DryShips' CEO Discusses Q4 2012 Results - Earnings Call Transcript

| About: DryShips Inc. (DRYS)

DryShips, Inc. (NASDAQ:DRYS)

Q4 2012 Earnings Conference Call

March 7, 2013 9:00 AM ET

Executives

George Economou – Chairman, President, and CEO

Ziad Nakhleh - Chief Financial Officer

Analysts

Michael Webber - Wells Fargo Securities

Joshua Katzeff - Deutsche Bank

Oliver Corlett - R.W. Pressprich

David Epstein - CRT Capital

Operator

Thank you for standing by, ladies and gentlemen. And welcome to the DryShips, Inc. Conference Call on the Fourth Quarter 2012 Financial Results. We have with us Mr. George Economou, Chairman and Chief Executive Officer; and Mr. Ziad Nakhleh, Chief Financial Officer of the company. At this time all participants are in a listen-only mode. (Operator Instructions) I must advise you that this conference is being recorded today on Thursday, March 7, 2013.

Matters discussed in this release may constitute forward-looking statements. Forward-looking statements reflect current views with respect to future events and financial performance, and may include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements, which are other than statements of historical facts.

Please take a moment to read the Safe Harbor statement on page two of the slide presentation. Risks and uncertainties are further described in the report filed by DryShips with the U.S. Securities and Exchange Commission.

And now I'll pass the floor to Mr. Nakhleh. Please go ahead, sir.

Ziad Nakhleh

Okay. Good morning and good afternoon, everyone. For the fourth quarter of 2012, DryShips posted a U.S. GAAP net loss of $129.8 million or $0.34 per share, which includes class survey cost for the Eirik Raude of $43.9 million and loss on the sale of our tankers the Esperona and Blanca of $41.3 million.

For fiscal year 2012, our group reported revenues of $1.2 billion, adjusted EBITDA of $500 million and generated cash from operating activities of close to a quarter of $1 million -- of $1 billion.

Another notable statistic is that our group repaid bank debt of $867.9 million during the year. One may compare the statistics to those of our competitors who have either restructured debt or filed for bankruptcy at this period.

For the remainder of this presentation, we'll be primarily focusing on our shipping segments' operations. For additional information on our drilling segment, please refer to Ocean Rig's fourth quarter presentation available on www.oceanrig.com.

Slide five, in 2012 our shipping corporation were profit and cash negative. On one hand we had above market charters in the Drybulk segment and the other all our tankers and a large number of our bulkers were earning spot rates which were well below our cash break-even levels. For 2012 our average ECA levels were $13.5000 for our tankers and $15.9000 for our bulkers.

On this -- on slide six, we presented our 2013 fleet capacity and revenue profile for both our Tanker and Drybulk segments. The major assumption on this slide is that we will take delivery of all our remaining Drybulk newbuildings on order.

As you may have noticed, our strategy at the current time is to place all our vessels both dry and wet on the spot markets. While we are not that bullish on prospects for both these segments for this year, we want to be ready for an eventual rebound. In this respect, our projected cash flows are ultrasensitive to changes in spot rates.

For example, during 2013, we have almost 13,000 spot fleet capacity days. This means that an additional 10,000 per day increase in average charter rates will result in $130 million of additional EBITDA for our shipping segment.

On to slide seven, here we present our newbuilding -- Drybulk newbuilding program. We have CapEx during 2013 amounting to $253 million, much of which is unfinanced. All these vessels are being built in China.

While we have good ties with certain Chinese lenders, we don’t believe that Chinese will take a leadership role in international ship finance and fill the void created by the departure of European lenders. Not that it is entirely their fault, as they have been impacted by certain high profile loan workouts.

As we said in the past, we are working with the shipyards to optimize our newbuilding program. Discussions with the yards include deferral of payments and deliveries, discounts, and seller’s credits, among other items.

At the same time, we have seen some interest in the S&P markets for our vessels. We are actively working on reducing our newbuilding CapEx and expect to make some announcement when we finalize the agreements.

