Something unusual is going on with the trading of DryShips (NASDAQ:DRYS) and I don't just mean it's trading down. Recall, DRYS owns 78.3 million shares of public oil-drilling company Ocean Rig UDW (NASDAQ:ORIG) and, as such, a large portion of DRYS' market cap has consisted of its ORIG stake.
Here's the thing: DRYS is down for two reasons: First, the value of its ORIG stake crashing which has lopped off about $700 million in value to DRYS over the last three months alone. Second, the dry shipping industry itself has been collapsing and dry shipping stocks themselves have been in free fall. But each part isn't adding up.
Now let's take a look at Sept. 4 as a starting point since that was just about when ORIG's crash began. On that date, ORIG closed at $18.31 per share making DRYS's stake worth over $1.4 billion. DRYS at the same time had a market cap of about $1.3 billion putting the value of the shipping business at around negative $100 million.
Fast-forward to the time of this writing, and the ORIG stake is worth around $700 million, DRYS's market cap is around $520 million (after 250 million new dilutive shares from an equity financing), but DRYS has $350 million in improvement on the balance sheet. So if you add back the $350 plus the $700 million ORIG stake, that puts the shipping business trading at roughly a negative $530 million value.
I'm no fan of the dry shipping industry of late, but that low of a negative valuation seems a little too severe. I've long criticized DRYS for not having Capesize spot exposure to benefit from the iron ore shipments to China. Now, that's a good thing as the iron ore shipment markt failed to live up to the hype and the spot-rate Capesize market has been pulverized.
DRYS' Capesize ships are locked in the safety of fixed-rate contracts while its spot-rate exposed Panamax ships are holding up reasonably well considering the carnage. These vessels tend to mostly transport grains and coal and aren't as sensitive to the wild swings of the single country of China and its iron ore appetite. Due to just how the cards unfolded in the spot market, DRYS is actually better positioned than most of its peers.
To sum it all up, I have to figure at negative $530 million value for DRYS' shipping business has to be as close to a fundamental bottom short term as you can get. In fact, I'd say DRYS stock is pricing in a further drop in ORIG shares before they even happen. At these prices you could get a lot of leverage buying DRYS ahead of an ORIG rebound. If you believe oil will rebound, and take ORIG will it back to even half its losses since early September, it would add $350 million in value back to DRYS. $350 million on top of a $520 million market cap would be a 67% return for DRYS as opposed to just a 50% return for owning pure ORIG shares.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.