The Only Way DryShips Can Survive

| About: DryShips Inc. (DRYS)

Plain and simple, George Economou needs to sell some ships, and fast. And when he sells the ships, the sale better not be another related-party transaction, or all bets are off. The market is watching DryShips Inc. (NASDAQ:DRYS) very, very closely right now.

Much of the shipping sector is already a foregone conclusion. Several companies are already gone. Some are almost certain to survive, but the future of DryShips is probably the most unclear of any publicly traded shipping stock.

Technically, DryShips has a bit of liquidity available to it if it can sell off the Ocean Rig (NASDAQ:ORIG) shares it owns, but it seems the market has imposed a clock in which the shares must be sold off or they will fall in value. Many people feel that the Ocean Rig assets are solid. I tend to disagree, but I do acknowledge there is some potential value there, even though the subsidiary is currently losing money.

But the problem really is not Ocean Rig. The problem is drybulk. The drybulk assets are destroying any chance for the company to be able to survive.

The one and only solution is for the drybulk ships or the tanker ships to be sold off right now. Why not do so? There are so many ships to start selling off that it would create some instant cash flow. With that cash flow, maybe key debts could be paid off and the company can become a survivor. And I don't mean sell two ships and then purchase six more with new debt. I mean sell eight and use the money to survive.

My guess is the accounting has gotten tricky to deal with. At this point, if any ship is sold off, it will result in recording a GAAP one-time loss and a hit to recorded equity. Even just a week ago, DryShips reported another GAAP loss. But it has reached the point of now or never.

Either ships get sold off within a month, or it is over for Dryships too. Economou is not managing the company in a safe manner like that of Diana Shipping (NYSE:DSX) or even Navios Maritime (NYSE:NM). Those companies have prepared for the worst.

George Economou, Chairman, President and Chief Executive Officer of DryShips, is delaying the inevitable. And the longer he waits, the less likely survival is. The company has already pulled every financial trick known to mankind. Swaps, options, mergers with goodwill, diversification into oil of all types, related-party transactions, even suspected insider trading, you name it. It is now a cash game, and oil is tanking!

DryShips debt is already pricing in a very bumpy next six months. The convertibles are yielding close to 20% these days, and that is while the 30-year treasury is getting near 2.5% (all time lowest yields ever).

Just ask yourself this: What would be wrong with Economou admitting that the company is overleveraged and trying to sell some ships to Diana Shipping? Diana might actually go for it, and it would greatly increase the odds that Dryships survives. Even one ship would help.

My suspicion is that DryShips may not even be able to sell a single ship from this point forward due to a massive accounting domino effect that could occur from the sale. The sale could provide the evidence necessary for lenders to foreclose on assets due to loan covenants being breached. Those covenants are only held together with scotch tape. Additionally, not selling a single ship to create some cash flow creates the perception that Economou may just in fact be intentionally trying to bankrupt the company with as many assets as possible.

Dryships debt holders probably can sleep for a few weeks, but the stockholders need to purchase a high quality mattress soon. In fact, with the convertible feature, the debt practically already is equity. The equity is behaving like a derivative. The derivatives are behaving like products at an option-selling superstore that have already been designed to have zero value whatsoever (whether puts or calls).

Many will surely disagree, but many will agree. DryShips and its same old story about Ocean Rig being its ace-in-the-hole and to have patience is getting very old. Shareholders were essentially duped into thinking that DryShips would pay out a massive one time dividend just a few years ago. Meaning, if they weren't duped, they wouldn't even currently be shareholders!

In conclusion, my opinion is that if DryShips does not sell off at least several ships within the next month, the clock will have ticked down too much, and survival will not be possible. One must remember that these ships are depreciating every day just from being used. Shareholders should be up in arms that more is not being done to try and keep the equity from becoming worthless. Maybe shareholders finally just don't care if DryShips goes bankrupt. Who can blame them?

Well Mr. Economou, your shareholders are waiting. Can you sell even a single ship to raise some cash?

Disclosure: I am short DRYS.

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