Following A Titan Of The Shipping Industries: George Economou And Dry Ships

Jun.19.13 | About: DryShips Inc. (DRYS)

Intro

George Economou, the CEO of Dry Ships, Inc. (NASDAQ:DRYS), made his fortunes in the shipping industries and understands how the market drives profits. Economou received his degrees from the Massachusetts Institute of Technology in Maritime Management before going on to work for several shipping companies before branching off and beginning to establish his empire. Over the years he has built several companies, to include spinoffs, which he has used to buy and sell assets in order to protect his wealth.

Prior to the global recession, Economou sat on top of an empire that was raking in huge profits and then suffered a massive net worth loss when trade came to a halt. Since then he has continued to navigate the rough economy and prepared for the eventual recovery.

How he charted his course

During the early 2000s, when shipping rates were growing, Economou aggressively grew DRYS from six ships in 2004 to 49 ships in 2008. He claimed to have seen the maturity of the market, and locked in high long-term contract rates for 61% of his fleet. He also decided to focus more attention to the Ultra Deep Water (UDW) Drilling sector and ordered new drilling ships for delivery in 2010 and 2011.

At this time, growth seemed to be riding high supported by the Chinese economy, demanding more coal and iron ore to support expanding production. There seemed to be no downside in expanding the fleet to maximize the demand. When the ball finally dropped, and the world economy came to a screeching halt, no one knew when it would rebound. Economou stated his investment thesis:

· Oil prices will rebound

· Resilient growth trend in China and India

· Dry bulk commodity demand set to grow once recession abates

· Significant exposure to China

· Shipping stocks oversold

· Strong Management with long track record in Shipping, Ultra Deep Water Drilling and Capital markets

Everyone believed the recession would be short lived, that Chinese GDP growth of 8% would be sustainable, and that iron ore consumption would remain high, helping to keep the shipping industry afloat.

When the economy did not recover as quickly as everyone imagined, and Chinese imports did not keep up as expected, Economou began to change his strategy. First was to cancel 18 dry bulk new buildings (or sell them off as the recovery stalled). He had solidified long-term fixed rate contracts that helped the company to stay afloat when the daily rates were at record lows, but scheduled a phase out of the contracts from 2012 thru 2015 in order to take advantage of the rebound. He also prepared the UDW Drilling division of the company for an eventual spin off into Ocean Rig UDW Inc (NASDAQ:ORIG). As part of that plan, it prepared to continue expanding the UDW sector and buy distressed assets.

Economou timed the spin-off of ORIG at a time when it could stand on its own during a period of high demand for UDW Drilling and low demand for Dry Bulk Shipping. This would protect that section of the business from being dragged down by the slumping shipping sector while also being a lifeline to DRYS as it continued to suffer from low rates.

His cancellation of order contracts reduced the liability of having a ship that cost thousands of dollars per day without having a contract to marry up with it. As DRYS has sold off or scrapped other ships, it has likewise reduced that burden as contracts have expired or been cancelled.

What his plan is now

Economou believes the market has bottomed out, but that it may still take at least another year for rates to rebound, and even longer to reach a breakeven point. In order to prepare for this, and a return to profitability, he has contracts set up to phase out over the next few years: down to 48% through the rest of 2013, and eventually down to 19% in 2015.

While he has not stated any plan to sell off the remaining buildings (two VLOC's and four Ice-Class Panamax's), should he choose to, they could be passed off to Cardiff Marine, Inc. While this could be profitable for Economou, it would also help the business. Economou will bear the risk and expenses for maintaining these ships while the industry is still depressed, yet they could also be available to be leased back to DRYS when the economy does rebound and the company decides to expand the fleet.

Economou has his ace in the hole with ORIG. The company is operating in the profitable UDW Drilling sector, with a back log of drilling. The stake DRYS owns in ORIG has a value that is in excess of the current market cap of DRYS. This means that as the economy stalls and struggles to recover, or drags on longer than expected, Economou can use ORIG to buoy up DRYS.

Conclusion

George Economou understands the shipping industry and how to navigate the troubled times. He is patient when necessary and moves quickly to expand when he sees an opportunity. When the economy fell, he positioned DRYS to stay afloat and ride out the storm. As he now looks forward to recovering rates, his strategy will provide significant long-term gains for those that can get in early.

Disclosure: I am long DRYS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.