DryShips' (DRYS) CEO George Economou on Q2 2014 Results - Earnings Call Transcript

Aug. 6.14 | About: DryShips Inc. (DRYS)

DryShips Inc. (NASDAQ:DRYS)

Q2 2014 Results Earnings Conference Call

August 6, 2014, 09:00 AM ET

Executives

George Economou - Chairman and CEO

Ziad Nakhleh - CFO

Analysts

Michael Webber - Wells Fargo Securities

Keith Mori - Barclays

Fotis Giannakoulis - Morgan Stanley

Oliver Corlett - R. W. Pressprich

Operator

Ladies and gentlemen, thank you for standing by and welcome to the DryShips Incorporated Conference Call on the Second Quarter 2014 Financial Results. We have with us Mr. George Economou, Chairman and Chief Executive Officer, and Mr. Ziad Nakhleh, Chief Financial Officer of the company.

At this time, all participants are in a listen mode only. There will be a presentation followed by a question-and-answer session. (Operator Instructions) I must advise you that this conference is being recorded today, Wednesday, the 6th of August, 2014.

Matters discussed in this release may constitute forward-looking statements. Forward-looking statements reflect current views with respect to future events and financial performance and may include statements concerning plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements, which are other than statements of historical facts.

Please take a moment to read the Safe Harbor statement on page two of the slide presentation. Risks and uncertainties are further described in the reports filed by DryShips Incorporated with the U.S. Securities and Exchange Commission.

And now I’ll pass the floor to Mr. Ziad Nakhleh. Please go ahead, sir.

Ziad Nakhleh

Thank you, operator. Good morning, ladies and gentleman. I’m starting on slide four. For the second quarter 2014, DryShips posted a U.S. GAAP net loss of $5.6 million, or $0.01 per share, as compared to net loss of $18.2 million, or $0.05 per share, for the same period in 2013. The main reasons for the improved results are another quarter of high utilization for drilling rig segment and positive contribution to our bottom line for our tanker segment.

For the second quarter 2014, our Group reported revenues of $0.5 billion and adjusted EBITDA of $220 million. In addition, we reported interest expense of $86 million during the quarter, which includes an amount of $12.1 million relating to the amortization of the discount on our convertible notes, which amortization we expect to cease once the notes are refinanced.

For the remainder of this presentation, we’ll be primarily focusing on our shipping segment’s operations. For additional information on drilling segment, please refer to Ocean Rig’s second quarter presentation available on www.ocean-rig.com.

Slide five. During the second quarter of 2014, the EBITDA of our shipping segment improved as compared to the same period in 2013, mainly due to an increase in average daily time charter equivalent levels on our tanker vessels from $10,000 per day to $16,000 per day.

Close to the end of the second quarter 2014, we witnessed a dramatic uplift in rates for Aframax and Suezmax tankers, which are currently performing above expectations for this time of the year.

On the drybulk front, our average daily TCE levels were unchanged from previous quarters, mainly due to the time charter coverage on a majority of our Capesize fleet and the spot rates on our Panamax fleet which remained more or less at historic lows.

Going on to slide seven, where we discuss the company updates. On July 25, 2014, Ocean Rig entered into a $1.3-billion Senior Secured Term Loan B facility to refinance the $1.35-billion Senior Secured Credit Facility.

On July 21st, Ocean Rig announced that its Board of Directors declared a quarterly cash dividend of $0.19 per common share. DryShips will receive 14.9 million of this dividend by virtue of 59.4% shareholding in Ocean Rig. On July 18, 2014, the company received a firm commitment letter from Nordea Bank for an up to 170 million senior secured credit facility to finance nine Drybulk vessels.

On July 16, 2014, the company received a firm commitment letter for an up to 350 million secured bridge loan facility, to partially refinance its 5.00% convertible bond maturing December 1, 2014. On June 7, the Ocean Rig Athena commenced drilling operations for drilling offshore Angola with ConocoPhillips.

On June 3, 2014, Ocean Rig signed definitive documentation, for the six year contract for drilling operations offshore Angola with Total. On June 3, 2014, Ocean Rig signed another drilling contract for one of its semi-submersible, the Eirik Raude for drilling offshore the Falkland Islands.

Onto slide eight, the graph on the left illustrates that for the second half of 2014, we have 34% fixed rate coverage at an average daily PCE rate of 34,000 per day. Our fixed coverage falls to 21% for 2015 and then to 15% for 2016 but both these years have a locked-in average daily franchised equivalences rate of between 30,000-34,000 per day.

