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Summary

  • DryShips is reporting solid growth in the revenue and is cutting its losses at the same time.
  • Improving spot fleet capacity days and new contracts should help DryShips improve its performance.
  • The end market prospects of the shipping market look bright, and should enable DryShips to deliver better results.
  • DryShips' bottom line is expected to improve at an impressive rate in the next five years as compared to the last five.

Shipping company DryShips (NASDAQ:DRYS) is making a comeback after a weak start to the year. The company's shares, although down 26% so far in 2014, have started crawling back after its latest second-quarter results.

A look at the recent results will definitely suggest that DryShips is moving in the right direction. It reported revenue of $527.7 million, an increase of 57% as compared to last year. It was also better than the consensus estimate of $434 million by a huge margin. Its net loss narrowed to $5.6 million from the year-ago period's loss of $18.2 million, which was again better than analysts' expectations. However, its operating cost increased 33.6% year over year to $396.8 million, which was on account of higher drilling rig operating cost.

So, DryShips performed well during the second quarter, delivering results above expectations. The company's three segments, Drybulk Carrier, Oil Tanker, and Offshore Drilling, reported strong numbers. However, at the same time, the bulk carrier has some headwinds to contend with in the form of higher debt management risk and weak operating cash flow. Now, investors need to watch DryShips' prospects and the global shipping market carefully, and see if the company can sustain its newly-found momentum going forward.

On track to improve

As seen from the numbers, the company saw significant growth year-over-year. This momentum is expected to continue going forward as well, driven by multi-year contracts in various segments. For instance, DryShips subsidiary Ocean Rig inked a six year contract with Total (NYSE:TOT) for offshore drilling operations in Angola. It also signed a contract for one of its semi-submersibles, the Eirik Raude, for drilling offshore the Falkland Islands.

Considering that DryShips has significant leverage to the dry bulk and tanker spot markets, the company's performance should improve. According to statistics revealed by the company, it has 6,651 spot fleet capacity days in 2014, which will increase to 15,821 days in 2015. This is good news, as the company expects its EBITDA to improve going forward on account of higher spot days. DryShips is also looking at possible options to refinance its convertible notes, which will strengthen its financial position.

Improving end-market prospects

The dry bulk industry is doing well, as a whole, but Panamax turned in a poor performance last time. There are mainly two reasons behind this decline. First, the absence of green and coal cargos in the market, while the second is the unremarkable iron ore volume coming out of Brazil. But, moving forward, management expects this situation to improve as Brazilian iron ore exports become more active on the spot market.

As reported by IHS Maritime:

Australia's Bureau of Resources and Energy Economics (BREE) now predicts Australian and Brazilian iron ore exports will now rise this year by a total of 132M tonnes or 15% this year.

While the forecast has been lowered slightly, it is very encouraging that Brazilian iron ore exports are still expected to total 361M tonnes this year. A large surge in Brazilian iron ore fixtures is likely to occur during 2H14 which would lend great support to Capesize rates.

China on the other hand reported splendid numbers with an increase of 90% in its capsize earnings. According to management:

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.

Hence, an uptick in iron ore shipping will act as a tailwind for DryShips going forward. Meanwhile, in the oil tanker market, DryShips is seeing good momentum with growth in large tankers such as Suezmax and Aframax. This is mainly driven by the improvement in the demand and supply imbalance. Management sees various factors that indicate that the supply-demand imbalance will improve further, and the freight environment will become healthier.

Already, there are positive indications in the shipping market. The Baltic Dry Index is improving, while shipping prices are stable. As reported by Benzinga:

The Baltic Dry Index provides an assessment of the price of moving the major raw materials by sea. The index is issued daily by the London-based Baltic Exchange and is not limited to Baltic Sea nations.

The index on Tuesday rose 5.6 percent to 836 points based on Baltic Exchange data. Tuesday's gain marks the index's largest single-day advance since early March.

Panamaxes rose 2.7 percent to $5,176 daily, Supermaxes rose 1.3 percent to $8,673 daily and Handysizes rose one percent to $5,501 daily.

In addition, according to Market Realist:

Seasonally proven stronger tonnage demand is expected in the upcoming months. Also, the market is experiencing an increasing number of inspections compared to June, 2014, which thereby suggests that the recent price correction may lead to a spark in buying interest amid a more positive outlook.

All in all, the end-market prospects seem bright for the shipping industry. As such, DryShips will benefit from a rise in crude oil demand, since this will increase fleet utilization and ultimately add to its profitability.

Conclusion

Hence, DryShips looks well-positioned going forward. In addition, it has a low forward P/E of only 9, which makes the stock too cheap to ignore. Also, over the next five years, DryShips' bottom line is expected to grow at a compound annual rate of 10%, way ahead of the annual erosion of almost 54% seen during the last five years. Moreover, DryShips' bottom line growth is expected to outperform the industry average going forward, making it an enticing buy on the dip opportunity.

Source: DryShips Looks Set To Improve After An Impressive Second Quarter