Tanker and shipping company stocks such as Frontline Ltd. (NYSE:FRO), Teekay Tankers Ltd. (TNK), Overseas Shipholding Group, Inc. (OSG), Paragon Shipping Inc. (PRGN), and DryShips, Inc. (DRYS) were off today. This appeared to be in response to Moody's downgrading Ship Finance International (SFL) from B1 to Ba3.
We follow OSG and DRYS. A quick review of our reports, published in July, shows a stark difference between DRYS and OSG when viewed through our risk-based research. The following are the summaries from each of the reports and the full reports are attached.
From the OSG report published 6-Jul-11:
We are changing our rating on OSG from Medium Risk - Negative Bias to Medium Risk - Positive Bias due to an aging of risk factors related to its Jun-09 auditor change and its past acquisition activity. Acquisition activity and one-time items support our opinion of a Medium Risk - Positive Bias rating on OSG. OSG reported 2 acquisitions for $547 million with the most recent acquisition having occurred in Apr-07. The company has recorded $179 million in write-downs to its vessels since 2008. The company also recorded a $63 million goodwill impairment charge in 2008.
From the DRYS report published 27-Jul-11:
We are changing our rating from Medium Risk - Negative Bias to High Risk due to ongoing and new material weaknesses in internal controls and additional acquisition activity. One-time items; multiple changes in auditor; material weaknesses in internal controls; executive suite turnover; the chairman and CEO positions being held by one person; related party transactions; and acquisition activity support our opinion of a High Risk rating for DRYS. Over the last 5 years, DRYS recorded $700 million of goodwill impairment charges related to the acquisition of Ocean Rig and $419 million in losses on contract termination deposits and forfeiture of vessel deposits. In Aug-07, DRYS engaged Deloitte, Hadjipavlou, Sofianos & Cambanis S.A. (Deloitte) to replace Ernst & Young (Hellas) as its auditor. In Apr-10, DRYS dismissed Deloitte as its auditor and engaged Ernst & Young (Hellas). Deloitte’s reports did not contain any adverse opinion nor were there any disagreement. However, the reports for 2008 and 2009 included explanatory paragraphs relating to uncertainty as to the company's ability to continue as a going concern. In Apr-11, DRYS reported receiving additional financing commitments from financial institutions to cover obligations falling due within 2011 and the majority owner committed to providing cash to meet the company’s liquidity needs during 2011. As such, DRYS stated, “the conditions that raised substantial doubt about whether the company will continue as going concern no longer exist.” In the 2010 20-F filed in Apr-11, DRYS reported material weaknesses in internal controls as of 31-Dec-10 related to the amount of interest capitalized as a component of advances for vessels under construction and other comprehensive income reclassified to earnings as a component of interest and finance costs. There have been 4 CFOs (including an interim CFO). Chairman & CEO George Economou was appointed twice as interim CFO. Economou has been Chairman & CEO since the company’s inception in 2004. DRYS has extensive related party transaction with entities controlled by Chairman & CEO Economou and some of his family members. DRYS reported 2 business acquisitions and the purchase of a minority interest for $2.1 billion, of which $700 million was allocated to goodwill. On 26-Jul-11, DRYS announced a definitive agreement to acquire OceanFreight (OCNFD $16.97) for a total enterprise value of approximately $239 million.