Slide eight, on this slide, we present our Tanker CapEx, which tankers are all being built at Samsung Heavy Industries in Korea. In 2013, we took delivery of three of our last remaining tankers under construction with $107.7 million senior secured term loan facility from ABN AMRO, Korea Development Bank, and Korea Trade Insurance Corporation.

Our Tanker newbuilding program is now fully financed and on the water. We could not have done this without the support from Korean yards and banks, who we feel are proactive, supporting, and acting in a concerted manner.

Slide nine, this slide details the secured debt profile of the drybulk and tanker segments as of December 31, 2012. Our shipping segment has approximately 280 million amortization of debt through to the end of 2014. In addition to our secured debt, our convertible bonds mature at the end of 2014, and we have started to consider our cash and non-cash options in this respect. It is interesting to note that the drybulk debt amortization in 2013 equates to approximately $8,000 per drybulk vessel day. Any restructuring of this amount will materially decrease our cash break-even levels.

As far as our loan to value covenant breaches are concerned, we have pledged 7.8 million shares under one facility. In addition, we have recently agreed with another banking group to pledge approximately 7.6 million Ocean Rig shares to remedy the loan to value breaches in its facilities. We will continue to pledge Ocean Rig shares if needed. It is the best way to cure our covenant breaches, conserve cash, and keep the upside in our Ocean Rig shares.

Slide 10, on this slide we wanted to highlight the fact that there is surplus value at DryShips. The fair market value of our shipping assets is slightly higher than the face value of the related bank debt. Other than these core assets, we have additional liquidity of approximately $1.4 billion, including free cash of $200 million and our Ocean Rig shares. We believe that our Ocean Rig shares are just as liquid as our cash. It took us only two business days to execute our secondary sale of 7.5 million shares in February 2013. We have estimated our future cash needs based on prevailing charter rates for 2013 and 2014.

We believe that time charter rates for 2014 are too low and that the drybulk market will recover in 2014. Nevertheless, based on current charter rates, we estimate prices we will need to raise 300 million through 2014 as these numbers assume no changes in the current newbuilding capital expenditure commercial bank repayment schedule.

Going on to slide 12 and the recent highlights, Ocean Rig has recently signed various charters LOIs, and the revenue backlog at our drilling unit currently stands at 5.1 billion. In addition, we finally signed definitive documentation for 1.35 billion senior secured facility and are proud to announce the full banking group consisting of DnB Bank, Nordea Bank, Export-Import Bank of Korea, [Export Credit GEIC], ABN AMRO, SCB, Swedbank, and DVB Bank.

On the shipping side, we sold our only two unfinanced tankers to third party thereby avoiding approximately $100 million remaining CapEx. Recently we have recent agreements with the lender under two of our drybulk loan facilities for certain amendment waivers under which we pledged approximately 7.6 million Ocean Rig shares. Finally, Far Eastern Shipyard agreed to provide a seller’s credit for an amount of $12.5 million repayable in two years and bearing a very competitive interest rate. This credit is securitized by a pledge over 1.6 million Ocean Rig shares.

On to slide 13, the lucrative charters entered into at the height of the markets are running out on staggered basis. For 2013, we have 35% cover and then dispose a 24% in 2014. As we have said in previous slides we have significant leverage to the drybulk and tanker spot markets and positive developments in these sectors could provide a substantial boost to our bottom line.

Turning to the industry overview, on slide 15, during the fourth quarter regarding we’re talking here drybulk demand, we saw various positive trends such as an increase in of about 40% in the price of iron ore. Chinese iron ore imports reached a record high level of 70.9 million metric tons in December of 2012.

Chinese PMI increased significantly to 50.6 in December of 2012 and finally Chinese iron ore inventory is down to a two-year level. However, during the first quarter of 2013, the news flow seems to have changed a bit as the following incurred.

One, iron ore prices seems to have peaked. Two, Chinese officials are committed to cool down the real estate market. And three, February’s PMI was 50.1 dropping significantly since December’s peak. So these developments indicate there is soft patch and iron ore demand might be heading our way.

Another bearish signal for drybulk demand comes from the thermal coal segment. Although there has been a series of events in Colombia for the last four weeks, negatively impacting coal exports. Thermal coal prices in other areas have not reacted significantly on the back of these developments.

