The shipping industry is in a depression for many years due to weak demand and excessive supply. DryShips (DRYS) was an industry leader before the entire industry crashed. Its stock was trading above $100 and the future seemed bright for investors. It had not all gone as planned and it now trades at around $2. Despite a little hike in charter rates and improvement in coal demand from China, I do not believe that this company will be able to create shareholder value. The improvements reported by Drys seems to be due to short-term seasonal factors.
DryShips is a shipping company, engaged in the transportation of dry bulk and petroleum cargoes worldwide. The company is also engaged in offshore drilling services through its subsidiary named as Ocean Rig UDW.
Supply and demand are the main driver for the dry bulk companies' top and bottom line improvement. Shipping rates improve due to increase demand. The recent spike in shipping rates is because of China's iron ore restocking activity, but this activity is only a short-term driver. China increases the import of coal to produce electricity for summer and is therefore a seasonal factor. Demand for coal rises between March and August due to increased demand of electricity in summers, primarily for air conditioning. As the weather becomes milder after August, this demand will go down again and rates will decline as well.
China is the largest importer of coal and steel globally. The government is in efforts to reduce coal consumption and use alternative sources like natural gas and electricity. The reason behind this shift is to reduce the carbon emission and to move toward greener alternatives. However, this will not affect the dry bulk shipping companies in the short term because it will take time to shift, but it is a negative long-run catalyst.
The Chinese factor is just amongst many that have negatively affected the dry bulking industry. The weak demand in Europe and Japan has also negatively impacted the shipping industry. Higher fuel price is also a main driver, which depressed the dry bulk companies' margin.
Sequential quarterly loss
DryShips is reporting losses from the past six quarters. The company has reported a loss of $116.6 million or $0.30 per share in the first quarter of 2013. Net loss includes a loss of $75.3 million related to sale of four dry bulk vessels. Excluding the sale, net loss would be $41.3 million or $0.10 per share. Total revenue has shown some positive growth, rising 29% to $319.7 million year-over-year while Wall Street had expected revenue of $309.2 million. DryShips Voyage revenue has decreased from $77,021 in the first quarter of 2012 to $45,482 in the first quarter of 2013.
Surviving due to Ocean Rig
The improvement in DryShips' top line was due to strong results reported by its subsidiary Ocean Rig. Currently, the poor performance of DryShips is sheltered by Ocean Rig. Ocean Rig is an international offshore drilling contractor. It provides the oil and gas exploration, development and production services.
Ocean Rig has reported a strong net income of $6.4 million, up from a net loss of $46.3 million a year earlier. Revenue increased to $246.4 million in the first quarter, as compared to $163 million in the first quarter of 2012. In February 2013, DryShips sold 75 million of its Ocean Rig shares.
DryShips might face a liquidity issue soon. The company's current and quick ratio is extremely low standing at 0.53x and 0.55x respectively. Low current and quick ratio means that the company would not be able to meet its short-term obligations. The company has a total debt of $4.42 billion, up from $4.39 billion a year ago.
Interest coverage ratio is only 0.61x, which further shows its weak balance sheet and indicates that the company is teetering on the verge of bankruptcy. The company has to pay $103 million debt repayment in 2013, and $136 million in 2014. It only gets worse in 2015, when it will have to pay $269 million of maturing debt. It currently has cash and cash equivalent of $744 million.
For the current quarter, average estimated earnings is (0.06) per share for DryShips while the high and low estimates are 0.02 per share and (0.09) per share respectively. Average revenue is estimated $329.57 million. The stock is currently valued at $2.03. It surged 28% year to date. The 52-week high is $2.74 and 52-week low is $1.46.
It seems difficult that the shipping industry will make any recovery in the future, which makes DryShips a highly risky investment. It has been constant losses and any improvement is not expected due to low charter rates and weak demand. Its financial condition is pretty poor and there is a serious risk that it may not be able to repay its debt obligations. I believe oversupply of ships will keep the charter rates low and there is no long-term catalyst, which can stabilize the industry. Therefore, we recommend investors 'Short Sell' Drys.
Additional disclosure: Equity Whisper is a team of analysts. This article was written by our industrials analyst. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.