Edited By Fanny Kelesidou
DryShips (DRYS) is a global provider of marine transportation services for dry bulk and petroleum cargoes. DryShips also engages in offshore drilling services through Ocean Rig (ORIG), its majority owned subsidiary. The company was formed in 2004. It is based in Athens and incorporated in the Marshall Islands. In February 2005, DryShips was listed on the Nasdaq Exchange. Until the sub-prime crises, the company rewarded its shareholders with significant gains. However, in the past few years, investors seem to be concerned about the company's capability to address its debt pile. At the moment, DryShips's total debt-to-equity ratio stands at 1.03, which is very close to the industry average. One might think that this level of debt could hamper the company's future growth expectations. Nevertheless, as Ernie Banks once said:
I like my players to be married and in debt. That is the way you motivate them.
In the same vein, the real issue to be addressed is not how much DryShips owes. In fact, the real issue here is how this debt motivates DryShips. In other words, how does DryShips plan to pay the debt and achieve higher future growth rates?
Second Quarter of 2012 Financial and Operating Results
In the latest financial statement, the company reported a net loss of $18.2 million, or $0.05 basic and diluted loss per share. This net loss was primarily attributed to the lower earnings from the dry bulk carrier segment. For Q2 2012, net voyage revenues from the dry bulk segment were down by $29.1 million compared to the same period in 2011. However, the oil tanker segment revealed a stronger performance. As of June 30, 2012, total net revenues from tanker services amounted to $8.5 million. For the three-month period ended in June 30, 2011 revenues from the oil tanker segment were just $4.1 million. In addition, for Q2 2012, adjusted EBITDA was $144.6 million, demonstrating an increase of 6.2 percent from the same period in 2011.
For Q2 2012, operating data on the dry bulk carrier and oil tanker segment reveal mixed results. For the dry bulk segment, daily vessel operating expenses reduced to $5,313. Fleet utilization increased from 98.4 percent in Q1 2011 to 99.4 percent in Q2 2012. Total voyage days remained stable compared to the same period in 2011. However, for the second quarter of 2012, time charter equivalent decreased to $18,319.
Operating data on the tanker segment indicate higher figures. For Q2 2012, daily vessel operating expenses were unchanged compared to Q1 2011. Fleet utilization stands at 100 percent, and total voyage days doubled to 552 days compared to the same period in 2011. Time charter equivalent presented a 9 percent drop, which was significantly smaller than the respective drop in the dry bulk segment.
Overall, total assets amount to $8.8 billion, and total current and non-current liabilities amount to $4.7 billion. The company has a current ratio of 0.90, which is close to the industry's average of 1.10. Gross margin stands at 54.20 percent while the industry's same variable stands at 44.10. Furthermore, the company has contract coverage of 44% on the drybulk fleet for the rest of 2012.
Ocean Rig comes to DryShips's rescue
As I mentioned in a previous article, about 70 percent of Dryships' income derives from its drilling rigs. Considering the multiple challenges that the dry bulk shipping market faces, the drilling segment represents a more stable source of income. Notably, for the three-month period ended in June 30 2012, revenues from drilling contracts increased by $136.9 million. It is clear that, by counting on Ocean Rig's healthy performance, DryShips will weather the storm. A few months ago, Ocean Rig signed a three-year period contract with Total (TOT) E&P Angola. This contract includes an extension option of another two years. The total estimated backlog is approximately $652 million. In addition, Ocean Rig has recently signed letters of intent with three major oil companies. If these contracts materialize the existing backlog will double to $4.8 billion. Given the under capacity of the ultra deepwater sector, there is strong evidence that the company's backlog will increase in 2013. Overall, the cash flow generated from drilling operations provides DryShips with the adequate flexibility to face the current tough shipping environment.
The stock currently trades about $2.22. 52-week range is between $1.75 and $3.84. One-month stock returns equal 0.45 percent, while year-to-date stock returns amount to 11.0 percent. At the moment, the stock is trading at desirable valuations. Price-to-sales ratio is 0.76, and price-to-book value ratio is 0.23. At this level, the stock is considered to be significantly undervalued. Analysts suggest that the average target price for DRYS is $3.25. As I mentioned several times in the past, DryShips' 65 percent ownership in Ocean Rig translates into an asset valuation of $1.3 billion. At the moment, DryShips' market cap is less than $1 billion, indicating that the stock is priced below its subsidiary.
DryShips' future financial and operating results depend on the success of the company's current growth strategy. So far, the diversification of DryShips' investment portfolio towards the drilling segment is presented as lucrative. Ocean Rig's positive results helped DryShips to float even in the most turbulent waters. Moreover, analysts expect DryShips to proceed to a possible asset sales and restructuring of newbuildings. At the moment, DryShips holds $463.5 million of capex remaining on its dry bulk fleet. It is highly expected that two of the company's un-financed VLOC's will soon be subject to restructure or sale. These vessels account for $95 million in total. Furthermore, as stated here, the company plans to employ four Panamax vessels to travel through Arctic waters in 2014. It is worth mentioning that daily rates for an Arctic voyage can substantially boost earnings. In particular, Arctic voyages can be charged about four times higher than a voyage through the Suez route. While there are relatively safer investments such as Navios Maritime (NMM), Dryships is also a cheap one. Its debt is manageable. Overall, even though investor sentiment appears reluctant at the moment, I strongly believe that DryShips will turn out to be a rewarding investment.