2013 was a good year for DryShips (DRYS), a global diversified marine transporter. Shareholders of the company must be quite happy as its share price moved more than 180% last year, from $1.64 per share to more than $4.60 per share.
Performance of DryShips is largely dependent on the global economic conditions. The company operates both drybulk carriers and tankers. Iron ore and coal demand is rapidly growing in China and India, as a result, demand for dry bulk vessels is increasing. Both iron ore and coal are the biggest source of demand for dry bulk vessels.
China is the world's largest iron ore importer. Iron ore demand in China is rising due to increasing steel production. Around 98% of iron ore is used in steel making. China's steel production is forecast to increase 3.8% to a fresh record of 810 million tons from an estimated previous record of 780 million tons for this year. With the growing steel output, China's iron ore imports are expected to rise 6.3% to a record of 850 million tons in 2014.
Iron ore consumption is also increasing in India due to growing steel demand. Steel demand in India is expected to grow by 5.6% this year. Due to lower domestic iron ore output, India's iron ore imports are expected to rise by 67% to around 5 million tons in FY14. Besides iron ore, coal demand is also rising in China and India that will drive the demand for drybulk vessels. Between 2012 and 2017, China's coal imports are forecast to grow at 38.4% from 289 million tons to 400 million tons. During the same period, India's imports of coal will surge from 137 million tons to 165 million tons.
As mentioned earlier, DryShips also operates tankers. The company owns a fleet of 10 tankers, comprising 4 Suezmax and 6 Aframax. Oil tanker demand is also rising due to increasing oil imports from China. According to a forecast issued by China National Petroleum Corporation (CNPC), China's implied oil demand in 2014 will increase 4% from a year earlier to 518 million tons, or 10.36 million barrels per day bpd. Net imports of crude oil will rise to 298 million tons this year, or 5.96 million bpd, an increase of 7.1% from 2013.
DryShips operates in the shipping industry. The industry is highly competitive and dominated many small players. Most of its competitors offer very similar services. Some of DryShips competitors include: Diana Shipping (DSX), Genco Shipping (GNK) and Navios Maritime Holdings (NM). The chart below represents the key statistics for DryShips and its competitors.
Return on Assets
DryShips operating margin, gross margin and return on assets percentage is higher than its competitors. Higher return on assets means the company is more efficiently using its assets which is a sign of great management. Looking at Price/Book and Price/Sales ratio, DryShips seems undervalued as compared to Diana and Navios Maritime. One negative aspect that stands out is the fact that DryShips has higher debt/equity ratio. Its current ratio is also much lower than Diana Shipping and Navios Maritime.
DryShips has a substantial amount of debt which is certainly a risk. The company also has a stake in Ocean Rig UDW Inc. (ORIG) that gives it some flexibility because if things got really bad, they could monetize Ocean Rig to get them out of the slump which is a bit of a competitive advantage I think against the other pure-play shippers. DryShips is expecting to start receiving a dividend from Ocean Rig this year that will help to cover its interest and finance expense in the coming quarters.
Ocean rig has a market cap of $2.26 billion. The drilling business is performing well and continue to do well in the future. Over the past few quarters, the company has shown a significant hike in its revenue and adjusted EBITDA. For the third quarter of 2013, Ocean Rig generated revenue of $328.5 million, as compared to $285.7 million for the same period in 2012. It recorded a net loss of $21.5 million. But the loss includes non-cash write offs and breakage costs associated with the full repayment of the $800 million secured term loan agreement and the two $495 million senior secured credit facilities totaling $61.1 million. This is a one-time and non-cash expense. Excluding this expense, the company's net results would turn into a net income of $39.6 million.
Ocean Rig is a long-term catalyst for DryShips. Due to the discovery of several big deep-water oil reservoirs, demand for deep water drilling services will increase in the future. The company has high quality and technologically advanced drillships, that will allow oil explorers to work even under unfavorable condition.
According to estimates, DryShips earnings are expected to improve this year. For Q1 2014, analysts are expecting earnings per share of $0.09 and revenue of $454.11 million. With improvement in the bottom line, the company will be able to strengthen its overall financial profile. DryShips is also working an agreement with some banking groups as it wants to cut down its debt service payments this year and is looking to adjust the financial covenants.
DryShips is well positioned to take advantage of improving economic conditions. Due to increasing iron ore and coal imports from China and India, long-term future of the company looks bright. Although it has a high debt, which indicates some risk, but improving Ocean Rig financials will provide some support to DryShips. In my opinion, DryShips is an attractive long-term investment.