One would expect that since thermal coal exports from Colombia counter about 30% of European net imports, a significant reaction to coal prices will materialize. This can be interpreted by some of the bearish signal to thermal coal demand going forward.

Slide 16, drybulk supply. While China’s demand for raw material has changes in demand side of the industry, there is still significant outstanding order book will really set the stage for the outcome of freight rates during 2013. The important factors we see right now in the supply side are one, drybulk demolition. About 2012, we saw significantly some of the vessels being scrapped.

So far in 2013, the pace has been somewhat slow because of the significant improvement in sentiment and expectation that rates will recover in the second half of 2013. Two, the improvement in sentiment during the last quarter 2012 and first quarter of 2013 has resulted in new orders being placed. For example, so far in 2013, we have had 19 new cape orders placed for 2014 and ‘15.

This of course is not helping us obtainable recovery down the road. Last but not least is the significant amount of slippage that is evident so far in 2013. It seems we are running at a delivery rate of half of what we saw last year. The main reason for this delay is of course lack of finance.

Going on to slide 17 and tanker demand, nowadays it is more clear than ever that a new trend has been set in the crude oil industry as the major economies are digging to find oil in their own backyard. New technologies including hydraulic fracturing of underground rock formations have transferred the U.S. old domestic production pushing into about 7 million barrels per day.

This production raises 22% higher than what we saw year ago reaching the highest production levels of our decade. As one will imagine increase of domestic production will hamper all imports of the U.S. as clearly evidenced during February of 2013 where imports were 13% lower than a year ago.

But the U.S. is not the only one looking for oil, Chinese as well. Their domestic production is on a steady growth trajectory with current production at 4.2 million barrels of oil per day. This level of production is about 6% compared to last year.

Finally, on slide 18, regarding tanker supply, it seems that -- in the previous slides, it seems like the largest two economies in the world are shifting their focus to secure oil supply on domestic grounds which by default will reduce the requirements for transportation of crude oil.

This contradicts the growth trend of the oil tanker fleet as its orderbook shows that the fleet supply is poised to increase further during the next two years since the field is very modern, scrapping might be kept to a minimum.

That represents end of my presentation, I’ll turn this over to Mr. Economou for closing remarks.

George Economou

Thank you, Ziad. In closing, I would like to clarify for everyone, once again that DryShip is a pure shipping company. Two-thirds of its fleet is exposed to the spot market in 2013. We're just holders of Ocean Rig -- of shares in Ocean Rig. It's completely different from us. In other words, DryShips does not have any access whatsoever to Ocean Rig's financial resources.

As mentioned earlier, the drybulk markets are weak and facing multiple challenges going forward. In the Drybulk and Tanker segments, spot charter rates continue to hover at historic lows and that the values have dropped precipitously in the last three years. The Tanker charter market lacks liquidity and rates are very low, in fact, well below our cash break-even levels.

We have significant capital expenditures to finance our newbuilding program, which is something we are proactively managing. However, there is a severe lack liquidity from traditional lenders as they contract their balance sheets to meet Basel III requirements and in some cases, exit the sector completely.

Finally, Ziad had mentioned days on our internal models would assume a drybulk market recovery in 2014. We estimate the DryShips will need to raise approximately 300 million in equity through 2014. We are applying to raise up to a maximum of $100 million towards the end of 2013 and the rest during the course of the next year. These numbers assume no changes in our current newbuilding capital expenditure and commercial bank repayment schedule which is a dry and have confidence we will reduce.

This marks the end of our fourth quarter earnings presentation and we now open the floor for questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Michael Webber from Wells Fargo.

Michael Webber - Wells Fargo Securities

Hey George, I wanted to first start with the sale of O Rig stake I guess earlier in the quarter. You were pretty clear on the last earnings call that you were not going to be selling down additional interests in O Rig rather looking to cancel commitments on the newbuild side, and then two months later, we get an outside deal selling down that stake at a valuation that’s below what you guys think it is worse. I am curious as to what changed in that period, whether or not there was a factor forcing you guys to make that sale and just maybe some sort of explanation between the guidance on the Q3 call versus the actions earlier in the quarter.

