Around 90% of world trade is handled by the shipping industry. Therefore, it is no surprise that the onset of the 2008 financial crisis took its toll on this vulnerable industry as global trade volumes declined. The Baltic Dry Index (BDI) indicates the volume of dry bulk traded by providing costs of moving major raw materials by sea - the index dipped immediately by 94% and has not been able to recover ever since. DryShips (DRYS), nested in the heart of the sovereign debt crisis, Greece, was badly affected by the global recession. The stock was trading at over $100 and currently, it is trading at $1.89 per share.
Overview of the company's performance
The performance of the company has been abysmal - consistent decline in revenue from core operations (i.e. drybulk shipping) has resulted in massive losses for the company as well as share holders. At the same time, the company has not been able to contain its operating costs, which have escalated and resulted in heavy net losses. So, looking back we do not find many positives for DryShips in the recent past. The offshore drilling investment of the company OceanRig (ORIG), has been adding substantial value due to the ongoing boom in the offshore drilling segment. However, the core operations of the company have disappointed and DryShips has been reporting worst than expected results in the last few quarters. The company has not been able to pick up its net earnings since 2008. Therefore, DryShips has not been able to pay any dividends to its shareholders in the last 4 years, and the shareholders are correct in worrying more about the survival of the company than dividends.
What's the future for DryShips?
Looking forward, the situation is not very different from the recent past. However, there are small bits that might encourage current investors to hold on to their positions. One of the biggest costs in the shipping industry is the maintenance cost, the vessels lose value quickly - the company however, has a strategic advantage over its competitors as the total assets comprise of relatively young fleet of ships, which are generally more cost efficient.
Another positive for the company is that it is focusing on reducing capital expenditures - at the start of the year; DryShips sold two under construction tankers by paying $21.4 million. The new buyer took over the responsibilities, obligations and complete rights of the contracts, and DryShips announced that it will help the company reduce capital expenditure by $101 million. For a cash strapped company in decline, it was a wise move. Finally, the most important news for the shipping industry was the possible decline in the oversupply of vessels in the industry, which was a key reason for the fall of the industry.
Recently, some Chinese shipping companies have declared impressive earnings and charter rates are improving. There are two reasons for the improving charter rates: The decrease of vessels in the industry, which was one of the key reasons for the fall of the industry, and increased trade volumes.
The constraints faced by the company are not hard to list as inferred from its financial performance. The company has geared its capital structure towards a high leverage ratio thus exposing itself to bankruptcy risks. DryShips was unable to pay off its debt contracts thus limiting its ability to invest in high yielding projects. However, management, after negotiations, has been able to receive covenant waivers; an event that would buy the company more time to recover. Low charter rates and change in state regulations further exacerbates the situation for the industry as a whole. The decline in the value of shipping vessels is another significant constraints faced by the company as the assets lose their collateral value.
Taking into account the current position of the company and future prospects; I would recommend that DryShips' shareholders be patient and hold on to their positions. We might see an increase in the charter rates along with an increase in trade volumes, which can propel the company over the next two years. The company is currently using its stake in OceanRig to get through this tough time, and it should allow the company to weather the storm for a little longer. In the meantime, if the economic recovery gathers pace, DryShips shareholders might end up making substantial gains.