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Objective of post:

I wrote an article last week on how the balance sheet of DryShips (NASDAQ:DRYS) would look and its valuation after the sale of shares in Ocean Rig to Norwegian interests. When I wrote it I had to estimate certain details. I now no longer have to do this, so I am updating the article with accurate values.

Balance sheet

Current assets DRYS Consolidated Ocean Rig UDW DRYS unconsolidated
Cash 367 124 243
Restricted cash 497 307 190
Trade receivables 42 0 42
Other 70 79 -9
Proceeds from Ocean Rig offering (4) 501 0
Fixed assets
Advances for vessels and rigs 1754 1733 20
Vessels (3) 1953 0 1405
Rigs 1263 1263
Stake in Ocean Rig UDW (4) 1933
Other non current assets
Other non current assets 91 91 0
Value of time charters (6) 0 0 466
Current liabilities
Other current liabilities 198 143 55
Non current liabilities and debt
Debt 2629 1111 1518
Other non current liabilities 218 126 92
ATM Proceeds, Dec 3 (9) 345 345
Equity/real book value 3,337 2,718 2,970
Current market cap. (10) 2336 2335.77 2336
Price to book 0.70 0.86
Price to book value at market prices 0.79

(The numbering is the same as in the last article, but I have removed the numbers previously needed for estimation.)

3. I am not using the book value here, but have instead calculated the market value of DRYS bulkers using current transaction values. This entails some estimation as no vessels are identical. It also leads to a significant shortfall relative to the book value. This is to be expected.

4. I expect the shares to be sold at the middle of the pricing range, $18.75 per share. This will lead to 501 MUSD being raised. It is not DRYS that is selling part of its shares in Ocean Rig, as I assumed, but rather Ocean Rig that is selling new shares; this amount goes to Ocean Rig. Ocean Rig had 103.1 M shares prior to the IPO and will after the offering have 129.8 M shares. DRYS' share of Ocean Rig will therefore be valued at 18.75*103.1=1933 MUSD.

6. This is the market value of existing long-term charter agreements. I come to this number by taking the difference between DRYS rates and the current long-term market rates and discounting with 10 percent. This almost makes up for the shortfall in 3.

9.These are the proceeds of the latest offering done in December.

10. This is the market cap using 370 M shares instead of 333 M. This is the share count plus the convertible preferred stock.

Price to book when using market values

This leads to a price to real book value of 0.79.

Undervaluation of ships

This means that DRYS is undervalued relative to the real value of its balance sheet by 2970 - 2336 = 634. As the only asset that is hard to value is the ships themselves, that means they are currently valued at 1405 - 634 = 771. That is an under valuation of 82 percent.

To close this gap DRYS needs to move to $8.05 per share.

Variance to last post

This is a lower target than in the previous post, and is mainly driven by the 500 MUSD going into Ocean Rig (and not DRYS) and about 100 additional net assets going into Ocean Rig from the consolidated DRYS balance sheet.

Potential dilution from convertible notes

The potential dilution from the convertible senior notes doesn't have a large effect on the real book value per share, as it takes place in 2014 at a price of $7.19 -- close to the current real book value -- meaning that debt is converted to equity.

Timing

I expect the book to close tonight European time, after which the shares of Ocean Rig will trade on the Oslo OTC market, and above calculation can then be refreshed on an ongoing basis. I suspect the gap can't last for long.

It is also very likely that Ocean Rig itself will appreciate in the coming period, as it does seem to trade at a significant discount to its peers in the industry ... though I haven't made much investigation into this.

Finally, pricing companies at book value is rather conservative, as it ignores all value of a going concern. I don't attach a high value to that for the bulker business, but there is some.

Disclosure: I am long DRYS.

Source: Dryships' Valuation After Ocean Rig IPO