George Economou

Yes, -- no, nobody forced us to do that. The fact that we needed to sell is because we -- the process in renegotiating whether it’s with the yards or the banks takes time and wanting to be proactive, we raised our cash to be over $200 million, this is free cash. We have restricted cash of 130 million which we will try to use as well. And we think that with ideal management on the banks and the yards, we will not have to raise much, if any, by the end of 2013. But to be on the conservative side, we mentioned the figure with it before. So, there is no -- definitely not any pressure from any of the party that we are conducting business with, being the banks, and it was our proactive move.

Michael Webber - Wells Fargo Securities

Well, in mid-November, you were still looking to walk away from those commitments, and you were pretty clear about not selling. So I am just curious did the process get more difficult since mid-November, did the penalties go up from walking away from those commitments? This has been in place for quite a while now, so I am just curious as to what really changed?

George Economou

Well, you have to realize that once you enter the contract, you cannot just walk out because you want them, and if you just do that, they’re going to come after you. So it does take longer and it takes longer with the yards, and it takes even longer with the banks. They have so many problems with their existing clients that are not breaching covenants as we are, that are not performing or simply going bankrupt. I mean if you look at what happened in shipping, it’s amazing, you had number two shipping company, in Korea, Korea Line got bankrupt, number four in Japan, Sanko going bankrupt. OSG, you know, tell you more about it and lots of others whether it is General Maritime, (inaudible) and the near-bankruptcy but restructuring all of the (inaudible). So they did not involve the attention that is needed for us to do amendments that are reasonable, and in the normal course of business, it shouldn’t have taken time. Things that we have taken a week or two will take three, four, or five months now. So this is the reason. We said, let’s be proactive, raise the money, we have enough time till the end of the year to see if we will need to raise more.

And we always said that we are looking for a win-win solution, Mike. I mean, if it was just for us walking away, that is way, but we are looking to maintain good relation with the yards and the banks. We want a win-win situation for everybody and we always said it’s going to be a tough drawn-out affair. We cannot walk out. I mean we are going to be -- they’re going to demand the money. I mean we cannot just walk out.

Michael Webber - Wells Fargo Securities

And I think that you guys are citing, certainly it happened before November, and the one thing that was relatively clear was that you were not looking to sell them a stake, which is why it is first and foremost, I’m sure on most people’s mind. So we can follow-up on it offline, and I’m not sure what changed though. In terms of walking away from those commitments, I know that it’s much more difficult than we would expect. Do you have a number around what sort of penalty would be in place, if you were to just walk away from that $500 million in drybulk commitment? Is there a hard number you are looking at?

George Economou

Well, everybody would like to maximize what they can get, which is a balance of the contract that is (indiscernible). I mean, they can mitigate the losses by going out and selling the ships. Those who buy will buy them at a discount to the going market. So, I mean you know the numbers. The numbers are on page on slide 7. You know, the maximum, it is not going to be that, it is going to be less, but we are going to be announcing in Q2 more actions on the newbuilding front. So, we are quite progressing in those discussions now.

Michael Webber - Wells Fargo Securities

Okay. So, we should hear some more on the newbuilds in Q2.

George Economou

Yes. Before the end, definitely.

Michael Webber - Wells Fargo Securities

Okay. And just a follow-up on, you mentioned $300 million of new equity. If you don’t do anything, which it seems unlikely at this point, but you said $100 million would be done in 2013.

George Economou

This is the maximum (indiscernible), maximum. Yes.

Michael Webber - Wells Fargo Securities

Right. And I would assume that it would be weighted towards the back end of the year at this point.

George Economou

Definitely, definitely.

Michael Webber - Wells Fargo Securities

It comes fast.

George Economou

That’s assuming full delivery of both the drybulk programs.

Michael Webber - Wells Fargo Securities

All right. I will try and keep my assumptions relative at this point. Okay. All right. I appreciate the time, guys. Thank you.

George Economou

Sure. Thank you.

Operator

Thank you. Your next question comes from the line of Justin Yagerman from Deutsche Bank. Please go ahead.

Joshua Katzeff - Deutsche Bank

Hi. Good afternoon. It’s Joshua Katzeff in for Justin.

