The Bullish Case For DryShips

| About: DryShips Inc. (DRYS)


Everyone already knows the bad things about DryShips, but are they any positives?

George Economou has a well-defined plan to turn around DryShips through operating leverage.

His plan is risky, but it could possibly work.

If past performance is any indicator of future returns, DryShips (NASDAQ:DRYS) is a terrible stock. It has lost over 99% since inception, and its CEO engages in a series of questionable behaviors. However, there is no need to beat a dead horse on DryShips, and investors deserve a balanced view of the stock so if they want a position, they will have all the information needed to make this investment decision.

(DryShip's CEO)

As I mentioned earlier, there are smart, risk-mitigating investors who follow DryShips. Without a doubt, this is the minority, but they do exist. I believe these investors are primarily speculators who are looking to profit from a surprise increase in shipping rates that could boost DryShips overnight. In light of the stocks large short interest, a short-squeeze would be astronomically bullish, and the potential returns may make up for some of the risks in the stock.

DryShips is positioning itself for this sort of turnaround by buying up shipping assets at distressed rates despite its liquidity challenges. (To be honest, it is not entirely clear what George Economou's real motivation is here. The firms he buys from are often related parties, and so there is a conflict of interest.)

The company recently purchased two vessels for around $102 million: an Aframax tanker currently under construction in South Korea and Very Large Crude Carrier built in 2011 DryShips plans to receive both of these assets in the second quarter of 2017, and they will be used in the spot market.

George Economou, Chairman, and Chief Executive Officer states:

We are very excited to have re-entered the tanker market by acquiring a modern Aframax tanker of eco-design and one Very Large Crude Carrier at historically low prices. We continue to look at opportunities to diversify and grow our fleet with high-quality tonnage and significant operating leverage.

Operating Leverage

Operating leverage is the key to Economou's plan here. Instead of playing safe, cutting costs, and dragging out his cash position for as long as possible, he is taking a double-down strategy by increasing his topline revenue potential so that when shipping eventually recovers, operating income will boom. The ships are not profitable now, and they will not be until the variable (shipping rates) becomes more cost efficient.

Regarding cash, DryShips has largely addressed this problem for the foreseeable future at the expense of shareholders via a recent $200 million dilution on top of an earlier strategic investment from Kalani Investments for $250 million. How long the cash lasts will largely depend on how aggressively Economou pursues his operating leverage strategy. DryShips is expected to purchase $250 million worth of ships shortly, and the company burns through around $31 million in cash from operations TTM.


George Economou is pursuing a high-risk, high-return strategy for DryShips that will depend on using operating leverage to magnify the operating returns from a possible recovery in shipping. His strategy depends on using the company's liquidity to buy as many ships as possible while they are still cheap.

While the DryShips strategy is well-defined, that does not mean it is a good plan or that the stock is worthy of investment. DryShip's has many challenges. One of these difficulties is management conflict of interest. The stock is highly speculative, and at this point, the risks may outweigh the potential returns due to dilutive pressure on the stock and other concerns. This is not a solicitation to buy or sell any security.

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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