The graph on the right highlights the earnings power of shipping fleets. We have significant leverage to the drybulk and tanker spot markets, and positive developments in these sectors will result in substantial cash flow to our bottom line. We remain committed to our strategy, which is to operate all our vessels, both dry and wet, on the spot market in order to take advantage of a sustainable recovery in these markets in 2014 and beyond.

During 2014 and 2015, we have 6,651 and 15,821 spot fleet capacity days, respectively. Our Panamax fleet represents approximately 60% of the spot days. A 20,000 per day increase in average charter rates will add another $133 million and $316 million of additional EBITDA for our shipping segment in 2014 and 2015, respectively.

On to slide nine, we have four Ice –class Panamax bulkers under construction at Jiangsu Rongsheng Heavy Industries in China with total remaining yard installments of 124.4 million. As we’ve stated in previous quarters, the deliveries of these vessels are severely delayed and the contractual delivery date are just around the corner.

As per the shipbuilding contracts we can only formally cancel the contracts 255 days up to the contractual delivery dates of the vessels. We have provided the cancellation dates for the vessels on the right hand column in this slide.

We may have no other option, but to cancel the contracts. As we’ve said before, the refund guarantees are issued by the Bank of China and we start to recoup not only our payments today, but potentially 8% interest as well. We will keep you updated in this respect.

Onto slide 10. A major financial covenant in shipping loans is the value maintenance clause also known as a minimum required value-to-net-loan ratio. The market standard today anywhere between the 125% and the 140%, in other words the value of the finance asset cannot be lower than 125% of the outstanding loan at all points in time.

On this graph we chart our shipping vessel values against secured shipping loans outstanding. Our fleet-wide value-to-loan ratio has jumped from 105% at the end of 2012 all the way to 171% at the end of June 2014.

We believe all the top of covenant breaches has overdone. Banks are primarily concerned with non-repayment of principal and interest. Quarter-after-quarter we have shown that lenders have been supportable to DryShips and they understand – as they understand that we only have a few remaining technical breaches. Only this quarter we have agreed with various banking syndicates for waivers of certain covenants.

Onto slide 11. As you can see our plan to refinance and our convertible notes are starting to take shape. We have said all along that it’s not a question of whether we can execute the refinancing. It’s a question of how we can refinance it as cheaply as possible.

Recently we have made great strives towards an event of refinancing over 5% -- convertible notes due to December 2014. Our top relationship banks ABN Amro and Nordea Bank have provided facilities of up to 520 million. The ABN Amro facility can be fully used to take out 350 million of the convertible notes.

On the Nordea facility, we will first use the proceeds to be paid the existing 325 senior secured facility or the ex OceanFreight facility which has a balance of approximately 60 million today. The remainder after fees and other expenses of 100 million will be marked for potential refinancing of the notes.

On the remaining 250 million, we are looking at a number of options and remain confident that we will complete the puzzle in the near future.

On to the drybulk industry section on slide 13. During the second quarter of 2014, freight weights were significantly stronger for capsize vessels compared to the same quarter in 2013. Panamax -- to surprise and were lower both on the year-over-year and quarter-over-quarter basis.

This decline is partly attributed to the absence of green and coal cargos in the market coupled with unremarkable iron ore volumes coming out of Brazil. However, this is situation we expect to improve in the near term as Brazilian iron ore exports become more active on the spot market.

China continues importing soft -- significant volumes environment together with the potential delay the fact of the anticipated strong Q2. More specifically, during the second quarter, Capsize earnings averaged approximately $11,900 per day and 90% year-over-year increase and Panamax earnings averaged approximate $6,300 per day and 19% year-over-year decline.

Going forward, the fact that we believe tightened the supply and demand and balance include the continued trade growth coupled with the slowing trend in new building deliveries. The strength of the iron ore, demand in steel production, the continuation of low cost iron ore supply in the market, which display some of the expensive and lower quality domestic Chinese production thus leading to increase seaborne transportation demand.

Expected increase in Brazilian iron ore exports, which during 2013 took place in the third quarter and tied up enough tonnage to push Capesize weight to about 30,000 per day. Should this development materialize, Panamax vessels will also benefit as charges may look into splitting cargos, thus offering stability to the overall market.

Last but not least, the average over supply in the Panamax segment could be mitigated by new deliveries being stretch out i.e. spillage, cancellations and increased spurting activity.

We will now switch to the industry section of the crude tanker market on slide 14. During the second quarter 2014, average spot weights for large tankers, namely, Suezmax and Aframax has recorded considerable gains, which weight increasing by approximately 41% and 21%, respectively year-over-year.

