June 19th UPDATE: I submitted this article for publishing on June 17th and it was published the morning of June 19th. Unfortunately DRYS announced another reverse stock split on June 19th. It is another senseless and unnecessary action taken by management and it has resulted in the stock being slammed about 20 - 25 % in pre-market trading. It also results in the central thesis behind the stock bottoming being destroyed. The steep decline in EMV and puts the company back in a position where additional share issuance will be quite dilutive. I will leave the article posted but the points made are now invalid.
- $9.2 million in equity raised.
- Approximately 5.2 million shares issued and shares outstanding at June 16th equaled 25.76 million.
The following table summarizes the issuance relative to trading in the stock for the week ended June 16th. The Actual column analyzes the equity issuance for the week and the columns titled Theoretical provide a "what if" analysis based on a range of assumptions of equity issuance as a percentage of Volume Traded.
|Equity Issuance Analysis|
|Shares O/S June 9th (millions)||20.57|
|Funding Gap (millions)||$66|
|Dates of Issuance||June 9th - 16th|
|Shares Issued (millions)||5.20|
|Avg Issuance Price||$1.77|
|Volume Traded (millions)||39.00|
|Value Traded (millions)||$74.33||(A)|
|June 16th Close||$1.75|
|Shares O/S June 16th (millions)||25.76|
|Equity Issuance as % of Volume Traded||13.32%||10.00%||12.50%||15%||17.50%||20%|
|Discount to VWAP @ Issuance||7.14%||8%||8%||8%||8%||8%|
|Est of Value of Equity Issued||$9.20||$6.84||$8.55||$10.26||$11.97||$13.68|
|Remaining Funding Gap||$56.66||$59.02||$57.31||$55.60||$53.89||$52.18|
|Equity Market Value @ June 16th Close||$45.08||$42.82||$44.52||$46.23||$47.93||$49.64|
|Remaining Issuance as % of EMV @ June 16th||126%||138%||129%||120%||112%||105%|
|Remaining Equity Issuance @ 8% Discount to June 16th Close (shares/millions)||35.2||36.7||35.6||34.5||33.5||32.4|
The VWAP and the Value Traded figures are estimates for the week ended June 16th.
Volume Traded and Value Traded for the week ended June 16th was up significantly from the prior week. Equity issued increased from $8.7 to $9.2 million W-o-W but as a percentage of Volume Traded it declined to 13.32%.
Funding Gap Update
The Funding Gap for the three remaining Newcastlemaxes and the four VLGCs declined to $56.66 million based on my revised Cash Earnings forecast (to be published in a separate article) reflecting recent declines in Dry Bulk rates. As highlighted in the following table, looking at the VLGCs in isolation and assuming the VLGC Credit Facility closes at the delivery of the first VLGC scheduled for the end of June, the Funding Gap on the three VLGCs due for delivery in September, October, and December would equal $72.3 million. This exceeds the Funding Gap on a company wide basis, so as a result of its recent equity offerings, DRYS currently has more than sufficient capital to close the acquisition of the three remaining Newcastlemaxes and the first VLGC due for delivery in June and to operate the company through the end of September.
|VLGC Funding Schedule|
|Option Exercise Payment||87600|
|Credit Facility Drawdown||150000||37500||37500||37500||37500|
There are 15 weeks between June 16th and September 30th. Assuming that DRYS issues equity equal to the entire Funding Gap as of June 16th of $56.6 million plus a cash cushion of $25 million by September 30th, it would need to issue approximately $5.44 million per week. It is likely that the pace of issuance will continue in the $8 - $9 million range for the next several weeks but the pressure this will exert on the market will diminish, as discussed below.
Downward Stock Price Pressure Abating
The following table illustrates the recent trend of slowing stock price declines and an increase in DRYS EMV.
|June 2nd||June 9th||June 16th|
|Prior Week EMV||$38.99||$36.34||$40.52|
|Equity Issued Current Week||$4.79||$8.68||$9.20|
|Equity Issued as % of Prior Week EMV||12.29%||23.87%||22.70%|
|W-o-W Price Decline||($0.53)||($0.33)||($0.22)|
|W-o-W Price Decline %||-23.04%||-14.35%||-11.17%|
|End of Week EMV||$36.34||$40.52||$45.08|
|W-o-W % Increase EMV||11.49%||11.27%|
It is still early in the trend and it will need to be confirmed during the next two weeks, but the W-o-W decline in DRYS stock price has begun to slow. If it follows the trend of the last two weeks, the stock price decline will fall into the single digits for the week ending June 23rd and it could be close to bottoming the week ending of June 30th, particularly given the likely catalyst of the first tranche closing on the VLGC Credit Facility.
As I discussed in my last article, the near-term uncertainty surrounding DRYS declines each week as vessels are delivered (the last Kamsarmax was delivered this week) and the Funding Gap narrows. The largest decrease in near-term uncertainty is expected to occur when the first tranche of the VLGC Credit Facility closes and the last three Newcastlemax vessels are delivered. If these events occur, they will remove all doubt about DRYS ability to fund the three remaining VLGCs, therefore the first drawdown of the VLGC Credit Facility will likely serve as a positive catalyst to the stock price and a signal of the stock price bottom.
The EMV value of DRYS stopped declining and began to reverse higher during the last two weeks, an important change in behavior. The increase in equity market value is of course related to the declining perception of risk slowing the decline in the stock price. As the EMV of DRYS increases and the Funding Gap decreases, the stock issuance overhang will decline precipitously and relieve downward pressure on the stock.
What a Short Position Is Betting On
If you are short DRYS, it is important to understand the inherent risks in the position. The Dry Bulk market should emerge from what is typically a seasonally weak period of the year during the next two months. August 2016 marked a period of steady Dry Bulk rate increases and that seasonal market behavior is likely to repeat itself this year. Relative to the finance and corporate management issues hanging over DRYS, fluctuations in Dry Bulk rates are of diminished importance.
Shorting DRYS for more than an intraday or overnight period of time during the near-term is therefore a wager on certain finance and corporate management events, namely,:
- the VLGC Credit Facility does not close
- a new credit facility secured by the non VLGC assets is not concluded,
- DRYS loses its access to the equity market or, conversely, dramatically increases the size of its current equity offering to fund additional acquisitions, and
- that DRYS' dramatic valuation discount due to GE's self-interested management of the company does not begin to dissipate.
Failure to close the VLGC Credit Facility could result in meaningful downside but the probability of such an event appears to be quite low at this juncture. Successfully closing the VLGC Credit Facility would have the knock on effect of improving DRYS access to the equity markets and increasing the probability of closing a credit facility secured by the remaining vessels. It would become a virtuous cycle and it would result in a revaluation of the company. In the final analysis therefore, the true driver of stock price performance in the near-term is whether DRYS closes the VLGC Credit Facility and the answer on that bet will be known during the next two weeks.
DRYS is not out of the woods yet but the downward pressure on its stock price is likely to continue to abate in the run-up to the delivery of the first VLGC at the end of June. There will continue to be intraday and day to day volatility and downward pressure in the stock but the asymmetric risk to the upside will grow as we near June 30th.
Disclosure: I am/we are long 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.
Additional disclosure: Please note that I have traded DRYS on a regular basis, sometimes intraday round trips, for the last several weeks on the long side. I do not short stocks. I will likely aggressively trade DRYS over the next several days, increasing and decreasing my position based on the stocks performance. I expect DRYS to be volatile over the next several weeks and I view trading DRYS as extremely risky.
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