DryShips And Diana Shipping Should Rise As Mr. Market Becomes Rational

Includes: DRYS, DSX
by: Alex Shadunsky

Dry bulk shippers have seen their stocks lose over 90% of their value over the past 4 years as a number of issues have hit the industry. Here are some examples of the carnage in the dry bulk industry. Industry behemoth DryShips (DRYS) is down 95% over the past 4 years, Excel Maritime (EXM) is down 93%, and Diana Shipping (DSX) looks like a top performer here, down a relatively benign 67% over the time period. Why the sell off? Well, first the economy came tumbling down and trade contracted all over the world. Secondly, after charter rates rose to all-time highs in 2007 and 2008 due to a lack of ships and excess demand, orders for new ships obviously picked up. Then as the new fleet began to be delivered, charter rates started to come down and now they are at 4 year lows as the ships ordered continue to come online. A good chart of the change in charter rates comes from DryShips and is located here.

So that's the story and the industry continues to work through ultra-low charter rates and the last year of a huge number of ships coming online. The lack of velocity in the recovery of global macroeconomic conditions hasn't helped either. However, this has created great opportunities in the sector because as the Mr. Market tends to go from very happy moods to very pessimistic moods very quickly. After sending dry bulk stocks to extreme valuations in 2007 and 2008 and being very optimistic about their futures, he is now very pessimistic about the stocks and is selling ownership stakes in the companies for less than it would take to start from scratch with the same fleet and contracts attached. For example, DryShips is trading for a P/B ratio of just 0.45. Of course, some of the fleet values attached on the DryShips are probably overstated at current rates, the discount here looks very attractive. Also note that an investment in DryShips comes with some downside protection as the company owns a majority stake in Ocean Rig UDW, an offshore drilling contractor providing oilfield services for offshore oil and gas exploration, development and production drilling. Ocean Rig owns and operates 9 offshore ultra deepwater drilling units, comprising of 2 ultra deepwater semisubmersible drilling rigs and 7 ultra deepwater drillships, 3 of which remain to be delivered to the company during 2013.

Diana Shipping is the other dry bulk stock worth looking at. The company is known for contracting its fleet out at long term charters which provides more visibility going forward. When charter rates are increasing at very rapid rates, this kind of caps the upside for investors. However, when rates are falling or are at very low levels like now, this provides downside protection for the company and allows it to generate revenues at rates not available at current market rates. The company is not as big as DryShips but still has 26 dry bulk carriers plus one on delivery. Notably, because of its conservatism, it has also a very solid balance sheet and a net cash position, very rare in the dry bulk industry especially in these times. This has allowed it to put it cash to use at very favorable prices. And the company just did that. On Friday, March 30, it announced that it agreed to purchase a 2005 built Panamax dry bulk carrier of 76,225 dwt, for a price of $20.65 million. Diana Shipping also trades at a deep discount to its book value at a ratio of 0.45.

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

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