DryShips: Red Flags

| About: DryShips Inc. (DRYS)

Summary

DRYS hits 52 weeks and all-time low once again.

Since my short rating on April 26, 2017, the stock has down by about 70%.

At this rate of downward pressure, I expect a reverse split soon.

Sifnos Island in Greece

Investment Thesis (NASDAQ:DRYS)

Since my short rating on April 26, 2017, the stock has down by about 70%. The stock has been hitting a 52-week and an all-time low on an almost daily basis. The company has been regularly providing investors key financial information specifically on book value per share. On May 24, 2017, the company announced the successful delivery of its new build of the Suezmax Tanker and commencement of 5-year time charter. The company said that the total expected gross backlog under time charter is estimated to be $43.1 million. Regardless of the company's revenue projection, the stock will be continuously hammered by its non-stop dilution.

Bull Case or Bull Trap

On May 24, 2017, the company provided key financial information. The bulls are convinced by the company, specifically the stock valuation by the company. On May 11, 2017, the company announced that the book value per share is approximately $44.20 share. Today (May 24, 2017) the company announced again that the book value per share is approximately $35.28 per share. The stock is currently trading at $3 per share, so the bulls think that the stock is currently trading at a 92% discount.

Key Financial Information as of May 23, 2017:

  • Cash and cash equivalents: approximately $215.9 million (or $17.75 per share)
  • Book value of vessels, net: approximately $413.7 million (or$34.02 per share)
  • Debt outstanding: approximately $200.0 million Equity, book value: approximately $429.1 million (or$35.28 per share)
  • Number of Shares Outstanding: 12,161,510

Key Financial Information as of May 11, 2017, post reverse stock split:

  • Cash and cash equivalents: approximately $268.8 million (or $27.92 per share)
  • Book value of vessels, net: approximately $356.8 million (or $37.06 per share)
  • Sifnos Loan Facility balance: approximately $200.0 million
  • Number of Shares Outstanding: 9,628,852

= $268.8 million cash + $356.8 book value of vessels - $200 million debt

= $425.6 million equity / 9,628,852 share count

= Book value per share: approximately $44.20 share

Bear Case

The bears clearly know the bulls' weaknesses. The bulls fail to include the share dilution in their stock valuation. On May 11, 2017, the company had a 9.6 million share count versus a 12.1 million share count today (May 24, 2017), which is an increase of 2.5 million shares (26%).

26% share count increase = 56% decrease in share price

Share dilution (massive supply of new shares) = Share price decrease (Short)

The bear case is very simple and straightforward. The bears don't need a lot research. The bulls often get caught by the dividend and book value news (victims of bull trap).

Conclusion

Since December 2017, the bears should be winning consistently while bulls should be losing consistently. I expect the share dilution will last for a couple of years. I wouldn't be surprised if the day traders are also losing along with the bulls. Last December, the stock traded about $1400 a share versus $3 a share today, which is a 99.8% decrease in share price.

Source: Tradingview

I wouldn't say there is a real battle between bulls and bears; instead it is a one-sided game. Sifnos Shareholders Inc. is a private company owned by the CEO. The dealings between his private company and DryShips are enormous; of course, he often discloses everything in the SEC filings. There is not much information about Sifnos on the SEC filings except for the fact that the company name triggers the red flags.

The vessel was acquired from and chartered out to entities affiliated with our Chairman and Chief Executive Officer, Mr. George Economou.

I cannot find any information about Sifnos Shareholders Inc. other than the Sifnos Island (see above image).

Source: Bloomberg

As you know, my recommendation remains the same: either avoid or short it. To read my previous articles, please click this blue link.

Note: On March 28, 2017, George Economou's other company Ocean RIG UDW Inc (NASDAQ:ORIG) filed for Chapter 15 bankruptcy protection in the U.S. court.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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