It's done. At least for now.
Picture: Panamax bulk carrier "Rapallo" - Picture: shipspotting.com
In after hours, the news eagerly awaited by momentum traders and DryShips investors finally hit the wires.
As previously disclosed, DryShips Inc. (the "Company") entered into a common stock purchase agreement (the "Purchase Agreement") with Kalani Investments Limited (the "Investor"), dated as of December 23, 2016, relating to the public offering by the Company of (NYSE:I) up to $200.0 million of the Company's shares of common stock, par value $0.01 per share, to the Investor over a 24 month period (the "Shares") and (ii) up to an aggregate of $1.5 million of shares of the Company's common stock, par value $0.01 per share, issuable to the Investor as a commitment fee in consideration for entering into the Purchase Agreement. Capitalized terms used herein and not otherwise defined have the meanings given in the Purchase Agreement, which was included as Exhibit 1.1 to the Report on Form 6-K filed by the Company with the Securities and Exchange Commission (the "SEC") on December 27, 2016. The information in this Report on Form 6-K reflects adjustments for the previously announced 1-for-8 reverse stock split of the Company's common shares that became effective as of the opening of trading on January 23, 2017.
As mutually agreed to by the Company and the Investor, the Company sold 22,539,773 Shares to the Investor, pursuant to a Fixed Request Notice with a Fixed Amount Requested of $69.5 million following a Pricing Period from January 23, 2017 to January 30, 2017, which will finally settle on January 31, 2017. The Fixed Request Amount was $69.5 million, subject to a price per share of $3.08 mutually agreed to by the parties, resulting in estimated net proceeds of $68.8 million, after deducting the Company's estimated aggregate offering expenses.
Between the date of the Purchase Agreement, December 23, 2016, and January 30, 2017, the Company has sold an aggregate 31,769,940 Shares to the Investor at an average price of approximately $6.30 per share. The aggregate gross purchase price for these Shares was $200.0 million. As a result, as of January 31, 2017, the Company will have completed the sale to the Investor of the full Aggregate Limit (as defined in the Purchase Agreement) provided for under the Purchase Agreement, which will automatically terminate in accordance with its terms. The Company's estimated aggregate net proceeds from the sale of these Shares is approximately $198.0 million, after deducting estimated aggregate offering expenses. Following the settlement for all of such Shares sold as of the date hereof, the Company will have a total of 36,253,870 shares of common stock outstanding. As of the date hereof, up to $0 million of the Shares is remaining that the Company may sell pursuant to the Purchase Agreement.
With this latest equity offering now successfully closed, DryShips has managed to raise gross proceeds of $300 mln within just ten weeks.
As a consequence, the company's balance sheet has substantially strengthened, moving from a material net debt to a net cash position of an estimated $80-100 mln as of this writing.
So what's the stock worth now based on the company's net assets?
Here's my rough assessment:
- Cash: $250 mln
- Drybulk and offshore service fleet: $100 mln
- Advance payment made towards the first VLGC: $22 mln
- Long-term debt: $160 mln
- Number of shares outstanding: 36.25 mln
In sum, DryShips current net assets roughly calculate to $212 mln ($250 mln cash + $100 mln fleet assets + $22 mln VLGC advance payment - $160 mln long-term debt) or $5.85 per share.
Moreover, my valuation of the drybulk and offshore service fleet might actually prove too low as I decided to cut the book value of these assets almost in half given the considerable age of the drybulk fleet and the sharp reversal in the Baltic Dry Bulk Index (BDI) as of late in addition to the fact, that half of the company's oil service fleet has been sitting idle for some time after sole customer Petrobras (NYSE:PBR) started to terminate a couple of contracts over the past year.
Given the recent events around the company, I do not expect the shares to recover to the $5.85 level all of a sudden as Mr. Market will most likely have some understandable reservations to concede DryShips a valuation based on its net assets without discounting the very substantial risk of further dilution and ongoing self-dealings orchestrated by the company's colorful CEO and Chairman, Greek shipping magnate George Economou.
In fact, ongoing strong trading volume might very well entail a third financing round with Kalani that would most likely put renewed pressure on the stock price and in the end lead to DryShips acquiring more vessels at unfavorable price tags from Economou's closely held entities.
As a reminder:
The company is currently expected to use the entire offering proceeds to purchase a total of four Very Large Gas Carriers (VLGCs) for $334 mln from companies controlled by George Economou. Thanks to long-term time charters attached to the vessels, the new VLGC fleet, once fully delivered and placed into service, will contribute positive cash flows in the range of $10-15 mln annually.
Unfortunately, DryShips will continue to record sizeable losses from its remaining drybulk and oil service operations for the time being as these markets are expected to remain largely depressed.
With the company's recapitalization now hopefully complete, expect the stock price to rebound materially from all-time lows as already evidenced by the after hours action following the news. As of the time of this writing, the shares are still up by 30% after an initial 55% run.
With an estimated current net asset value of close to $6 per share, the momentum crowd will be provided a bold argument to aggressively chase the stock once again. Thus, expect the shares to remain volatile over the short- and medium term.
That said, don't expect the stock to deliver another 2,000% run this time like the one witnessed in November as the vastly increased share count will most likely prevent these kinds of excessive moves going forward.
Tomorrow will be an interesting session for sure. Expect record volume and some very violent swings. Should the stock preserve its regained after hours momentum during regular trading hours, expect the usual peer suspects like Euroseas (ESEA), Sino-Global Shipping America (SINO), Seanergy Maritime Holdings (SHIP), Navios Maritime Holdings (NM), Navios Maritime Partners (NMM), Diana Shipping (DSX), Diana Containerships (DCIX), Safe Bulkers (SB), etc. to be picked up as side plays once again.
Personally, I went long some DryShips shares at the end of the regular session as I, like many other traders, was already eagerly awaiting the news. Given the outsized after hours move, I decided to take some gains off the table but nevertheless kept a sizable amount of shares for tomorrow's session. I also took positions in some of the above mentioned side plays.
Lastly, I recommend investors looking for more color on the DryShips saga, taking a closer look at my recent series of articles.
Disclosure: I am/we are long DRYS, ESEA, SHIP, SINO, NMM.
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.
Additional disclosure: All of the above disclosed long positions are solely held in expectation of strong momentum developing during tomorrow's regular session and will most likely be disposed of at session end at the latest point.
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.