The drybulk shipping price index (BDI), shown below, is not showing any signs of recovery any time soon. The issue is there are simply too many ships floating in the water ready to be used and demand is not nearly able to keep up. Nonetheless, Dryships (DRYS) and TBS International (TBSI) have performed well of late.
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Fortunately for Dryships, revenues are not entirely based on the drybulk industry. In fact, nearly half of all revenues are earned from the oil drilling segment Ocean Rig, which is Dryships' subsidiary.
Voyage Revenue has fallen 14% over the past year and oil driller revenues have risen 36%. This is a trend that will likely continue because the shipping rates shown above are likely to stay subdued, due to excessive ship deliveries industry wide for at least the rest of the year, and oil drilling revenues will rise as Dryships has more and more drillships hitting the water.
For example, just in the last few days, George Economou, chief executive of Dryships, exercised an option to purchase a seventh drill ship for $608 million. This follows the April 29th exercise of two options to construct drillships, and the recent announcements of increased current backlog on ships already in possession.
In the most recent quarter, Dryships earned four cents in drybulk EPS and seven cents oil drilling EPS. Over the past week or so, DRYS has seen its stock rise significantly. Optimism in the stock seems to be based in comfort with Economou's oil drilling prospects rather than drybulk prospects, although there has been some bright spots in drybulk during the last week as well.
For example, TBS International has risen almost 70% from its low reached a few weeks ago, apparently on word that there may be some kind of insider buyout in the works. Drybulk industry followers probably see this as the first signs of a true bottom in the sector. TBSI has nothing but drybulk exposure, so if a buyout occurs, it would be a very strong signal that management feels drybulk has bottomed or nearly bottomed.
The chart below shows Dryships and TBSI International stock performance versus the S&P500.
In conclusion, both stocks offer significantly higher risk than that faced by the market. Drybulk stocks in particular seem to have taken a larger than average beating over the past three months, not only because they are riskier than average, but also because they usually have close ties to Greece, which has been in the news as the most troubled economy in the world.
In the case of TBSI, this could have a large impact because of the possible buyout in the works. If the Greek economy collapsed, then there is a greater chance that Greek shipowners would be less likely to buy up the assets in the drybulk industry for their privately held interests, causing a domino effect into their world-wide listed publicly traded interests. So, it remains very unclear whether DRYS or TBSI have found their footing, but there are a few shimmers of logic that help justify that they have.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
