As astute Seeking Alpha writer Achilles Research points out, DryShips (NASDAQ:DRYS) the company and the stock owns such a large position in public company Ocean Rig UDW (NASDAQ:ORIG) that the value of this holding is higher than the market cap of DRYS stock itself! You are essentially getting the drybulk shipping and tanker business for free when you buy DRYS. Where I disagree is that perhaps that isn't necessarily a good thing. What good is owning a money-losing business that continually cannibalizes the larger Ocean Rig holding? The market is telling you DryShips has a negative value probably not by accident.
Let me cut right to the chase: the non-Ocean-Rig businesses that DryShips own are a cash and earnings drain on the company and have been for years. DryShips has continually diluted shareholders and sold shares of its Ocean Rig in order to keep this shipping business alive and continuing to burn money. With the latest earnings report, I see no signs of that ceasing.
The two largest portions of its shipping business are the Capesize drybulk fleet and the Panamax drybulk fleet. Despite the severely depressed daily spot rates, CEO George Economou is very optimistic that they will stage their seasonal rally later this year and beyond. He believes increased demand for iron ore from China will lead the way along with decreased supply of new ships coming online. There is a lot of new iron ore supply coming from Brazil which should eat up supply and shoot up rates.
The problem for Economou and DryShips is iron ore is typically transported using Capesize ships and not Panamax ships, unless Capesize rates get excessively high than some of that demand tends to spill over to Panamax to pick up the slack. DryShips' Capesize fleet is all locked up in fixed rate charters, most of it for years to come, and at very significantly higher spot rates anyway. In other words, the demand for iron ore the company expects won't have much of an effect on DryShips.
It's very large Panamax ships on the other hand do for the vast majority operate based on daily spot rates. These are the ships that transport mostly grain. The problem has been droughts throughout South America that led to a terrible grain season and Panamax ship rates are doing terribly. While Capesize rates are within shooting distance compared to the year-ago period, Panamax rates have been depressed by as much as half what they were a year ago. This all leave DryShips in a bad position with not a lot of hope that I can see through the end of the year.
To recap, three problems facing DryShips are:
- Its shipping business continues to lose money.
- Expected increased demand for iron ore shipping, even if it comes, won't help DryShips much.
- It desperately needs Panamax rates to rise but glut of Panamax ships coupled with the shortage of grain shipping leaves little hope for this year.
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