DryShips: Restructured But Still Not Attractive

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About: DryShips Inc. (DRYS)
by: Orthodox Investor
Summary

Restructuring moves have almost entirely wiped out the previous shareholders.

New entity benefits the new shareholders and creditors.

Foray into the international gas transportation is a good decision but the rate of return looks weak.

DryShips (NASDAQ:DRYS) has been anything but boring in the last few months. The stock price has been jumping up and down due to a number of reasons. It will still remain an interesting stock but I believe the overall trend will be negative. I am still not convinced and will not buy for at least until the fruits of restructuring start to materialize. DryShips was on the verge of bankruptcy, and although it did not file for it, it is fair to say that the event virtually happened. DryShips' previous shareholders almost got wiped out due to the erosion in stock price and reverse stock splits, which I have explained here in detail.

What we are seeing now is effectively a new company with a new ownership. The management has skipped the bankruptcy proceedings and instead opted for other ways to start afresh. Normally, if the restructuring efforts are successful, stock price will rise. However, in DryShips' case, the price has been falling consistently and it is below $3 again, as I predicted in my article linked above. I do not usually advocate shorting a stock as I am a value investor and feel more comfortable holding a stock with a time horizon of at least six months. As a result, I will not advise shorting DryShips.

If we look at the company filings from November 21 to January 9, we will see a lot happening. Settling bank loans through a related party loan from Sifnos, another George Economou owned enterprise. Issuance of new shares and the option to further issue $200 million worth of shares in the next 24 months. After the previous reverse splits, shares outstanding had come down to just over 1 million. This number has again gone above 33 million due to the equity issues. This amounts to a further dilution of 97% for those shareholders who were left after the reverse stock splits. Keep in mind that these shareholders had already lost most of their investment due to the consistently falling stock price and reverse stock splits. In this restructured entity, new shareholders and George Economou are the real winners. By new shareholders I mean the entities that have received new shares in return for their financing or those who have the option for further award of stock.

George Economou will benefit through Sifnos as a creditor of this new entity. The credit issued to DryShips has a high interest rate of around 7% (based on the lowest LIBOR rates) and it also gives the right to Sifnos to participate in the value appreciation of collateral. Sifnos will be able to participate in the value appreciation up to 30%. The positives from this deal are that the company has around $77million in cash and about $79 million in undrawn credit facility. This gives it ample liquidity. Also, the possibility of default has been eliminated and the current debt ($137.5 million) has relaxed terms and there are no financial covenants. This certainly enhances the debt profile of the company.

On the business front, the company is going in a new direction. It is logical that the management would look to new sources of income as drybulk carrier segment has been under pressure. DryShips is going to acquire four Very Large Gas Carriers for a total of $334 million. First of these carriers will be delivered in June and will be contracted to a major oil company for the next five years, with an option of extension for another 3 years. The global gas transportation business is certainly looking attractive with US, Qatar, Australia and other Middle Eastern countries looking to export LPG, LNG and NGLs. South Korea and Japan remain the major buyers in Asia, but the demand is likely to go up in the future. The order backlog, however, looks a little underwhelming. The management has stressed that they are getting above market rates, but the rate of return is not very attractive for me. Total order backlog for four carriers will be $390 million, including the expansion options. The payback period will be quite large although the charters will allow the company to have steady revenues and cash flows.

There is still a lot of uncertainty about the company and the previous track record of the management is a hindrance for investors as well. How the shareholders were burnt during the last six months, will remain a deterrent for quite some time when it comes to attracting new investors. Fundamentally, the company still does not have to offer anything. Debt profile has improved but the overall levels remain the same. Revenues and earnings are still uncertain. It is effectively a new business which has not started operations yet. The drybulk segment is weak and the gas transportation business will not start to show any gains until at least the third quarter of the year. Taking all these factors into consideration, it is not difficult to understand why investors are not showing any faith in the management.

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.

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