This article outlines why it's time to sell your shares in DryShips (DRYS). DRYS is a holding company engaged in the ocean transportation services of drybulk cargoes and crude oil worldwide through the ownership and operation of drybulk carrier vessels. At the height of the shipping market in 2008, DRYS was trading near $100 a share. The financial crisis and over-supply of new ships has weakened shipping rates dramatically, with current spot market rates below DRYS' cash flow break-even point. Today, DRYS trades around $2.00 a share. This article discusses the net asset value (NAV) of DRYS as well as its cash flow and earnings prospects going forward. Based on this analysis, it is believed that DRYS is a sell even at its current suppressed stock price levels.
Cash Flow Analysis
For Q1 2013, DRYS featured a time charter equivalent revenue of $11,396 and $12,792 per vessel day for its drybulk and tanker shipping segments, respectively. Using a 79% to 21% weighting of drybulk to tanker vessel days translates to an average revenue rate of $11,685 per vessel day. In a similar manner, the operating expenses for both drybulk and tanker segments are pulled from the earnings report, and the resulting effective expense rate per vessel day is $5,896. As shown on slide 11 from the recent investor presentation, DRYS features maturing debt payments of $103M for the rest of 2013 and $136M for 2014. If we just take the 2014 debt load and divide through by the total number of vessels (46) and the number of operating days (365), the resulting debt expense per vessel day is $8,100. The debt picture for 2015 is even bleaker. The scheduled debt payments are 269M, or more than 15K per vessel day. The debt load needs to be addressed by management, as there is no way DRYS will be able to make its scheduled payments given the current drybulk market conditions.
The operating expenses and debt servicing costs exceed the revenue per vessel day, resulting in negative free cash flow of roughly -$2,300 per vessel day. It should also be noted that this number does not reflect other cash expenses such as general & administrative costs. While DRYS does not separate the G&A expense between the shipping segment and the ocean rig segment in Q1 2013, the quarterly expense was $36M per the Q1 2013 10-Q. Assuming the DRYS G&A expense drops by two-thirds after not including Ocean Rig (ORIG), the per vessel day rate could be as much as $2,000. This results in a ballooning of the cash flow deficit to -$4,300 per vessel day.
In order to get to cash flow break-even, it is estimated that spot market rates will need to increase by nearly 40% (40% = [cash flow deficit] / [current revenue]). The trend in drybulk rates does not suggest an increase any time soon. This idea is further confirmed given recent comments from DRYS management in the Q1 2013 conference call:
...we have significant leverage to the drybulk and tanker spot markets and positive developments in these sectors could provide a substantial boost to our bottom line. Our strategy at the current time is to place all our vessels, both dry and wet, on the spot markets. While we are not that bullish on prospects for both these segments for this year, we want to be ready for an eventual rebound.
Finally, some of DRYS vessels continue to operate under favorable rates that were locked in during the height of the drybulk market. For example, the panamax vessels Amalfi and Catalina feature daily charter rates of $39,750 and $40,000, respectively, per the fleet profile table on slide 22 of the investor presentation. These charters expire in Q3 2013. Given current spot market rates of ~$10,000 for panamax vessels, it is likely that these vessels will be re-chartered at a rate near $10,000 resulting in a total per day revenue decrease of $60,000 across the two vessels. The decrease in revenue translates to $5.4M per quarter. Given the Q1 2013 drybulk revenue of $73M, a revenue decline of 7% is possible by year's end if no uptick in charter rates occurs.
Net Asset Value
The NAV analysis is performed on a per vessel basis using data from the Q1 2013 earnings report. It is comprised of two components - the value of the vessels it owns and the value of Ocean Rig shares it owns as a result of the recent public offering. As seen in the Table below, DRYS has $280M in cash and cash equivalents, $1,345M worth of ORIG stock based on a closing price of $17.18 and 78.3M shares, and a fleet of vessels valued at $1,180M. On the liability side, DRYS features debt of $1,012M, convertible debentures of $700M, and a tax liability of $58M. This results in 1,035M in net assets, or $2.59 per share assuming 400M shares outstanding.
|cash & equivalents||280|
|per share||$ 1.92|
This valuation of $2.59 may not be conservative enough. As seen in the Q1 2013 presentation (slide 12), of the 78.3M shares of ORIG held by DRYS, 19.9% are pledged to lenders. A re-do of the calculations above but assuming 62.7M shares of ORIG instead of 78.3M results in a NAV of $1.92. The NAV calculated under this scenario is very close to DRYS' stock price.
The short-term outlook for DRYS is not good, which has been confirmed from a basic cash flow analysis and recent comments from DRYS management. DRYS must realize nearly a 40% increase in charter rates to become cash flow break-even. Come 2015, the picture looks even worse for DRYS as its scheduled debt payments double relative to 2014. From a NAV perspective, the current stock price of ~$2.00 per share does not provide a large enough discount given all of the issues with DRYS. For these reasons, it is my opinion that one should exit any long positions in DRYS.