Why I Prefer Excel Maritime to DryShips

This is an ironic story because in the comments section last week, reader Keith P asked why I trade in Excel Maritime (EXM) rather than everyone's favorite dry bulk shipper - DryShips (DRYS). Monday's news which has been a long time coming explains why [Oct 31, 2008: Credit Tsunami Swamps Trade] [Nov 3, 2008: UK Telegraph - Investors Shun Greek Debt as Shipping Crisis Deepens]. While DryShips is the daytraders' / speculators' favorite stock, it is not for me, or my timeframe - not with the potential to wake up any morning and seeing banks pulling the plug. Back in January we posted how DryShips was breaching covenants and in talks with another bank about more covenants to be broken:

DryShips Inc (DRYS) said two of its banks notified the Greek dry bulk carrier that it is in breach of certain financial covenants and it is currently in discussions with its lenders for waivers and amendments to loan covenants.

The company added that it is in talks with another lender that currently holds $650 million of its debt regarding breach of loan covenants.

Speculators seem to ignore these things, and as long as it is hot money they like to play... which makes it difficult to short because this type of stock moves 20% in any random direction based on which way the wind is blowing.

Now again, we are in an era where individual stocks mean very little and sectors trade together - the tarnish of one stock stinks up the entire sector. That is illogical on many fronts but it is what it is. Other stocks in dry bulk are being hammered, even those that have no covenant issues. Hence we were able to pick up some EXM Monday AM at nearly 20% off Friday prices.

Via Reuters

• Greek dry bulk carrier DryShips Inc (DRYS) said it got a going concern notice from its auditors as the company reclassified $1.8 billion of long-term debt as current.
• Last week, DryShips said it was in discussions with some of its lenders concerning current breaches of loan covenants, and pending the outcome of such discussions it has reclassified about $1.8 billion in debt as short-term. In a regulatory filing with the U.S. Securities and Exchange Commission, the company said it may not be successful in obtaining covenant waivers or modifications or its lenders may accelerate its indebtedness.
• "If our indebtedness is accelerated, it would be very difficult in the current financing environment for us to refinance our debt or obtain additional financing and we could lose our vessels if our lenders foreclose their liens," the company said in a regulatory filing.
• However, DryShips said it will generate sufficient cash from operations and proceeds from new equity to satisfy its liquidity needs for the next 12 months.

Via TheStreet.com

• "As discussed during our latest conference call, the going concern explanatory paragraph is the result of the previously announced reclassification of $1.8 billion of long-term debt as current," said DryShips CEO George Economou in a news release. "With the proactive approach already taken to reduce $2 billion in capital expenditures, the confidence of our three main lenders with whom we are in close ongoing discussions, secured revenues of over $2.4 billion in the next three years from drybulk time charters and offshore drilling contracts and the recent equity infusion of $380 million through the ATM Equity Offerings share issuance program, we have repositioned DryShips for the long-term and remain ahead of the curve."
• In its filing with the SEC, DryShips outlined key reasons for the drybulk shipping market's deterioration in general and DryShips revenue specifically, citing: A lack of trade financing for purchases of commodities carried by sea, causing a sharp drop in cargo shipments. An excess of iron ore in China, leading to lower iron ore prices and increased stockpiles in Chinese ports.

The last point speaks to the hilarity of this market and its drive to create a thesis; after all - all things commodities and China are booming because of anecdotal reports of iron ore (and other metals) being shipped to China. Apparently to sit in ports. Thesis baby - thesis.

• The company said that continued low charter rates in the drybulk market would harm its revenue, cash flows and ability to comply with covenants in its loan agreements. Should lenders not agree to waive or modify covenants, the filing continued, lenders could accelerate the payments of some debt, and the company could lose vessels.

As an aside, for an example of what happens when covenants are fully breached with no give from the banks - see Manitowec (MTW) (thanks to reader Thomas) Again, another stock that rocketed upward in the Kool Aid of the past 3 weeks, and would have inflicted much pain on the short side ... but that darn reality keeps interjecting itself onto the bulls landscape.

• Manitowoc Co (MTW) said it was likely to violate some debt covenants in the second half of 2009 as the proceeds from sale of its ice business were lower than expected.
• The diversified manufacturer, which currently meets all covenant requirements, also withdrew its outlook for 2009 expects lower earnings to further increase the risk of covenant violation.

On the latter point, only pundits can somehow see clearly 6 months into the future - they assure us once again brighter times are ahead. I continue to scratch my head at how they keep reaching for the Magic 8 Ball which has failed them for a year +... yet somehow they continue to believe they know better than company after company which has rescinded guidance due to lack of visibility. Pundits rule.

Disclosure: Long Excel Maritime in fund and personal account

Comments

[texalope:]

Take this as constructive. This article does not make your reasons for preferring Excel over Dryships clear. My takeaway is the Dryships is overleveraged (no secret) and business is lousy.

Excel also has a weak balance sheet and faces the same business cycle. They've cancelled the dividend, postponed their earnings to negotiate with banks. What do you see that makes this a better investment or bet?

Apr 01 05:43 AM

[Stanislav O...:]

Ironically, EMX has much more severe covenant violation problems than DRYS at the moment.

Apr 01 05:50 AM

[texalope:]

There are 2 types of covenant violations. Technical or material.

A technical violation occurs when they breach a covenant like debt to equity (this can easily happen when prices of ships are falling). Under this scenario they are like our banks but they have liquidity due to their cash flow.

