After the close of trading on February 24, DryShips updated investors on the progress of its ongoing equity raise with Kalani Investments Limited ("Kalani"):
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 February 17, 2017, 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. (...)
As mutually agreed to by the Company and the Investor, the Company sold 22,482,371 Shares to the Investor, pursuant to a Fixed Request Notice with a Fixed Request Amount Requested of $55.0 million following a Pricing Period from February 21, 2017 to February 24, 2017. The Fixed Request Amount was $55.0 million, subject to a price per share of approximately $2.45 mutually agreed to by the parties for an aggregate gross purchase price of $55.0 million, resulting in estimated net proceeds of $54.5 million, after deducting the Company's 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 58,836,362 shares of common stock outstanding. As of the date hereof, up to $145.0 million of the Shares is remaining that the Company may sell pursuant to the Purchase Agreement.
So, obviously it took Kalani just four trading sessions, to sell roughly 22.5 million new shares into the open market. With an overall trading volume of slightly above 100 million shares over the last week, basically 1 out of 5 traded shares was sold by Kalani.
Picture: Newcastlemax Bulk Carrier "Moritz Oldendorff" reportedly acquired by DryShips last week - Picture courtesy of Port of Hamburg, Germany
With the share price already having traded down considerably in Friday's after hours session after the new equity raise was disclosed, the stock opened down 20% on Tuesday in anticipation of things to come without Kalani having sold a single share into the market at that point. Tuesday's opening price of $3.63 was also the highest trading price of the entire week with the stock moving down substantially each session. At Friday's closing price of $2.24, the shares were down by 50% from last week's closing level and 38% from Tuesday's opening price.
The additional share sales also diluted the company's estimated net asset value per share from roughly $5.50 before the new offering was announced to $4.32 as of Friday's close.
Last week's dilution for existing equityholders calculates to roughly 40%.
Unfortunately, things are going to become much worse for shareholders as I fully expect DryShips / Kalani to continue their share sales at the current breathtaking pace given the reported, but not yet confirmed purchase of a quartet of Newcastlemax bulk carriers for around $121 mln by DryShips last week.
Assuming a similar pattern relative to last week, expect the share price to settle at around $1.40 at the end of next Friday's session, but given the fact that this time Kalani has five trading sessions available instead of just four last week, the stock price could very well decrease even further.
In the following week, another reverse split would most likely come into play as the share price would be otherwise projected to settle below the $1 mark at the end of the week.
Extrapolating further, the assumed final week of the offering (not accounting for a potential reverse split) would bring down the stock price to the $0.50 level.
Projected final share count under this scenario would be up to 250 million shares which would also lead to net asset value per share being diluted to $1.60.
As discussed previously, the huge projected discount between expected stock price and net asset value per share would again open up the chance for a potentially highly lucrative recovery trade as soon as the current offering has successfully closed.
Unfortunately, investors should not expect George Economou, the company's colorful CEO and chairman particularly notorious for his disregard of outside shareholders and repeated self-dealings, to stop at this point as I firmly expect him to exploit this highly successful financing scheme as long as possible. So don't forget to take your gains and move on should the rebound speculation succeed.
But for now, simply continue to look for shares to get short the stock - there's still plenty of money to be made this way over the next few weeks.
I will follow up on my projections regarding anticipated dilution and net asset value per share after the company will have issued its next update, presumably after the close of Friday's trading session.
Sell DryShips or even better:
Get short the stock if you manage to find shares to borrow, there's still plenty of money to be made over the next few weeks.
Expect the offering to close somewhere in Mid-March followed up by another violent recovery rally fueled by the temporary removal of the ongoing supply overhang and the huge anticipated discount to net asset value per share.
Don't forget to take your gains off the table as I fully expect George Economou to continue his highly successful financing scheme as long as possible.
Disclosure: I am/we are short DRYS.
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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