Troubles Will Continue For DryShips

| About: DryShips Inc. (DRYS)

The Shipping industry has suffered a lot due to the slowdown in the global economy. Almost all of the participants are currently suffering and losing substantial revenues. The shipping boom started in 2003 when rates went as high as $100,000, and then the industry crashed in 2007. The biggest reason for the crash was oversupply of ships along with recession. Oversupply brought the rates down to the historical low levels, where they still remain. More than 1,500 new ship owners entered the market between 2009 and 2010.

DryShips, Inc (NASDAQ:DRYS) is an important player in the shipping industry, and it is hit hard like most of its peers. The stock was trading over $100 in the middle of 2008. However, at the end of 2008, the stock price came down to single digits, and it has remained there for the last four years. At present, there are no signs of immediate recovery for this fallen giant, and the most recent earnings announcement has shown that the loss has widened for the company.

Poor Earnings a Norm for DryShips

Poor earnings have become a norm for the industry, not just DryShips. The company reported its fourth-quarter earnings, which showed a considerable increase in the loss. The company reported a loss of $129.8 million, or $0.34 per share. The loss for the same quarter last year was $6.2 million, or $0.02 per share. Loss figures included two extraordinary items, a loss of $43.9 million on a 10-year class survey for Eirik Raude ship, and a $41.3 million loss on the sale of two tankers. However, these two losses are extraordinary and may be avoided in the future. Adjusted loss for extraordinary items was $59.9 million, or $0.15 per share.

There was also a substantial decline in EBITDA for the fourth quarter. The company reported adjusted EBITDA of $109.5 million, compared with $169 million for the same quarter last year. The full-year loss for DryShips stands at $246.8 million, or $0.65 per share. The full-year loss after adjustments for one-time losses is $162.8 million, or $0.43 per share. Furthermore, full-year adjusted EBITDA also declined by almost $100 million. Full-year adjusted EBITDA for DryShips is $500.5 million, down from $600.9 million for 2011. Furthermore, Revenue for DryShips declined by 14% to $282.9 million during the fourth quarter.

OceanRig (NASDAQ:ORIG), a subsidiary of DryShips, has been helping the company. OceanRig's good performance has been overshadowed by the poor performance of its parent company. At the moment, OceanRig's backlog stands at $5.1 billion over the next three years. There is considerable cash flow and growth visibility for OceanRig. Due to the condition of the shipping industry, the credit situation is very tight for the companies, and it is not easy to get funds. Again, OceanRig helped the parent company by issuing shares worth approximately $120 million. Moreover, DryShips also pledged some of the OceanRig shares to cover for the covenant breaches. Overall financial performance of the company is extremely poor and voyage revenues have come down by about 40% over the past year.

Future Outlook

The shipping industry will not be able to make a substantial recovery in the near future. The global economy is showing slow signs of growth, especially, Europe is still falling behind other regions. As a result, I do not see a major recovery from DryShips in the short term. At the moment, the poor performance of the company is being somewhat masked by healthy growth of OceanRig. However, DryShips cannot rely on OceanRig indefinitely. However, as the global economy recovers, shipping industry will undoubtedly make a recovery. The industry will also have to get rid of the oversupply of vessels to improve the shipping rates.


DryShips shareholders will have to be extremely patient. At the moment, it looks like the stock will linger on. DryShips is an extremely risky investment at the moment. The company has troubles with its covenant obligations and raising funds. I would categorize DryShips as a high risk investment, and only high risk tolerance investors should consider it. If the company is able to survive and enter the global economic recovery, it may reward patient investors. OceanRig is a big positive for DryShips, and it will continue to support its parent company.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.