George Economou

Hey, Josh. Hi.

Joshua Katzeff - Deutsche Bank

Just want to clarify, when you say that capital raised $300 million, potentially $300 million, potentially $100 million this year. You are not referring to outside capital. You are referring to potentially selling off more of the ORIG stake.

George Economou

Correct.

Joshua Katzeff - Deutsche Bank

Okay. And I guess in previous presentations, you have had the China Development Bank debt on your slide for VLOC 2 and 3, and now that’s gone. I assume that financing is not in place anymore.

George Economou

Yes. We are still working on that, but if it’s not on that slide, it’s not in place, yes.

Joshua Katzeff - Deutsche Bank

Okay. And can you give us a sense of kind of timing on some of these newbuildings commitments within 2013? Were there payments in Q1 that were due, I guess? Just nothing is really changed on the CIP column?

Ziad Nakhleh

Yes. I mean, look, I mean it’s clear from our actions that we haven’t paid anything to the yards until 2013. I mean, these are the negotiations we are doing with the yards, and we should be getting credit for this because we are actually actively taking, pushing out payments for deliveries.

So, I think to give you dates right now wouldn’t serve any purpose, right. Because we are trying to delay them as much as we can. But you can assume end of second quarter, beginning of third quarter.

Joshua Katzeff - Deutsche Bank

Got it. And I guess with regard to your restructuring of this program, can you kind of handicap, maybe for us, I know you said maybe an update in late Q2, but I guess the preference is to try and cancel or just walk away from the contracts, but that’s difficult. Should we expect to see a lot of this kind of maybe stay and just be delayed out until 2014, 2015, or…?

George Economou

No, I don’t think we can delay. We can delay the last two, which is what you see is VLOC 4 and 5 for =2014, the rest we have to deal in 2013 and we will deal in Q2.

Joshua Katzeff - Deutsche Bank

Okay. So and then I guess when you mentioned that there is kind of demand for your vessel. Is that in reference to your newbuilding contracts or are your delivered fleet?

Ziad Nakhleh

No, no. We are talking just as we sold our two tankers in the S&P market, the same thing is for our bulkers as well. For every exit, there is an entrance.

Joshua Katzeff - Deutsche Bank

So we shouldn’t expect any sell-down of your current fleet?

George Economou

No.

Joshua Katzeff - Deutsche Bank

And then I guess with regard to your -- to the bank debt, you talked about restructuring, and I guess that the lenders are not going to do that for free, so far they’ve been willing to take pledges of share, should we expect to see more shares pledged in order to maybe kind of get rid of some of that amortization.

George Economou

The (indiscernible) action we would like to do is free up some of the restricted cash, and you see we have $131 million tied up in restricted cash. So this is the first thing that we want to trade with the banks. But that should not result in higher costs. Even with the restructured repayments, that could and will result in higher costs, but we also don’t want to have higher costs, so we will pledge more shares in order to be able to keep the costs that we have today because most of our facilities expire in 2016 or maybe 2017 onwards. So, we do have time and we’d like to keep the cost as it is, so the idea is to release those to get the cash, pledged share, so we stay with a lower cost.

Ziad Nakhleh

And also as far as restructuring, I think it’s -- we shouldn’t use the word (inaudible) in that sense.

George Economou

Yes exactly.

Ziad Nakhleh

We are trying to keep lenders on hold, with restructuring we put them one step back. So when we get something, we give something in return, that’s how we treat our lenders. So it’s like an exchange like for like, win-win solution, that’s what we are about here.

Joshua Katzeff - Deutsche Bank

Understood. My apologies for the use of that terminology.

George Economou

That is okay, as long as it’s not (indiscernible).

Joshua Katzeff - Deutsche Bank

With regard to the tankers’ CapEx, how much of -- how much of it what was paid in Q1 with bank debt versus cash, just trying to get a sense of Q1 debt.

Ziad Nakhleh

The only cash we paid if I recall correctly was $20 million in equity, so from January. So if you look at what was remaining from the $111 million on slide eight, it must have been – yes, because it was all delivery payments, so there were around 20 million to 30 million maximum in that.

