DryShips (NASDAQ:DRYS) reported earnings on February 8th, with several headwinds: $243 million in cash on the balance sheet, $95 million in ship-based assets, and a relatively healthy Baltic Dry Index. The money alone totals $6.70 per share. CEO George Economou laid out the company's game plan:
We are pleased to have put 2016 behind us. Having now restored our balance sheet and successfully raised over $300 million in new equity in the last 12 months, DryShips is in a unique position to opportunistically acquire vessels at prices close to historic lows.
The result was a massive 15% drop in the market cap of the company. But why? Nothing in the report should have come as a surprise, even the $65 impairment. It is widely known that DryShips is struggling. So what exactly was the market expecting in this report? DRYS investors are overoptimistic about this company, and the reaction to Q4 shows that.
Nothing has changed at DryShips
A few weeks ago, I initiated coverage on DryShips with concerns about the company's related party transactions between CEO Economou and his other companies.
Now, DryShips has a large mountain of cash, which, instead of paying down the debt, will be used to buy assets from another Economou-owned company. The CEO plans to use virtually ALL the company's cash to buy four large gas carrier ships. From this report:
Under the new VLGC agreement, DryShips would buy a series of Panamax LPG carriers from the Economou-owned management firm TMS Cardiff Gas, and TMS would operate the ships under long-term charter to Gunvor and Shell. Hyundai Heavy Industries is scheduled to deliver all four vessels by the end of the year.
When the cash runs out, the company will be right where is started, and there may be another equity raise or stock split. EBITDA doesn't even cover interest expenses. Economou and DryShips investors are betting on a massive shipping industry recovery, and this is an "all or nothing" bet. The problem is that the CEO has rigged the game in his favor.
If you are bullish on the Baltic Dry Index, there are better ways to bet on a shipping recovery than DryShips. The problems go much deeper than just weakness in the industry. The company has a management team that shows no signs of caring about investor value.
George Economou may continue self-dealing, to the detriment of shareholders, and this $240 million pile of cash will quickly evaporate into the pockets of an Economou-owned firm. When this happens, DryShips will be exactly where it started: broke. The company's cash flow situation is worsening, and it may need to raise capital through dilutive equity financing.
To make matters worse, DryShips' market cap is falling towards the $30 million Nasdaq requirement before delisting.
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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