DryShips' performance has been weak this year with shares down 22%.
However, this is a buying opportunity as DryShips' operations are gradually improving and the company is cutting its losses.
Better balance sheet management and improvement in industry conditions should lead to better times for DryShips going forward.
The shipping company DryShips (NASDAQ:DRYS) is having a torrid time in 2014, but all that might be about to change. Although the stock dropped after its recent first-quarter results as DryShips missed estimates, investors shouldn't forget that the company reduced its losses tremendously and saw a huge jump in revenue.
Management believes that the worst is over and good times are ahead. Going by DryShips' recent results, this looks like a strong probability as the company is making solid improvements. In the first quarter, its revenue rose 43.1% to $457.5 million from the year ago period. Its loss came in at $34 million, well-below the year-ago period's loss of $116 million. Also, during the first quarter, DryShips reported a higher EBITDA due to an improvement in its operations.
On the dry bulk front, its average daily time charter equivalent (TCE) levels were unchanged from the previous quarters, mainly due to the time charter coverage on a majority of its Cape size fleet. Also, the company made a principal repayment of $22 million under its long-term credit facility. This is a good move and should help DryShips reduce its debt going forward. Moreover, DryShips has not made any payments to Rongsheng Heavy Industries, as the ships are still under construction and are experiencing delays. So, the company is managing its cash position quite well.
Improvements in the cards
The situation in the industry is improving. According to DryShips CEO George Economou:
"Following a period of oversupply and recent volatility in the tanker and dry bulk sectors is a clear sign of a more balanced supply and demand. We continue to expect a sustainable recovery in charter rates during the second half of 2014 and beyond.
While charter rates for larger dry bulk carriers underperformed during the first quarter of 2014, forward charter rates and asset prices are holding up resiliently, underscoring the bullish market sentiment."
DryShips subsidiary, Ocean Rig (NASDAQ:ORIG), has entered into two contracts to construct two seventh-generation new integrated design drill ships at Samsung Heavy Industries. Delivery is expected to be in 2017. Ocean Rig has also deferred the delivery of Ocean Rig Santorini from late 2015 to mid 2016. It has received a letter of award (LOA) from Total (NYSE:TOT) in Angola, which is a six year contract for drilling operations offshore Angola for Ocean Rig Skyros.
Also, Ocean Rig closed its offering of senior notes that were due in 2019, amounting to a total of $500 million, so that it could repurchase and redeem the old bonds due in 2016. This will further bolster DryShips' financial position going forward.
Recently, DryShips concluded a memorandum of association with an unaffiliated third-party to acquire the second-hand Capesize vessel Conches, which is called by the name Raiatea. It was purchased for an amount of $53 million.
Better times ahead
DryShips' shipping fleet should lead to strong earnings power going forward. It is seeing positive developments in the dry bulk and tanker spot markets. It would operate its vessels in both dry and wet on the spot market in order to take advantage of a sustainable recovery in these markets in 2014 and beyond.
DryShips is also trying to maintain the minimum required value to loan ratio. It faced certain challenges in the past to maintain this ratio, but now the situation has improved significantly. Going forward, the company will keep a close eye on factors that need to be monitored in order to identify the direction of the fleet market, and decide its direction accordingly. This includes overall chartering activities, which it expects to increase going forward.
Also, DryShips expects that iron ore production will increase in the next three years, which will in turn increase the demand for transportation. The company sees considerable scrapping potential as more than 8% of both the Cape and the Panamax fleets are over 20 years old, and an additional 10% and 12%, respectively, are between 15 to 19 years old. According to management:
"We reiterate our view that fears over severe oversupply have been overstated and the depressed freight environment we experienced in the past several years was more result of stagnant demand rather than a pure oversupply issue. A situation we see normalizing as the global economy outlook improves."
DryShips looks very attractive at a forward P/E ratio of just 10. The good thing about the company is that it is decreasing its losses at a tremendous pace. In fact, for the next five years, its bottom line is expected to grow at a CAGR of 10%, a huge improvement over the annual drop of 54% seen over the last five years. Hence, investors should definitely consider DryShips for their portfolio as it looks set to improve in the future and the stock can scale new highs.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.