Joshua Katzeff - Deutsche Bank

Got it. And then just one more question before I turn it over, you mentioned the bank debt and then you’ve mentioned the newbuilding program. But I guess not too far off in the distance is the convert, are there any thoughts on that at the moment or is that just kind of too far away?

George Economou

For us it’s too far -- obviously it’s too far. You will work 24 hours a day and this is two years away. But at the same time we understand the concerns from convertible bond holders who want to know their fate at that time. And all we can say is we consider to call our options. We have cash options but more importantly more realistically given the state of the industry today, we have non-cash option that could be also a win-win solution for both them and us. And non-cash options we definitely mean exchanges, extending opportunities and so forth.

Operator

Your next question comes from the line of Oliver Corlett from R.W. Pressprich.

Oliver Corlett - R.W. Pressprich

I just wanted to get a little clarification on liquidity. Because sometimes you talked about cash on a consolidated basis as opposed to DryShips as a separate entity from O Rig. Did you give a number for the -- your cash position pro forma for the O Rig offering?

Ziad Nakhleh

Yes, that’s on slide 10 and we are telling the DryShips -- the shipping segment’s free cash at the end of the year pro forma for the O Rig offering in February is around 203 million.

Oliver Corlett - R.W. Pressprich

And your -- you didn’t actually break out your cash flow from operations this time for the quarter. Can you give some indication of the cash flows, cash flow from operations, what was your CapEx in Q4 any of the detail you can provide there?

Ziad Nakhleh

Actually I have that with me, because I think somebody will ask it some time. But you will give me one second. Actually we’re going to file annual reports within a couple of weeks, so all this stuff will be disclosed there. Let me see it if I can find it within the next -- yes, I mean in Q4, our operating activities netted the surplus cash of $24 million. And obviously this is on a consolidated level of DryShips thing.

Oliver Corlett - R.W. Pressprich

That’s excluding O Rig?

Ziad Nakhleh

No, that’s actually with O Rig, that’s on a consolidated level. But you get that, you can work it out yourself when the time comes.

Oliver Corlett - R.W. Pressprich

Yes, when it comes. Now you mentioned also on the potential restructuring of the two bank facilities that might be a cash feature. Can you go into a little more detail on what that might be?

Ziad Nakhleh

I mean there is. It’s on this facility now that, with the lender to pledge some shares of Ocean Rig in exchange for certain amendments of the facility. This cash we feature will just basically say that anything up to a certain date in the future about our cash break-even will be swept to the banks.

Oliver Corlett - R.W. Pressprich

Okay. Okay. That’s reasonable. Now, I just wanted to ask, you said you can’t walk away from the commitments on the shipyards very easily. Are these contracts typically structured with a guarantee from DryShips, so that in series they could -- quality falls on you if you don’t…?

George Economou

Yes.

Ziad Nakhleh

That’s correct but we do have relation with these yards. So we are not anywhere near in doing that.

Oliver Corlett - R.W. Pressprich

Right.

Ziad Nakhleh

So you don’t need to worry about it.

Oliver Corlett - R.W. Pressprich

Okay. That’s all I have. Thank you very much.

George Economou

Thank you.

Operator

(Operator Instructions) Your next question comes from the line of David Epstein from CRT Capital. Please go ahead.

David Epstein - CRT Capital

Hi folks. Just had a question about your diluted share count, obviously you listed into the financials. And I think it’s about 380 million shares. But couple of quarters back, you guys were talking about a slightly different figure than what was on your income statement. You’re probably making some sort of economic adjustments separate from the accounting. Is the 380 million share count, what we should use or do we use a different figure?

Ziad Nakhleh

I mean, what you should use is the full share count minus the borrow facility. So I just don’t have the numbers in front of me. I’m not aware of any significant changes in the last quarter. That’s why I’m not prepared for this question. I mean, it’s the same thing as in Q3.

David Epstein - CRT Capital

Thank you.

Operator

Thank you. I would now like to hand the conference back to Mr. Nakhleh and Mr. Economou. Thank you, gentlemen.

George Economou

Okay. Thank you everyone for listening in. We’ll see you next quarter.

Ziad Nakhleh

Bye.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. And you may now disconnect.

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