related-party transactions between public DryShips and his privately-held shipping concern, Cardiff Marine. According to Forbes, Economou canceled a deal to exchange Cardiff’s vessels for DryShips stock when the share price drop made it less favorable for Economou personally. But he still exacted his price from DRYS shareholders. DryShips paid Cardiff both a cash fee for the cancellation and a cash fee for an option to purchase the ships by the end of 2009.

DryShips isn’t the first time Economou has hurt investors. After raising $175 million in junk bonds, his previous company, Alpha Shipping, defaulted on the payments. Creditors forced the deadbeat company into bankruptcy, where Economou worked out a deal to take possession of the ships in exchange for giving the creditors 37 cents on the dollar for their debt.

Bottom line: DryShips does not deserve the faith of its investors. Your emails make a persuasive case why under certain scenarios and metrics DryShips should bounce back or even excel — but they are missing one thing. The company does not operate in a vacuum. It operates in a cutthroat environment, where its CEO has proven himself to be no friend of investors. If I wanted to play the Baltic Dry Index, at least on the long side, DRYS is not the vehicle I would choose.

DISCLOSURE: No position.

Comments

[User 164606:]

You are right. Economou would have been better served and so would had DRYS if his private entity and DRYS worked in tandem helping one another in times of need. Such help should have been limited to one offering the other its credit to weather bad times. Unfortunately Economou chose the worst of all solutions, passing assets and liabilities from one to other giving the impression that DRYS is wasted for Cardiff's benefit. Hopefully this should be just the impression and not the actuality

Feb 17 07:32 AM

[David White:]

DRYS came close to its Nov. low today at $3.87. This article would seem to have been right so far about its direction. However, the banks don't seem to be quite so sure of its demise this time. Plus it has gotten rid of a large number new build capesize ships (at a big cost). This should leave it in a much better fiscal position going forward. Also it does have the $500M shelf registration that should allow it to raise capital from the equities market. Unfortunately this would cause share dilution, especially at the now depressed prices.

On the positive side, DRYS may bounce up from here, especially if the general market does. The DJIA has reached its Nov. lows again. It may find support there. Then it could go up, at least for the short term. It would likely take DRYS with it if it does.

The Hang Seng Index was down strongly today (over 500 points). Yet the BDI was up today (+49). This should tell you that dry bulk shipping is strong. In other words the play on infrastructure build out in China may work. The dry bulk shipping stocks may have gone down today in sympathy with the market, but this seems likely to be a temporary setback if the BDI can rise counter to a strongly down Chinese market. Of course, if the US equities markets fail to find support (continue downward), dry bulk shipping stocks will likely follow them.

Feb 17 10:22 AM

[Land Lover:]

The good Dryship will sail without me from this point on. One bath is enough.

Feb 17 12:14 PM

[notsosmart:]

if you trust the greek shipowner with your monet ,so be it.

Feb 17 12:44 PM

[Mark Anthony:]

Look at the fundamentals of shipping. The BDI has been going up strongly.

The nature of shipping industry is when demand is high, it is HARD for the shipping capacity to increase to meet the demand. Ships can only go so fast in the ocean. Building new ships also takes a lot of time and material.

But when the demand is low, it is very EASY and QUICK for the industry to quickly adjust to lower demand: Old ships are scrapped. New ship orders are canceled, delayed, or simply will not receive bank financing. Ships will be laid up for more maintenance time instead of put in service. Ships can load only 80%, 90% of the cargo at a time instead of full load. And ships can sail at reduced speed to save fuel, further reduce capacity.

I see at most a small percentage drop in global trading, which shipping can absorb easily. If the drop ios more than 20% to 30% then the whole world is doomed. That's not going to happen. In the best case scenary all the government spending will boost commodities demand.

Feb 17 02:27 PM

[David White:]

The BDI is up again this morning (Wed. 18) +91 to 1986. The BCI is up +231 to 3587. The Capesize avg. spot price is up +3180 to $36,815. This is the second up day in a row for the BDI. It is especially heartening after the carnage in the equities markets yesterday.

Still there is much to worry about. The slide in dry bulk shipping stocks yesterday came only partially as a result of the market. The bad news was that EXM cut their dividend to preserve cash. EXM had a problem with two of its charterers, affecting 3 of its ship charters. These two apparently just unilaterally decided to start paying EXM only 1/2 of the charter contract rate. If EXM lets this stand, it will mean a huge loss of income over the life of the contract. If EXM gives into these two charterers (i.e. renegotiates the contracts or simply accepts their actions), large numbers of charterers will likely want to renegotiate their contracts. This would have a huge negative impact on the entire industry. This potential "monster problem" includes DRYS, which has substantial long term contracts at higher than the current avg. spot prices.

