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Summary

  • DryShips' revenue grew at a great pace in the previous quarter, and the company also lowered operating expenses.
  • An increase in spot rates this year should benefit DryShips.
  • An increase in iron ore exports in Brazil and Australia, and China's urbanization plans could lead to higher chartering activity, benefiting DryShips in the process.

Shipping company DryShips' (NASDAQ:DRYS) shares have fallen off a cliff this year. The stock is down a substantial 25%, as the shipping industry has fallen upon tough times, and there could be tougher times ahead. However, we shouldn't ignore the positive moves that DryShips is making that could help it make a comeback in the long run.

Even though DryShips turned in a weak performance last quarter as a result of a decline in shipping rates for cargo, a comeback cannot be ruled out in the future. The prospects of the shipping industry are expected to improve, according to analysts, and DryShips could also witness a turnaround.

Positives to note

The positives can be seen right off the bat, as DryShips' revenue in the fourth quarter rose 52.5% year-over-year to $431 million. Also, during the quarter, DryShips lowered its drilling rig operating expenses, resulting in a 4.8% decline in total operating expenses. As the shipping industry is expected to gain some momentum later this year, these moves of DryShips should come in handy during its recovery.

DryShips is also working on other aspects in order to cope up with the present scenario. DryShips has managed to reduce its net loss, driven by the solid results of its subsidiary, Ocean Rig (NASDAQ:ORIG). Ocean Rig has been able to maintain high utilization levels, while it has also generated incremental revenue after starting Ocean Rig Mylos in Brazil. So, DryShips should be helped by Ocean Rig's strong performance in the future.

Also, Ocean Rig has refinanced its existing short-term Tranche B-2 term loans with an add-on to its existing Tranche B-1 term loans. Hence, this refinancing should provide DryShips with better stability to carry out its operations in the future.

In addition, DryShips is working on its own to maintain its liquidity situation as well. The company is in discussions with Nordea Bank-led banking syndicates for a $325-million senior secured credit facility to defer certain principal repayments to maturity. If these discussions go through, DryShips' free cash balance will have an additional cushion and give the company enough time to profit from the recovery in the market.

Overcoming challenges

However, DryShips is seeing challenges in its shipping operations. The Suezmax and Aframax fleets didn't perform well as its tankers, along with a large number of bulk carriers, where earning spot market rates were slightly above operating levels. However, DryShips expects this scenario to improve in the future.

The Baltic Dry Index is projected to increase impressively this year to a range of 1,400 and 1,600, a solid jump over last year's 1,060 points, according to Barclays and Jefferies. In addition, the global dry bulk seaborne trade is expected to grow 5.8% this year to 4.37 billion deadweight tonnage, according to Barclays Research. In addition, the increase in iron ore exports in Brazil and Australia, and China's urbanization should lead to higher chartering activity, thereby pushing up dry bulk rates.

DryShips is undertaking many aggressive strategies to improve its business. The company is intent on operating all its vessels in both the dry and wet segments on the spot markets to take advantage of a sustainable recovery in these markets this year. The success of this strategy can be noted by DryShips' Panamax fleet representing 60% of the spot days. Also, an increase of $20,000 per day in average charter rates is expected to bring in $250 million to $310 million in additional EBITDA to DryShips.

Moreover, DryShips sees Japan as a key opportunity. Japan's coal imports increased approximately 9% year-over-year in the fourth quarter last year, according to management. Further, the shipping company is seeing growth in demand for dry bulk commodities, as mentioned above, so as the market improves, DryShips should be able to perform better.

Valuation and conclusion

The negativity around DryShips has pushed its valuation to dirt-cheap levels. The company trades at a forward P/E ratio of just 5.75. This is way cheap for a company whose earnings are projected to grow at a CAGR of 10% for the next five years, significantly outpacing the loss of 50% a year that it has seen in the last five years. Clearly, DryShips is on the road to recovery, and investors should consider capitalizing on the drop in the company's share price this year to buy more shares.

Source: DryShips: A Turnaround That You Would Regret Missing