Dryships Spoils the Party

With the Baltic Dry Index up every day for an entire week, the shippers become somewhat divorced from the general market, and find a strong support zone:

click to enlarge

My key plays on dryshippers have been calls on ESEA, EGLE and TBSI. Individual stocks:

ESEA: a shipper with one of the lowest debt-to-equity ratios around, and a P/E ratio of 7. Stock is struggling with resistance just under the $6 mark, but we could see this stock at $9-10 by midsummer. Played this with June 5 calls GWQFA.

EGLE: a former shipping darling with a 6 P/E, it has an average debt load but has fine management, and they have good survival ability when rates are low. Stock was showing exceptional holding power. QEKFB and QEKFU are the June 7.5 and 10 calls which I held.

TBSI: This versatile shipper has a P/E ratio under 2! Yet it is not in trouble, has manageable debt, and a variety of smaller vessels which keeps it flexible. This company is about $10 now, and I fully expected to see it at $25 before the end of the year. I held TQFEB and TQFFV, the May 10 and June 12.5 calls. If ever there was a decent shipper with grossly oversold stock, this is the one. For goodness sake, they have over $4 per share cash in the bank.

On Wednesday, EGLE and TBSI calls were up with gains of over 300% each, and ESEA was up 50%. I took profits because of earnings on TBSI, not wanting to play the uncertainty. Because I had fairly fat stakes in these three, the overall gain was really good. I worried that I would be missing gains from TBSI earnings, but selling turned out to be a good move.

What happened? TBSI reported a larger loss than anticipated. Not unreasonably, either. But the market slammed TBSI back into the pit. Earnings from EGLE followed, and the company reported good results in line almost exactly on predictions, with only a tiny miss in revenue, and the company sold off massively. I was baffled, but the logic of the market, crude as it is, can always be discerned.

It was DRYS which spoiled the party. The "bad boy" of shipping, the company is always the most heavily traded, and is regarded by the market as the bellwether of dryshippers. But this badly managed company, one might even say borderline criminally managed, is the worst possible bellwether for the group. DRYS filed another ATM equity offering to sell another $475 mln in common equity to shareholders, which would increase DRYS share count by another 47.5 mln shares to 232.3 mln shares outstanding, assuming the shares are issued at $10 per share which is likely conservative. After three dilutive equity offerings over the past six months, the market is extrapolating the situation to the rest of the shippers - spawning the market's feared THREE D's -- disappointment, dilution, and downgrades. No matter that a couple of weeks of rising BDI could not possibly have a bottom line effect on the individual names this early - the market is upset, and the casualties are the entire sector.

But all is not lost. The market, seeing that we have not had a disappointment in the tanker sector, has decided that, perhaps dryshippers are accursed, but maybe the tankers are not. Let's look at my current recommendations for tankers:

DHT: Petroleum shipper whose $5 calls are amazingly cheap. Because this foreign company is so hard to evaluate, the market just ignores it when its stock is under $5. Stock now at 4.50. The P/E ratio is under 4, but this is not a dog, just a slow mover. Be patient with this one, and you will win very big. I am targeting $6.25.

ONAV: A fairly opaque stock but I have a position in it. The company cut its dividend and was promptly dropped a few months ago, but the price is attractive and moving up.

GASS - lpg shipper, still paying its dividend.

GLNG: This non-Greek methane shipper is exceptionally strong. I put out the word on Friday and scalped a quick 30% as a day trade on its $5 calls. We can possibly see this one move a lot more.

So, what can go wrong? DHT and GASS earnings are May 14, before market open (BMO). ULTR, another undervalued tanker, earnings are May 12 AMC. FRO reports May 21. None of these names are bellwethers, except for FRO, so we do have time to exploit an anticipatory earnings play. So, let's do it!

Comments

[HerrHansa:]

Even for companies with predominantly chartered fleets, a declining BDI can signal pressure on some charters. My feeling is that wet haulers will lead dry haulers, though this sector could also just go sideways another quarter.

