Economou's Redemption

| About: DryShips Inc. (DRYS)

Imagine yourself out at sea. You are a stowaway aboard a dry bulk cargo ship which has been overtaken by a large storm, a financial storm. The waves are amongst the largest ever experienced by any ship, yet the ship still survives. As you cower and shake with each gigantic wave crashing on the deck, somebody has to continue steering the ship. The crew is panicking because the odds of survival are grim, impossible even. The captain continues to push the ship forward, undaunted. Many, many other ships are momentarily in sight and then eventually disappear, only to later be seen turned into floating bits of wood circled by seagulls. Half of the crew has already abandoned ship. There are even pirates in the area? Surely the ship needs to be turned around.

As you panic and make an attempt to join fleeing crew members in the last dinghy, from out of nowhere, a crew member tackles you and holds you down. You feel the air pressure change as everything becomes silent. The lights of the ship flicker as all on board look up and see the largest wave imaginable towering in front of them. The wave actually blocks the light of the moon. In slow motion, it crashes down so hard that all aboard the dinghy are washed away never again to be seen. The wave knocks you across the floor, but you survive. The storm momentarily eases up. You are freezing cold, shaking, afraid, and then the man who tackled you gets up and yells, "Stowaway!"

Just when you fear your luck has run out, just when you feel there is no possible good ending for you, the captain pops his head into the window and says, "Stowaway? Welcome aboard. Grab a rope. This is Dryships." The Captain disappears while making a celebratory sound like a crazy person and shaking his fist into the air.

Although highly metaphorical, this is the life of a Dryships (NASDAQ:DRYS) stockholder. It is a life of risk, a life without fear, or you get killed. The captain does not turn the ship around when a storm is spotted. At best he turns into the softest part of the storm, but the ship always continues forward.

Rather than reducing risk, the captain seeks risk opportunities where others don't. Debt is rarely reduced. Capital is never discouraged in any way. While most companies deal with small, manageable bites of capital at a time, Dryships is a black hole, constantly sucking in every single dime it can possibly find, from every possible source. Other companies try to get the share price up to show their company's success. Dryships is so focused on growth the share price is constantly battered down with dilutions. In other words, the captain wants your capital so he can put it to work.

Since its IPO, Dryships has been a growth machine. The chart below shows that Dryships has seen its total assets rise every year of its existence (2013 is shown but understates growth because it lacks the fourth quarter of 2013).

Dryships Total Asset Growth (Millions)Click to enlarge

The chart below shows that assets have grown every year in percentage terms as well, but seemed to have bottomed in late 2012, which may reflect why Dryships' stock price bottomed around that time as well. The stock bottomed in late 2012 at a price of $1.65. If this is in fact an accurate assessment of how the market is valuing Dryships stock, Dryships will likely see a positive return to its stock price in 2014, as asset growth seems to have bottomed, and so have shipping rates. Further large declines in ship values are quite unlikely due to a slightly tightening supply and demand situation amongst drybulk ships.

Dryships Total Asset Growth (percent)Click to enlarge

In the past, CEO Economou has had many faults, including buying a company from his relative at an inflated price with potential insider trading just before the deal and inside conflicts of interest between his privately held companies and the publicly traded companies he manages (more information). So his behavior does demand a risk premium on the stock, as stockholders have seen some value vanish. But deeper beneath the surface, one must remember that running a business is much different than making stock trades. Some of the questionable deals may in some cases be necessary to create vital business relationships. Economou seems to have forged deep connections with banks to obtain lines of credit when others cannot. Excel Maritime, TBS International, and other drybulk companies have vanished, partially from not being able to continue obtaining adequate financing. Dryships has not had that problem. If Economou can keep Dryships afloat and potentially able to expand even further while much of the rest of the industry disappears, maybe he deserves to pocket $10 million on a conflict of interest or two.

True, the financial reporting is highly vulnerable to manipulation through lack of asset impairments due to questionable classification of the type of assets on a company's books and company acquisitions and goodwill at inflated prices distorting asset values. But for the most part, I am satisfied with asset reporting simply due to the fact that Dryships seems to have weathered the storm and proven that its ships are in fact assets which are held-to-maturity, not trading securities (which ought to be impaired). Additionally, with enough accumulated depreciation on the books since most of the ships have been acquired, possible impairments can be ignored with improved accuracy. The Ocean Rig (NASDAQ:ORIG) acquisition has also proven to be good enough to withstand scrutiny, and is probably the only reason Dryships survived. Ocean Rig was not the greatest deal in the world, but it did diversify out of drybulk and keep the company afloat.

The company is a growth beast with no income to show for itself in a long, long time. If unleveraged assets ever climb in value, even a drop, the hidden growth will become visible, and the stock price will explode upwards. The main issue Dryships had was it was truly a 'going concern' for all intents and purposes, but seems to have weathered the storm.

Dilution is a bad thing for a shareholder but is truly just expensive financing. Would you rather have a captain who turns the ship around and drops anchor to sit and waste time? Or would you rather have a captain who continues onwards even in the toughest storms of all time and still comes out with a larger company than ever?

In sum, Economou has made some major blunders/errors in the past. Dryships could be a much more valuable company for the stockholder, but Economou's risk-seeking approach seems to be getting close to finally paying off. Dryships is a stock designed for risk-lovers with the ability to hold on in the roughest of storms. Rather than erasing his mistakes, he just paints over them. As I think about the future, all I can really see is growing assets, a better managed debt load, and Economou's redemption.

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.