These gains are primarily driven by the improvement of the supply-demand imbalance in the market and with global oil demand forecast continue to increase as the global economy gains momentum coupled with the evidence shift on the Atlantic Basin on further east. We see the ton mile dynamic improving again.

Furthermore, it is worth noting the market has been more volatile recently as compared to recent years and favorable supply-demand trends combined with periods of trade dislocation can cost substantial spikes such as the one weakness in the end of June, start of -- beginning of July when average Suezmax spot waves jumped from 20,000 per day to approximately $48,000 per day, and the average Aframax spot rates jumped from $18,000 per day to above $49,000 per day.

These spikes is an indicator of the positive development in the supply-demand balance and suggest that we may be entering a period of a much healthier freight environment. As such, we expect that for the full year [technical difficulty] up at levels well above 2013.

Additionally, it is worth mentioning that the Suezmax order book currently stands at above 8% of the fleet; whereas, for the Aframaxes, the ratio is approximately 13% with the majority of the orders scheduled to hit the water during 2015 and 2016.

Last, but not least, we note that slippage remains strong and demolition activity has accelerated. Both factors have positively assisted in the growth of the supply – of controlling supply growth.

In light of the above, we reiterate our view that any type of increase in crude oil demand should positively affect the tanker market fundamentals and translate into increased fleet utilization, which in turn will result into an overall more profitable tanker market.

I will now turn the call over to Mr. Economou for closing remarks.

George Economou

Thank you, Ziad. In closing, I would like to clarify for everyone, once again, that DryShips is a pure shipping company with predominantly spot charter market exposure in 2014 and beyond and a majority stake in Ocean Rig, which operates as the deepwater drillships.

We continue to be positive in managing our liquidity. We expect to receive our second Ocean Rig dividend of $15 million on August 11. We believe we are still on course to cancel our delayed Chinese newbuildings.

Finally, our ATM program remains active to raise equity, if we have to, but we remain disciplined sellers. Our top priority in 2014 is to refinance our convertible bonds maturing end of the year.

As Ziad has mentioned, we have received services from ABN AMRO and Nordea Bank to potentially refinance the $450 million of notes. For the remaining amount, we are examining all our financing options -- or equity, or a combination of these sources.

At the end of the day, we want to execute a successful refinancing so we can eradicate the so-called overhang once and for all. As far as the broader drybulk and tanker markets are concerned, we are optimistic, expect the sustainable recovery in the second half of 2014 and beyond, and believe DryShips is well positioned to take advantage of the -- rates in the drybulk and the tanker sectors.

This marks the end of our second quarter presentation, and we now open -- yes, sir? Yeah, operator we can – we now open the floor for questions, so much you got that.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Michael Webber from Wells Fargo. Please ask your question.

Michael Webber - Wells Fargo Securities

Hey. Good morning, guys. How are you?

George Economou

Hi, good morning.

Ziad Nakhleh

Great, thank you.

Michael Webber - Wells Fargo Securities

First just zeroing on the remaining better funding that’s needed in the slide on Page 11 is actually really helpful. But around that 250 million, Ziad, this is probably question for you, how many shares are left outstanding that can actually still be placed standard or collateralized?

George Economou

Yeah, I mean. Actually the – the amount has been being pledged to build, want to be pledged, approximately 5.5 million to 6 million that’s the range. So out of our 78 million shares the maximum is around 5.5 million to 6 million shares.

Michael Webber - Wells Fargo Securities

The maximum run rate?

George Economou

Value of the share. So the free…

Ziad Nakhleh

The remaining is 72 million.

George Economou

Yes.

Michael Webber - Wells Fargo Securities

Okay. Alright, that’s helpful. And then I mean, more broadly speaking when you think about that $250 million, you guys obviously have some tools you can use there. How do you think about that -- filling that in terms of other asset sales or you have an ATM going on now just to add that, as you said today, what’s for the most likely way you think you could fill that gap?

George Economou

We don’t need to sell any of the assets, and/or Ocean Rig shares and/or do the ATM. We are well advanced in negotiations to make it happen without having to resort to any of the previously mentioned cash – other cashing means.

Ziad Nakhleh

Let’s just say just refinance.

Michael Webber - Wells Fargo Securities

Okay. That’s helpful. And then, I know you probably mentioned this on the OR goals you’ve got part of – but if you can may be run through quickly are there any potential timeline or thought process around and MLP spend at O Rig obviously it’s going to be a big catalyst for DryShips in terms of the incremental valuation and potential cash flow. So you can maybe just give us a quick update there?

