The shipping industry has been under immense pressure over the past five years due to the slowdown in the global economy and trade. There were some industry specific issues as well, such as oversupply to the operators resulting in record low shipping rates - this might have been sustainable if the global economy were in a boom; however, a recessionary environment coupled with oversupply of vessels is a recipe for disaster, which is exactly what happened. DryShips (DRYS) was one of the victims of these circumstances - the stock was trading close to $100 before it took a dive in 2009. However, more recently, the stock has shown impressive growth and it is up 106% since July. With improving economic conditions and increased export of dry-bulk, the company could be on its way back to its old glory.
Improving Financials: An Encouraging Sign
Before we discuss the market and economic conditions, first we should look at the company's performance itself. In the third quarter, revenues for the company increased by 17.8% to $404.9 million while the operating income increased by 114%. The interest expense increased significantly by 152% to $130.9 million. Loss on interest rate swap went down by 58%, but still a loss of 11.6 million. Altogether, net loss increased by 31.5%. The income from core operations is increasing, which is very encouraging, but the company needs to decrease its financing costs as it is converting its operating income into losses. Nonetheless, the overall performance of the company has massively improved.
For the purpose of understanding, if we take out the interest expense out of the picture from both years to compare, the company would have made a profit of $58.3 million as opposed to a net loss of $3.3 million of the last year. The reason why this assumption was necessary is that interest expense is a result of long-term debt which the company has taken to expand itself. It is going to take time, but it will pay off in the long-run. Meanwhile, we should not cloud our judgment by looking at the negative numbers.
Drybulk, Economy, OceanRig and Shipping Rates
Durable carrier business has somewhat seasonal growth and is directly related to the demand and supply of drybulk. China is the largest importer of about 50% of the world's export of iron ore, which takes up about 25% of the world drybulk trading and shipment. Australia is the largest exporter of iron ore. With ample supply of iron ore, the prices have gone low, since China can take only so much of iron ore. Despite this, Australia is not taking it easy on the extraction of iron ore and is on its way to add a further 100 million metric tons of capacity for iron ore this year. One the other hand, drybulk shipment companies are placing orders for new drybulk carriers even when the increase in drybulk demand is not very apparent. It is plain economics, when the demand for something increases, so does its price. In the same way, shipment rates are responding upwards due to the global economic recovery and increased demand.
OceanRig (ORIG) has been a single positive for DryShips in the recent testing times. The company has been able to report better results due to the impressive performance of OceanRig. Deep sea drilling is experiencing a boom at the moment as the energy giants are turning attention to alternative reserves. Drilling rates are extremely attractive, and with improving shipping rates, DryShips is well placed to grow in the future.
It looks like Dryships is finally coming out of its slump. I have been cautiously optimistic about the company as the industry is heavily dependent on the global economic conditions and it looks like it's recovering. The market has started to take notice of the recovery in the industry and it looks like the shipping companies are again going to make a comeback. I believe Dryships is well positioned to grow and its shareholders will soon reap rewards of being patient in the tough times over the past four years.