In a material breach the cash flows fall short. This is obviously much more of a problem. The banls' concern is how do we get paid? If the business revenues are falling the interest and principal payments are in jeopardy.

Stanislav, what insight do you have here regarding EXM.

It seems when they bought quintana one of the goals was to add the more predictable cash flows from their charter business. This should provide some insurance regarding a material breach.

Apr 01 07:41 AM

[rustychain:]

Since I gave up heroin, I trade DRYS for kicks

Apr 01 07:43 AM

[oldfolkdancer:]

Diana Shipping- DSX -is best of the breed. We are in an era where the strong will survive and the weak won't

Apr 01 09:05 AM

[ramisle:]

Strictly Trading!
As for Fundamentals, there is nothing on the horizon to suggest that charter rates will increase. Until you see Steel companies ramp up production, you will not have a resurgence in Dry Bulk.
Even then, there are more Newbuilds hitting the water, then are being scrapped.
Last Friday's sector rally seemed to be fueled by speculation of an agreement in the Iron Ore negotiations.

All the speculation in DRYS is related to the Primelead spinoff.

So you are rolling the dice, what will the next press release be?
A contract for one of the drillships being built? (Good)
Or, the need to raise more cash to satisfy Banks. (Bad)

Apr 01 09:19 AM

[YoYoMama:]

I prefer neither right now.

Apr 01 09:48 AM

[Alan Young:]

Good comment stream. There are any number of bulk shippers in better financial shape than either of the two discussed here. ESEA is still paying a dividend (so far).

Apr 01 12:56 PM

[biomedlives:]

I agree. DSX was smart to suspend its dividend early.


On Apr 01 09:05 AM oldfolkdancer wrote:

> Diana Shipping- DSX -is best of the breed. We are in an era where
> the strong will survive and the weak won't

Apr 01 01:01 PM

[Julie Simms:]

I also prefer EMX to the other shippers, FRO is good for a Contango trade which Goldman Sachs said is back on the table this week as the back of the board rises faster then the front. However it's all SPEC. right now untill we see the BDI firming.

A tip for the author, please proof read before you publish.

Disclosure: Long EXM Shares

Apr 01 04:26 PM

[Julie Simms:]

Alan - Did you ever think that it's not prudent to keep paying a dividend insted of preserving capital? All shippers are cutting dividends, so the stigma is not really relevant, actually might hurt them to keep paying it. This is what I can stubborn.

Apr 01 04:30 PM

[Julie Simms:]

What I call stubborn.

Apr 01 04:30 PM

[Julie Simms:]

Alan - 5yr chart of ESEA compared to EXM shows ESEA never turned positive, while EXM topped out at an 800% gain. Hmmmm I wonder which is better.

Apr 01 04:34 PM

[ramisle:]

There have been many discussions, in many forums about whether or not to worry about the amount of debt a company has.

DRYS had to sell over 100 m shares at $5 in order to comply with their Bank loans.

EXM just sold shares to insiders for $1.75

Debt is poison !!

Apr 02 11:22 AM

[einstein p ...:]

I would have bought shares at $1.75 too.

Maybe the insiders knew something that we outsiders didn't --- like the pending deal with the banks was about to be announced and earnings aren't going to be as bad as expected.

Apr 04 12:38 PM

[Gaucho:]

I find it amazing that DRYS is currently leasing two drilling platform for 1.2 million a day total and about 900K a day positive cash. Then we have people shouting they are going BK. BS is all I can say. Once DRYS renegotiates the remaining 25% of their outstanding loans then the shorts (over 40% short) will need to create another "the world is ending for DRYS:" story.

A good sign is that Cramer is bashing the hell out of this stock. He is a front for the hedge funds and will do their bidding. Another stock I own is DNDN and he is bashing the hell out of that one every day. I two weeks they will announce the results of yet another positive Phase three trial and the we will see it go from the 6+ to 30+. My last purchase was in the low 3's just two weeks ago.


Remember the louder that jerk Cramer yells sell the more trouble his hedge buddies are in.

Apr 07 05:23 PM

[ramisle:]

I don't think that many people are calling for BK.
DRYS will be a good trade on the Primelead spin-off.
The problem is that they needed to raise $500 million to satisfy the banks. By the end of the secondary they will have over 175 million shares outstanding. With 15 m short. Who knows the float?
So Primelead will have 210 m. or more shares, with two drillships, paying the debt on six drillships, until the others are delivered in 2010 and 2011.
The drybulk part will struggle for a few years.
It's a good trade, but it's not a steal.

Apr 07 06:05 PM

[Chris B:]

Why is nobody mentioning Eurozone and specifically, Greek, risk?

What do you suppose happens when the banking system in Greece collapses. If you're investing in shipping stocks, and unaware of the Greek financial situation, you better get crackin' on that homework.

Also, why is nobody mentioning pirate risk? Is 3-6 mos. of lost shipping time plus a million dollar ranson immaterial?

Apr 08 01:34 PM

[PeteK:]

Recently we heard about pirates on & off again.
It's all about politics. Now the Saudis willing to put up the money (2 billion ?) and suddenly every country is sending war ships to that area. Even Taiwan, Japan, Korea, China and others.
In this 21st Century, a few pirates can do such thing is a joke.
Just world politics in play !
Also, why ships don't sail far away from the coast to avoid pirates is another question mark. Stupid ?

Apr 10 11:02 PM