DryShips: Not Concerned by 'Going Concern' Warning

I’ve never been accused of ignoring risks in DryShips (Nasdaq:DRYS). Earlier posts warned of CEO Economou’s conflicts of interests and renegotiation of charter contracts.

But yesterday’s commotion about a “going concern” warning in DryShips’ 20-F filing strikes me as much ado about nothing. This is not news. As Economou pointed out, it was discussed in the company’s last conference call.

The “going concern” warning relates to reclassification of $1.8 billion in debt. Of course, that’s not a good thing — if the company cannot convince its lenders to waive covenants then the repayment obligations could be accelerated.

But it's not another shoe dropping. Investors already knew that the debt was going to be reclassified as a current obligation. They already knew that DryShips was negotiating with its lenders. And they already knew that DryShips has gained some breathing room by reducing capital expenditures and signing a long-term contract for one of its deep-water rigs.

Click to enlarge

So if you want to trade DryShips, focus on the Baltic Dry Index. Focus on whether there is a thaw in the underlying business (which is still hurting). But don’t waste time on yesterday’s news, even if it’s in today’s headlines.

DISCLOSURE: No position.

Comments

[Obi-Wan:]

As one analyst put it, 'DRYS could be debt free in 3 years' based on their current cash position and projected cash inflow based on some new contracts.
This is a dicey one, but one where it's possible to see pricing in the $40 range over next 12 months.
Put it on your watch list....

Mar 31 09:00 AM

[BigOlDave:]

Good article. "Going concern" warnings for DRYS would be laughable, but for all the strange things going on in the financial world. Count on the Greeks to quietly figure out how to make big money.

Obi-Wan's right: shipper stocks are "dicey", but a careful, patient investor can make the 1000% returns he suggests. Remember: a large %age of a small number is still a small number. DRYS is -91% in the last year. Do a chart: share price is flat since 12/08, suggesting it is scraping along a hard bottom.

Overlay EXM, one of DRYS's competitors. It's also down (-85%) and scraping a hard bottom. But EXM's fundamentals are better. It hit $76 in 10/07 and is $4.50 today. If it recovers only halfway, there's a 900% return.

So most of the better shippers' share prices will be victims and beneficiaries of the fall and rise of the BDI, which languishes at levels unseen since mid-2002. When the world begins to recover, the BDI will be a leading indicator and it will show that it's time to pack some $$$ into a shipper stock. Appreciation potential is enormous and most will re-initiate dividends that have historically been lavish.

Mar 31 10:34 AM

[Gaucho:]

YOU MISSED a very important item. DRYS will spin off a drilling platform company call Primelead the second 1/2 of this year. That company with a PE of around 4 is expected to fetch at least 15 per share and the DRYS share holder are expected to get a full share to 1/2 shre of this company. They currently have 2 drilling platforms drawing 1.2 million in revenue per day and have 4 other plaforms on order and to be delivered in 2009 2010 2011 and 2012. These are expected to gain revenue of another 2.4 million per day. This company is just a gold mine and all we need to do is wait for the spinoff. With that said, the shorts want to control it. There are probabily millions of unreported naked share that they are going to need to cover or they are screwed. SOO you will see the media prostitutes beat the hell out of this company in the mean time. Do not listen to the financial media they are there to beat the bushes for the hedge funds and flush the weak handed rabbits.

Mar 31 07:00 PM

[Minlita:]

In 03/25/2009 DRY post fourth-quarter results (loss of $1.02 billion or $12.68/share )
The results were impacted by a non-cash loss of $700.5 million, or $12.68 per share, related to impairment charges stemming from the acquisition last July of Ocean Rig ASA.
Excluding this and other charges, earnings would have arrived at 43 cents per share.
In the report it´s clear that DRYS is in violation of some loan covenants; pending the result of discussions with its lenders, the shipping concern has reclassified approximately $1.8 billion in debt as short term.
So the market knew about this since the 03/25/2008 shorts in this day us at 42% /50% of the equity's float.
Most of losts since 03/25/2008 to taday are due to shorts sellers:
- Who are likely cheering bleak earnings numbers and
- Downgraded to Underperform at Oppenheimer in Jan 29, 2009 with a price target of $8 on concerns of a potentially dilutive capital raise.
Jan 29, 2009 DRYS was

Mar 31 07:13 PM

[Fighting Yoda:]

EXM is a better buy, far less speculation and much better balance sheet.

Mar 31 11:08 PM

[Mark Anthony:]

I agree EXM is a better buy. Look at what happened to TBSI. The same good news could happen to EXM very soon. I own all these shippers: EXM, TBSI, EGLE, DRYS. But EXM is by far my largest shipping position.

Read about shipping fundamentals:
tinyurl.com/d25abb

Mar 31 11:43 PM

[aarc:]

Yes, EXM looks good on the monthly chart. It is defining an expanding flat or a triangle. No definitive pattern but a bullish expanding trading range on the monthly chart is good enough for buying the stock while EXM is still at the bottom of the range. The weekly chart is still indicating a little more downside before the next recovery can start. There is still a missing leg to the downside if you know how to analyze a chart using Elliott Waves.

Ditto with DRYS. I don't know what pattern DRYS is defining due to lack of data on the monthly chart. But the run down from Oct 2007 to present is well defined 1-2-3-4-5 pattern on the weekly chart with the 5th wave still missing.

