Dryships Is Not Dead Just Yet

Nov. 9.11 | About: DryShips Inc. (DRYS)

Yesterday, Dryships (NASDAQ:DRYS) released earnings that beat estimates by one cent. Investors reacted by pushing the stock up as much as 8.9%. At the current time, DRYS is earning very low profits due to the interest rate swap losses that have been a continual vacuum. "Earnings" were 16 cents per share, but GAAP swap losses bring real earnings to only 7 cents for the quarter. The swap losses are not expected to go away anytime soon. And the unknown story behind the headlines is that DRYS GAAP earnings have fallen 63% year over year, not exactly a sound performance.

The price-earnings ratio stands at roughly 10 using the latest earnings report as the basis. Historically, this is extremely high for Dryships. Normally investors have not been willing to pay more than a P/E of 5-6.

The earnings from Ocean Rig have not been as great as many have forecasted either. Ocean Rig's profit came in at 37 cents a share, compared with 49 cents a year ago. At the same time, drybulk earnings have been masked due to the acquisition of OceanFreight. In reality, drybulk shipping rates and ship values have been falling steadily year over year (see the chart of the BDI shipping rates below).

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George Economou, CEO, does a superb job of presenting Dryships as a profitable company, but beneath the surface, it is a company that earned only 7 cents in the quarter, and through the nine months of 2011, has lost 19 cents per share and been forced to increase debt and dilute shares like I have never seen before. The weighted average number of shares is now standing at 348 million, an increase to dilution by 36% year over year. Debt is now at nearly $5 billion, an increase of approximately 60% year over year. Equity theoretically stands at roughly $11 per share, but after year-end impairments will likely end at somewhere around $8-$9 per share.

The truth is current liabilities stand at nearly $700 million, and Dryships' cash position is totally dependent on securing more financing. Earning $25 million per quarter is not helping the cash position nearly enough. If Economou ever loses his ability to sweet talk bankers into securing more debt, the company may have to end operations, but that seems unlikely.

CONCLUSION:

The earnings beat was somewhat fake, and it was likely only a byproduct of the Ocean Freight acquisition bringing operating profits over to the parent company. It is my opinion that the acquisition took place at the 300% premium to market value partly just to mask the parent company profits Dryships reports. Love him or hate him, it is Economou's ability to get financing in place that is keeping the company afloat. And if he continues to do it forever, Dryships will survive. The question is, will he do that? And even then, will the dilution to shareholder value ever stop?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.