Should Investors Be Running From DryShips?

As you may have heard on the news, the SEC has recently issued a subpoena to Dryships, asking for records of its business dealings from June 2016 through July 2017. Although this stock has historically been a volatile one, and one that has been steadily decreasing over the past few months, news of the investigation have caused share prices  and investor confidence to dip to new lows. Although this investigation may come as a surprise to some, those who have been paying attention to Drys Ships, should not be so shocked. Over the past 18 months Drys has agreed to a number of deals in which it has sold shares of its stock to a number of investment firms, one of the most notable being the mysterious Kalani Investments Limited (almost as mysterious as its relationship to DryShips CEO George Economou). Once sold, the DryShips’ shares are then reverse split. These deals have helped Dryships to raise the capital necessary to purchase new fleets, equipment, and services. This has been at the expense of shareholders whose stocks have become diluted in value. Moreover, while re-investing funds into one’s business is generally a positive thing, the purchases have been from other companies associated with Dryships CEO George Economou. In the end, Economou is personally profiting off of the deals these suppliers are making with DryShips, as a result of his being affiliated with them.

Questions of insider trading and its selfishly poor leadership aside, there are still some serious financial questions regarding DryShips, which its capital boosting efforts do not seem to remedy. DryShips ended 2016 with $137.5 million of debt and only 76.8 million of cash and $79 million of liquidity. This is a considerable amount of debt considering the company had $229 million in assets at the end of the third quarter of that year. While investors would usually be comforted by the fact that most of this debt has been assumed by the CEO himself, given the SEC investigation into his dealings, as well as his history of putting himself before shareholders (selling and reverse splitting shares, no longer offering dividends, little to no voting rights for shareholders), this may be more of a sign of worry. Moreover, the extent to which Dryships had to dilute its shares and reverse split its stock to raise capital do not bode particularly well for the company’s long term financial outlook.

While questions about Dryships management and financial situation have been raised, potential investors should also keep tabs on Dyships business model itself. The company is heavily reliant on the price of transporting major raw materials by sea, leaving it vulnerable to price shocks. Dryships leases its dry bulk fleets at spot market prices, leaving it susceptible to the current market rate. And while many dry bulk shipping companies have profited off the rebound this Index has experienced since February 2016, dryships has not been one of them. Thus, this model bodes well for dryships when prices are high, but not so much when they are low. To Dryships’ credit though, they have purchased fleets that will be locked into fixed rate contracts, which allow for a more fixed and steady stream of revenue. It remains to be seen though if Dryships will be around long enough to reap the benefits of this new shift amid the SEC investigation and the pressure it is feeling from shareholders seriously doubting their long-term investments in the company.

 

Sources:

https://www.wsj.com/articles/sec-issues-subpoena-to-dryships-1504128518

https://www.fool.com/investing/2017/01/11/investors-really-dont-like-dryships-incs-decision.aspx

https://www.fool.com/investing/2016/12/20/how-risky-is-dryships-incs-stock.aspx

https://en.wikipedia.org/wiki/Baltic_Dry_Index

https://www.smarteranalyst.com/2017/09/05/hedge-fund-manager-ken-griffin-jumps-ship-dryships-inc-drys-top-ships-inc-tops/

https://seekingalpha.com/article/4103635-dryships-just-get

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