I bought DRYS during it's first run down closer to the bottom last Nov and early Dec 2008 - and sold 4/5 my positions during the first run up; then bought back the 4/5 on this succeeding run down. I don't care if DRYS goes BK - my positions are now "risk free".

DRYS is still capable of making 2x to 5x in the next expected run up. If that happens, sell half or less than half current positions and you won't have to worry of any BKcy on the remaining positions.

EXM can do 2x but more likely less than 3x if it makes another run right here due to the limited price range of the existing trading range on the weekly chart. However, the daily chart pattern is too anemic and will most likely need a little lower run down before it can make another "bear rally". The weekly chart still needs more time consolidating before the next run down can start in order to place the "missing leg" and make the weekly chart pattern whole and complete.

It won't hurt too much buying at these extremely depressed prices for longer term hold. Things can happen and we may not see any further downside.

But waiting for the next lower low won't be bad either and will be a better opportunity to add more positions.

Apr 01 03:05 AM

[User 305589:]

'could be', yes. Or, the crook running this one-man scam show could easily take on another billion in debt to buy yet some more stuff from his other, non-public companies. gambling on drys means speculating that the BDI turns up AND that Economou will not screw shareholders again. The former condition may be met,even though it#s unlikely. The latter has the full amount of historical evidence against it. instead of buying this stock you could as well write a cheque and mail it straight to economou.


On Mar 31 09:00 AM Obi-Wan wrote:

> As one analyst put it, 'DRYS could be debt free in 3 years' based
> on their current cash position and projected cash inflow based on
> some new contracts.
> This is a dicey one, but one where it's possible to see pricing in
> the $40 range over next 12 months.
> Put it on your watch list....

Apr 01 03:11 AM

[aarc:]

Shippers made a good run to the upside when China stock markets start going up in Oct 2008. China's $600B Stimulus Package is so huge (equivalent to $1.8T for the US in GDP percentage terms) it cannot be ignored by the shippers' investors. That led to China buying commodities at depress prices left and right - cheap prices means more volume for the same $ amount, so much the better for the shippers.

However, the failure of the US and Europe to rally from Oct 2008 brought investors back to reality. Export shipments to those countries are not going to increase and in fact would deteriorate until they are able to stage an economic recovery - while shipments of raw materials to China will decrease in time as more resources will be deployed to their infra-structure re-construction programs; this rhymes well with the expected lower lows DRYS and EXM monthly and weekly charts are forecasting.

There is new hope as the US and Europe was able to stage this 3 weeks of phenomenal rally. Bear rally or not; take it for what it is - phenominal and not going out so soon due to the massive momentum these rallies have generated on the daily charts of Dow Jones, SnP, DAX, etc.

However, China's 75% rally off the Oct 2008 low is nearing it's end and will have to start doing the necessary pullback in the months ahead.

It is going to be a delicate balancing act as more upside is expected of the US, Germany and France stock markets - while China will have to start the pullback on their Shanghai and Szensen weekly charts sooner rather than later.

Apr 01 03:39 AM

[The Virtual...:]

Hi

I am a shipbroker and the problem for dryships and other shipowners is that long term contracts mean very little at the moment. I have recently been involved in the renegotiation of a 10 year supply deal leaving the shipowner many millions out of pocket. Not to mention the cashflow issues! For a good bet regarding shipping companies ignore furutre earnings and asset prices. Focus on debt levels and liquidity!

Apr 01 08:36 PM

[The Virtual...:]

A few quick comments regarding the BDI

What is happening now is expected (to me anyway). the recovery was pushed by nongrowth factors such as stockpiling (chinese iron ore), and the Atlantic grain Season.

Having said that I agree that the benefits of Chinese stimulus package should kick in 4th quarter. What the Chinese need though is for the rest of us to keep buying their exports. This will avoid civil unrest which could push the country into social troubles..

Apr 01 08:39 PM

[ramisle:]

The Media needs to stop using the BDI as a Barometer of the Economy. Especially at this time of year. We are in the middle of Iron Ore price negotiations. These negotiations are contentious, with each side trying to influence the supply/ demand equation.
Last year in a nutshell, In efforts to muscle the Steel makers, Vale cancelled 50 shiploads of ore, BHP declared Force Majeure, to slow shipments as flooding damaged railroads. These events caused the BDI to fall. After Vale settled on a 65% increase in the Contract Ore, BHP and RTP held out for 85% to account for a "Freight Premium".
When Vale settled, ships were sent to Brazil, tying up hundreds of Capes, adding to the length of voyages. Bottlenecks at ports also added to the scarcity of available ships.
Then in an effort to drive home the case for a Freight Premium, in late April, BHP leased 29 ships in three weeks, driving prices for a Cape to $300 k, per day. The BDI peaked in May.
BHP, and RTP settled with CISA in June,
Anyway, the BDI can be an indication of how robust the economy is, but is mostly an indication of the balance in the supply of ships.
The world economy my recover at a rate of 5%, but if the supply of ships increases by 10%, the BDI will stagnate.
The value of scrap steel is falling, The owners of old ships may not want them any more, but the Shipbreakers will only buy them if they can make money.

Apr 08 08:46 AM