The downturn in the dry bulk shipping sector, caused primarily by the slowdown in coal and iron ore shipments to China and an oversupply in ships has been particularly crushing to DryShips (NASDAQ:DRYS).
In an attempt to save the company, George Economou, the CEO and founder of the company, began liquidating assets. Over the past year, the company has:
- Sold its Tanker Fleet for $245M
- Sold the majority of its Capesize and Panamax Fleet
- Sold its final three Capesize ships
- Sold its stake in Ocean Rig (NASDAQ:ORIG)
- Conducted a reverse stock split
- Suspended payments on debt
The resulting company has 23 Panamax and ownership of Nautilus Offshore Services with 6 offshore supply vessels. Mr. Economou has stated he intends to transfer DRYS, but has been vague about what his vision for the company may be. The first four options are attempts to liquidate assets to keep the lights on. Conducting the reverse stock split helps to maintain compliance with Wall Street. The last one can be an early sign of impending bankruptcy. In the latest Quarterly earnings, the company stated:
Given the prolonged market downturn in the drybulk segment and the continued depressed outlook on freight rates, the Company is presently engaged in discussions with its lenders for the restructuring of its debt facilities.
Three of these bank facilities have matured and the Company has not made the final balloon installment. For the remaining bank facilities, the Company has elected to suspend principal repayments to preserve cash liquidity.
The balance sheet isn't that strong compared to its peers. At the end of the last quarter, the company had just over $15M in Cash and Equivalents. The drop in reported cash has a lot to do with the unbundling of the ORIG and DRYS books.
The recent sale of 3 Capesize ships has helped to reduce the number of ships the company is responsible for, but the company announced the cash received would be used to help pay down debt and not to stock the coffers. It would average out to roughly $750K per ship.
Revenue has also been falling, partially due to the liquidation of its tanker fleet and the majority of its dry bulk fleet, but also from the steep drop in rates. The last quarter, the company reported Voyage Revenues of $23.8M, having steadily fallen over the past year.
And while the revenue has been falling, so has expenses. The company has been able to reduce Voyage Expenses from roughly $30M per quarter during 2014, down to just over $4M for the 4th Quarter. Again, the drop in expenses is partly due to the reduction in the fleet.
The company also appears to be seeing a very low charter rate also. From the last quarter, the company announced that it had 16 of its 23 ships operating in the spot market. Assuming none of those have been placed in a long-term charter, and the sale of the 3 Capesize, the company still has 16 of 20 ships, or 80% of its fleet in the spot market.
(Source: company earnings)
With an average of just under $200K in Voyage Expenses during the last quarter, the entire fleet is significantly underutilized. In the earnings release, the discrepancy between earnings and operating expenses is glaringly obvious.
(Source: company earnings)
The discrepancy between Expenses and Revenue from the 4th Quarter resulted in a -$15.7M difference.
Again, the company has sold assets, and used much of the proceeds to pay down debt leaving $213.7M debt. But with $15M in cash at the end of the quarter, the short term looks bleak for the company. However, those that know Mr. Economou know he is an astute player in the industry and not likely to give up easily. Some possible options investors may still see are:
- The sale of the rest of the dry bulk fleet. Mr. Economou had waffled on purchasing the rest of the Capesize fleet, before finally accepting what needed to be done. It is likely he may need to purchase additional ships to keep the company afloat.
- A further increase in the revolver. The company has a current revolving facility with the CEO, which was recently increased to $70M and not due until October 2019. With public financing tightening, this may be an option. It would also signal confidence in the company by its owner who is willing to put up his own money.
- Additional dilution. This may be difficult without a recovery in iron ore and coal on the horizon.
- Bankruptcy. If Mr. Economou isn't willing to front his own money, or buy out the company and take it private, this may be the only option.
The future of DRYS looks bleak right now, especially in the current market. The lack of cash coupled with falling revenues that don't cover the expenses paints a bad picture. On the flip side, there are followers of Mr. Economou who believe he will come to the rescue and save the company. It may just take him investing significant amounts of his own money to keep the company from going under.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have 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.