The End For DryShips (NASDAQ: DRYS)?

DryShips (NASDAQ: DRYS) has been getting beat up, while the U.S. equity market is near all-time highs. DryShips is continuing to fall due to multiple rounds of raising capital. In 2016, we saw DryShips have a remarkable run higher, but it ultimately ended the year down 98.59%. Moreover, the stock was down 95.36% YTD, as of March 3, 2017. According to Morningstar, DryShips underperformed the shipping & ports industry by over 100% YTD, and over 60% over the past month.

Here’s a look at the shipping company’s performance:

Source: TradingView

If you don’t know what DryShips does, it simply owns drybulk carriers and offshore support vessels around the globe. Currently, DryShips owns a fleet of 13 Panamax drybulk carriers, which have a combined deadweight tonnage of approximately 1M tons, 1 large gas carrier newbuilding and 6 offshore supply vessels, which is comprised of 2 platform supply and 4 oil spill recovery vessels.

That being said, there are a few ways to interpret DRYS under performance. Since DryShips is a shipping company based in Greece, its revenues depend on shipping rates, which could be measured by the Baltic Dry index. If shipping rates rise, then DRYS earnings could rise over the short term. However, shipping rates have been rising, and DRYS has failed to move higher.

Over the past year, the Baltic Dry Index was up over 150% over the past year, as of March 3, 2017. On the other hand, DRYS was down 99.92% over the past year.

Now, market participants seem to have a negative view on DRYS due to the management strategy of DryShips CEO George Economou. With that being said, some of the corporate actions DryShips has taken are concerning for the company.

DryShips Raising Capital

It’s generally a good idea for companies to look to raise capital, if they’re using it for the right reasons. Moreover, when companies raise cash through equity sales, they’re diluting the stock, which may be viewed as a negative to shareholders. According to Zacks Research, DryShips has been doing this and boasting $77M in cash and cash equivalents for the period ended on December 31, 2016. This was over a 400% increase from its cash and cash equivalents for the period ended on December 31, 2015. Despite its strong cash position currently, DRYS has been looking to purchase more vessels to expand its business.

On January 31, 2017, DryShips announced that it successfully completed its $200M common stock offering. According to DryShips Chairman and CEO, “We are very excited to have successfully raised $198M of equity and with total available liquidity in excess of $300M, we have strengthened our position to continue the process of re-building the Company’s fleet and earnings capacity and pursuing investments in various shipping segments.”

In addition to the stock offering in January 2017, on February 17, 2017, DryShips entered into a $200M common stock purchase agreement with Kalani Investments Limited. Under this purchase agreement, DryShips could further dilute its shares and may sell up to $200M of its common stock to Kalani over the next two years, with some limitations.

It goes without saying, DryShips is looking to strengthen its position through stock offerings and raising capital. However, the markets do not find this as bullish news. Here’s a look at DryShips performance since mid-December 2016:

Source: TradingView

What’s DryShips Doing With All This Capital?

Now, since DryShips has raised some capital, it’s going to spend it so the company could grow in the future. On February 21, 2017, DryShips re-entered the tanker market and acquired two modern tanker vessels. DryShips announced it entered into agreements to acquire one 113,644 DWT Aframax tanker and one 320,105 DWT Very Large Crude Carrier.

According to DryShips CEO, “We are very excited to have re-entered the tanker market by acquiring a modern Aframax tanker of ecodesign and one Very Large Crude Carrier at historical low prices. We continue to look at opportunities to diversify and grow our fleet with high quality tonnage and significant operating leverage.”

Now, one unorthodox corporate action the company just announced on February 27, 2017 was a dividend declaration. The company’s stock price has taken a hit as DryShips is spending cash to return to shareholders. It’s generally not a good idea for a company to focus on growing, raising capital and returning income to investors. DryShips will now pay a regular fixed quarterly dividend of $2.5M to common stockholders.

According to Economou, “We are very excited to initiate our new dividend policy which is a testament to the dramatic transformation of the Company’s finances over the last 6 months. We continue to transform DryShips and we are confident that the results of our efforts will become evident in the near future.”

Is This The End For DryShips (NASDAQ: DRYS)?

DryShips has been raising some capital through stock offerings thus diluting its shares at a fast pace. Although the capital would be used to grow its business, at the same time the company plans to return $2.5M to shareholders on a quarterly basis.  Market participants view this as bearish. Moreover, rather than spending on dividends now, DryShips may want to spend its cash to reinvest into the company and shift its entire focus to grow its earnings.

 

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