George Economou

Well, we can always refer to the call, but basically, we are well advanced into proceeding as typically as Joe said, the plan is September-October to be able to see go-to-markets.

Michael Webber - Wells Fargo Securities

Great. I will turn over. Thanks guys.

George Economou

Thank you.

Operator

Thank you. The next question comes from the line of Keith Mori from Barclays. Please ask your question.

Keith Mori - Barclays

Good morning, gentlemen. Thank you for taking my questions here.

George Economou

Sure.

Ziad Nakhleh

Hi.

Keith Mori - Barclays

Just on the market here you know, you guys are pretty encouraging, you have a pretty bright outlook on the drybulk sector and that your views here. Can you maybe talk a little bit about some of the increased ordering activity you are seeing on the Capesize and Panamax, we have a lot of supply coming online.

Does that give you any moment to pause here that maybe this year we might not get the same level of lift you may have experienced last year, how could that impact the sensitivities that you have provided earlier in the presentation?

George Economou

Sure. We believe, I believe that the Capesize market will have a lot more volatility. We are at $9000 a day which is as low as it get is going down below that but we don’t think it's going to be happening.

And the place is quite balance and it only takes a few extra ships to service the oncoming cargoes out of them long term, I would call [freightments] (ph) so we believe there is going to be quite a high in Q4 which will start last year now it has changed if anything supply demand is getting better balance. So that’s why we are talking a lot of our Capesize. Panamax is what happens is when the Cape market overshoots Panamax is followed because they can split cargoes to keep the rates – Panamax as well up.

Keith Mori - Barclays

Okay. And that’s helpful. And I guess anything on the sensitivity here on Spot A you layout potential upside to EBITDA with the market spot rates, should we be thinking that your forecast internally is more or like market spot rates continue as they are or you already baking in a little bit of upside here?

George Economou

No, we think the market on the gates will -- should remain. Just mainly the last year it reached $42,000 today.

Keith Mori - Barclays

Yeah. Absolutely. And I guess George you did talk on the Ocean Rig call around an implied valuation for the MLP, there's going to be upside there for dry ship.

The bridge alone gets you through may be to 2015, should we be thinking with the potential for a lot of liquidity come on into dry ships in 2016, I know it’s a long time -- long lease away, but what would your view of spending net capital beyond incremental dry bulk ships or would you look at alternative ships here for the company.

George Economou

I think what we have to do is the rise in the market as we see it and then we'll take our decision then. And just to remind you on the previous cycle what we did is when we saw the pic -- we saw many vessels as we could, the rest we put on five-year chart a few for 10.

And I think given these [indiscernible] in the dry bulk market and the ability to hedge by contracting forward that we would be following the same policy if we were to see the market picking up and sustained for one or two years which we think is going to happen between Q4 2014 and 2016.

Keith Mori - Barclays

Okay. And just one for the -- I know Michael asked a question around potential refinancing of the remaining 250 that you highlighted, how many ships are at the fleet that are unencumbered today?

George Economou

Probably a couple. But it’s not the intension to use the unencumbered ships to raise the money. That would be insignificant considering that the amount that needs to be paid on December 1, the $700 million.

Keith Mori - Barclays

Okay. Thank you, gentlemen. I will pass on.

George Economou

Sure. Thanks.

Operator

Thank you. The next question comes from the line of Fotis Giannakoulis from Morgan Stanley. Please ask your question.

Fotis Giannakoulis - Morgan Stanley

Yes. Hi and thank you. Most of my questions have already been answered. But I would like to ask you about the extreme weakness of the Panamax sector. If you can give us your estimate of what is going on there, why the Panamax has been so weak?

And apart from the iron ore market from Brazilian supply that is going to come next year, are there any other drivers that they can support the entire drybulk market? And also if you have to -- if you can give us some estimate what is in your view a normalize rate for Panamax and Capesize vessels, it would be very helpful?

George Economou

Yeah. First question on the Panamax is, the problem with the Panamax is, it’s a very fragmented market and it is even more fragmented with a lot of the operators appearing from South Asia and excludes the traditional ones from Japan and Korea and sometimes in these prices there is a lot of competition. As you know drybulk is out of market, its price sensitive only and that's why you will see and you will continue to see, I think, those parameter affecting the market going forward.

On the Capesize, the market is much more balanced. The iron ore has exceeded our expectations in terms of transportation mostly in the China as you know. Unfortunately the coal is lagging behind. That’s a combination of alternative cheaper sources of – for power generation or for energy and also the economic situation into Europe. The iron ore will I think continue to increase. So all we need is a little bit of coal movement and then you should get the result.