Congrats on your day trade of Golar LNG (GLNG). I liked what I saw in this company, so I bought into a dip a week earlier. They also report earnings this week. They are also a John Fredrikson controlled company, like Frontline (FRO), but on a smaller and more narrow focus scale.

May 11 03:44 AM

[jwells:]

I was not aware that ONAV had cut its dividend....do you want to check that statement?

May 11 07:46 AM

[ansoncom:]

ONAV has not cut its dividend.

May 11 09:57 AM

[Chuck Anthony:]

Hello Andy, I might day-trade a DRYS May 7.50 Put if the stock reaches its 20-day movng average (looks like around 7.10). I'm using stochastics, ADX and RSI as measures. Perhaps a step towards its rising 50-day moving average ahead of expiration.

May 11 10:59 AM

[elliot_mllr:]

I agree wholeheartedly that DRYS ought not to be viewed as a bellwether for anything except self-dealing at shareholders' expense.

May 11 04:54 PM

[notsosmart:]

who can trust the dry ship ceo?

May 11 08:08 PM

[Andiroo:]

My guess is that GASS will beat the estimates. What has to be the youngest CEO of a major public company i think will grow into a titan. I have been a buyer each time it dips below $4.75. I am looking for this to reach $10 by the fall now it has broken its 50 day MA.

A.

May 11 08:15 PM

[aarc:]

Very nice article. For me at least.

Still the bad boy DRYS was able to whip around at phenomenal rate than most dryshippers. I bought and sold it twice already at 2x to 5x profits selling half the positions and holding another half for long-term hold. DRYS going BK does'nt matter to me anymore. If it learns a lesson or two and become a less bad boy or a saint, so much the better.

Remember Buffett's saying the bad boys can become saints while the saints can become bad boys? More likely not all of them. Still, one success can be worth more than ten failures. That is just how the math goes at these extremely depressed stock prices and phenominal volatility. Once the turn-around happens, expect 10x to 20x rallies off their bottoms in a very short period of time for the shippers. Those that will survive, anyway, assuming some of them will become casualties.

Consolidation on the weekly charts say almost all of them will see lower lows.

China's Shanghai and Szenshen indexes have almost completed their impressive impulsive rally since Oct 2008. They may be able to extend the rally a bit but not much is expected - then they will have to go through the usual corrective or pullback process. More likely, in synch with the US and European sell-offs.

This expected pullback for China and/or the next sell-off by the US and Europe will put considerable pressures on the shippers they can go down in a meltdown mode so be very careful buying the next run down.

May 12 09:34 AM

[igggy:]

Don't know about a better metric but stop it with P/Es for cyclical stocks already. Were you buying steel stocks last fall too? I thought one should buy cyclical stocks when their P/Es are negative or very high signaling a bottom.

May 12 02:44 PM

[Bull Run:]

Andy: What's your take on SSW-Seaspan?

May 14 12:54 PM

[Frohickey:]

GASS just suspended their dividends!!!

May 14 03:57 PM

[HerrHansa:]

A few more resources, beyond going through company websites:

www.bunkerworld.com

www.tankerworld.com

www.riverlake.ch/news.php

Along with Hellenic Shipping news, these aggregate news information and company releases. Riverlake is mainly a ship broker.

If you want a more contemplative view of shipping, get the VesselTracker.com application plug-in. This lets you see ships near ports, and whether they are moving, moored, or anchored.

www.vesseltracker.com/...

The free version has a 24 hour delay, but I still think that's useful. If you know the major world ports, and understand what goes through those ports, this gives you a quick visual on where are the ships.

The industry cannot break old ships fast enough, and there is still oversupply. Many cancellations of newbuildings lately.

May 15 08:12 PM

[a. palmer jr.:]

I just read on another website where onav did suspend "temporarily" their dividends in order to make new acquisitions. Good thing I saw that last article...I was getting ready to buy some of that. I'll wait now.

Jun 28 01:28 PM