I had hoped that the BDI (and avg spot prices) would rise quickly enough to obviate this problem. That may still happen, China definitely has a lot of importing to do. It should push up prices in the near term. I had expected them to go to at least the avg. of the current long term contract rates. We shall have to see what happens over the next couple of weeks. If the BDI rises to the current avg. long term contract rates soon, this problem will likely be much smaller in scope. If the BDI does not rise quickly within at least the next month, this could quickly become a big problem. The race is definitely on. DRYS is in this quagmire along with all of the other dry bulk shippers.

Feb 18 09:22 AM

[skipper54:]

David White mentions the difficulties of EXM resulting from their charterer(s) unilaterally reducing the charter hire by half. Regrettably this practice is becoming universally applied as if it is now OK to breach a contract because the market got tough all of a sudden. Dire times ahead for shipping and certainly for shipping stocks..............Th... old Baltic Exchange motto of 'Our Word, Our Bond' has gone out of the window.

Feb 18 12:03 PM

[poor&unempl...:]

David

I am still waiting to hear from you!

How is BDI calculated?









On Feb 18 09:22 AM David White wrote:

> The BDI is up again this morning (Wed. 18) +91 to 1986. The BCI is
> up +231 to 3587. The Capesize avg. spot price is up +3180 to $36,815.
> This is the second up day in a row for the BDI. It is especially
> heartening after the carnage in the equities markets yesterday.
>
>
> Still there is much to worry about. The slide in dry bulk shipping
> stocks yesterday came only partially as a result of the market. The
> bad news was that EXM cut their dividend to preserve cash. EXM had
> a problem with two of its charterers, affecting 3 of its ship charters.
> These two apparently just unilaterally decided to start paying EXM
> only 1/2 of the charter contract rate. If EXM lets this stand, it
> will mean a huge loss of income over the life of the contract. If
> EXM gives into these two charterers (i.e. renegotiates the contracts
> or simply accepts their actions), large numbers of charterers will
> likely want to renegotiate their contracts. This would have a huge
> negative impact on the entire industry. This potential "monster problem"
> includes DRYS, which has substantial long term contracts at higher
> than the current avg. spot prices.
>
> I had hoped that the BDI (and avg spot prices) would rise quickly
> enough to obviate this problem. That may still happen, China definitely
> has a lot of importing to do. It should push up prices in the near
> term. I had expected them to go to at least the avg. of the current
> long term contract rates. We shall have to see what happens over
> the next couple of weeks. If the BDI rises to the current avg. long
> term contract rates soon, this problem will likely be much smaller
> in scope. If the BDI does not rise quickly within at least the next
> month, this could quickly become a big problem. The race is definitely
> on. DRYS is in this quagmire along with all of the other dry bulk
> shippers.

Feb 18 08:13 PM

[David White:]

SKIPPER54: Here is a link to the Wikipedia entry about the BDI -- en.wikipedia.org/wiki/....

Feb 19 09:13 AM

[David White:]

The BDI is up +71 to 2057 today. The BCI is up +146 to 3733. The Capesize avg. spot price is up $1926 to $38,741. This is now the third up day in a row after 17 straight up days followed by two down days. The demand for dry bulk shipping seems to still be trending higher. This should help DRYS, EXM, and all of the other dry bulk shippers.

Feb 19 09:20 AM

[Mad Hedge F...:]

Early reflationary plays were flashing the green light today. Copper was limit up in Shanghai to a two month high at $1.61/pound. Also, take a look at the Greek shipping firm Dry Shipping Inc. (DRYS), which I recommended in November at $3. It soared 460% to $17, fell back to $5, and is now up to $6.30 on news that they successfully rolled over $800 million in debt. It is another great time to make a second visit to the trough for (DRYS), in case you missed it the first time. This shows you that successful refinancings are going to have a huge positive impact on stock prices as we bump along the bottom here, and will be a major market play for the rest of the year.

Feb 21 09:07 AM

[31October:]

I am so glad somebody wrote this piece.

Nobody should ignore history, ignore a payout structure that rewards theft, ignore factory order declines, ignore layoffs (i.e., demand destruction), and say "It's going to rocket up from here."

Since I am tired of warning people why DRYS is the worst of an unstable sector, just read the comments attached:

seekingalpha.com/user/...
seekingalpha.com/user/...
seekingalpha.com/user/...
seekingalpha.com/user/...

Shippers are now being held captive by customers. Dry bulk was already in a mere technical rally that will go down with factory orders. Blackmail by customers throws a wrench into what potential was left.

Shipping is awsome, and I'll be back in once factory orders stop declining and layoffs stop. That won't be this month.

Oh, wait, did China just have 20 million workers leave the factories? Does the USA have 7 million on benefits, with even more unemployed but not receiving?

Maybe not next month, either...

Feb 23 11:07 AM

[jfr1107:]

If the President and corporate officers of DRYS pull another shell game like they did previously with Cardiff, I strongly recommend the readers to contact the Greek embassy in Washington and get the telephone number for the Greek investigative agency that looks into cases where both Greek and foreign shareholders have been defrauded of their investments because of the slight of hand that Economou has pulled and ask that criminal charges be brought against him.

Mar 22 02:42 AM