Now normalized rates, it’s hard to say you have more statistics than – that come to mine that I’d like to discuss because it can end up being a never-ending discussion. So I think you know excluding the period of – through ’08 where you saw the recycle and as a result huge returns on capital employed and also time charter rate. I think you know that’s one in the cards.

But you will hear a lot till then you can maybe see normalized over the next two years on the Cape averaging $40,000 a day. Panamax is usually due to one long-term but short-term it varies a lot also.

Fotis Giannakoulis - Morgan Stanley

Thank you and if you are considering any asset classes from the shipping space, I am going to exclude the drilling market, between tankers products, crude, dry bulk vessels or LNG carriers what would you think would be the best place to put your money in today’s market given today’s asset values.

George Economou

It depends on the horizon. Very short time dry bulk is probably going to outperform. The tankers provided, you do an anchorage and that’s going to be a problem with all these guys that came in because the exit isn’t going to necessarily be there and you know, we can elaborate privately if you want on that.

Longer term, it took a five horizon. It’s probably the tankers. L&G is a very different ball game. The spot market doesn’t exist. So, you need to have the bid employment, right now its soft bats for the next couple of years. So the returns are not comparably that same, that you don’t have assets that have the same opportunity between short term and long-term employment.

Fotis Giannakoulis - Morgan Stanley

All right. That’s very helpful. Thank you. I appreciate your time.

George Economou

Sure.

Operator

Thank you. [Operator Instructions] The next question comes from the line of Oliver Corlett from R. W. Pressprich. Please ask your question.

Oliver Corlett - R. W. Pressprich

Hi. Thanks for taking my questions again. I just wanted to explore on that ABN AMRO $350 million bridge loan, you say that you have a firm commitment for up to $350 million. Does that mean a firm commitment for $350 million or I don’t…

Ziad Nakhleh

Its – and maybe ways in our option because obviously our aim is to minimize the total cost of refinancing 700 million that cover it. So…

Oliver Corlett - R. W. Pressprich

Right.

Ziad Nakhleh

We'd like to retain everything else we have.

Oliver Corlett - R. W. Pressprich

Okay. So, I mean, but if you needed the 350 you would have it?

Ziad Nakhleh

We will have it.

Oliver Corlett - R. W. Pressprich

Right. And now it’s called a bridge loan, and usually mean the bridge to somewhere, where – what is it bridging exactly, is it – what's the maturity on the loan?

George Economou

There is initial period of one year, can be extended by the existing little bit the interest. We -- our firm belief is that we need that period to -- for the market to rise, bringing the cash flows, reduce our debt and then we will see where we are after one and half year.

But I think it was a good way to say that, we believe one and half years would be sufficient to be able to find the cheap resolution and what we're going to have to be paying for the bridge facility.

Oliver Corlett - R. W. Pressprich

Right. That makes sense. And it seems to be that maybe the simplest way would be to just restructure the existing covert and have some discussions with the holders. Has that taken place? Is there any element of that in your equation?

George Economou

Yes, we have been discussing with the current shareholders for a long time. I mean, we are in good terms, obviously bonds did trade. There are some people that have held on their bonds and we are in discussions with them, we just to make the best for the company in terms of what it will cost us. But we are in touch and we are talking to people that have not traded their bonds to others, yes.

Oliver Corlett - R. W. Pressprich

Okay. And so you could do a portion of the 700 possibly with a restructuring of some kind or the whole thing if it turned out that way?

George Economou

Yes, we can, definitely and its intention on the bondholders to do. We just want to see what it would cost us. To us it's not a matter of being able to do it, it’s the matter of what's the cheapest way of doing it.

Oliver Corlett - R. W. Pressprich

Right, right. Got you. And then you mentioned a little bit needing some covenant waivers on some of the bank debts. What waivers are there and that is still necessary and what kind of amount of debt is involved?

George Economou

Yeah actually the amount of debt that’s affected is very small, I mean the calculation is 8% of the total shipping that that’s pretty much affected. When I say affected that affected that has only technical minor technical bridges.

Oliver Corlett - R. W. Pressprich

Okay. All right. That’s – that all I have. Thank you very much.

George Economou

Thank you.

Operator

Thank you. We have no further questions at this time. Please continue.

George Economou

Thank you for listening in everyone. We wish you a good summer. We’ll talk next quarter. Thank you.

Operator

Thank you. That does conclude your conference for today. Thank you for participating. You may all disconnect.

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DryShips (NASDAQ:DRYS): Q2 EPS of -$0.01 beats by $0.05. Revenue of $527.6M (+57.0% Y/Y) beats by $45.53M. Shares +1.5%.