DryShips Inc (fka DRYS)

[Net-Man]

Here is my response to the SA article:

http://seekingalpha.com/article/3459486-should-investors-expect-a-turnaround-at-dryships

This article represents yet another weak analysis of DRYS. Oil prices moving up don't have a direct impact on dry bulk spot rates. It could be argued moving oil prices will impact bunkerage costs, but to say higher oil prices will be good for the dry bulk market seems silly. The author also comments that DRYS revenue "was way below expectations, even though the company's earnings per share were in line with estimates" is a ridiculous statement. How can revenues be in line with estimates and not meet expectations? I could go on critiquing the article, however, suffice to say it seems the author's intention was more to lead readers to an unfounded conclusion.

Spot rates are important to DRYS revenue performance going forward especially after September once all of their tankers transfer to new owners. Most of DRYS Capes are operating under a new charter for next 4+ years and have a floor rate now of $12,500. The contract also provides for 50% rate sharing for anything above the $12,500. Cape demolitions so far this year have kept pace with newbuildings and net tonnage has changed a mere ~46k dwt in 2015 (Clarksons). This is a primary reason why Cape spot rates have gone up so rapidly from their low earlier in the year. Panamax spot rates have also be inching up since their lows and are roughly where they were this time last year. Spot rates have historically improved significantly during the last half of the year and this year is unlikely to be any different. Higher spot rates for both Capes and Panamax will directly impact DRYS net revenues. Consider that DRYS sans paper write downs in 2Q actually posted positive revenues of .05/share. Although I am not expecting the same performance in 3Q without the ORIG dividend, DRYS should post break even to slightly positive results.

Another important factor specific to DRYS that will affect its balance sheet and net revenues is the substantial debt that is being paid off this year:

ORIG $120 million
ABN AMRO $200 million (balance of loan $185 million 2015)
Tanker debt $182 million
Tanker amortization $48 million
2015 Balloon and Amortization $218 million

By the end of this year, DRYS debt will be something less than $350 million and likely closer to $290 million. Clearly there is huge debt reduction under way. The remaining debt will most likely be restructured providing significantly lower amortization payments thus increasing net revenues going forward. ORIG is a non-performing asset and probably won't pay a dividend again for some time. GE could very easily swap this asset to pay for the ships DRYS holds options on and add additional debt free ships to the fleet.

As far as the dry bulk market is concerned, yes, coal into China has suffered a 24+% decline over this last year and impacted spot rates primarily for Panamax ships. The volume of shipments is unlikely to recover to higher levels in the short-term. However, overall worldwide dry bulk demand has increased. The problem affecting profitability remains the supply glut. As I noted previously, Cape demolitions have helped keep fleet growth in check and spot rates improved as a result. Panamax owners have not followed suit - yet. There are 200+ Panamax that are at or well beyond their economic lives and are due to meet the scrap yard. As these ships meet their fate, the reduction in capacity will help spot rates at least stabilize. 285 newbuilding Panamax ships are scheduled for delivery in the next 18 months (Clarksons). This is the risk to Panamax spot rates. Without corresponding scrapping or otherwise removing older ships from service, spot rates will continue to be low. World growth has slowed and it may be some time before world GDP moves up strongly. However, it is growing none the less and more dry bulk goods will be consumed. So a portion of the fleet over capacity will be utilized to support the growing demand level. None the less, some amount of scrapping will necessarily be undertaken simply because of economics. As supply pulls back along the curve in the face of increasing demand, spot rates will advance helping DRYS bottom line.

DRYS share price has been punished unmercifully more so due to the NASDAQ delisting notice it received rather than revenue performance. The core reason for the notice is the shares have not traded at or above $1 for some time now. GE has 24 trading days remaining in order to get the shares trading above $1 for 10 days, request a 180 day extension from NASDAQ, or request the shares be moved to the NASDAQ Capital Market. I expect he will request the extension, which will provide GE time to restructure remaining debt in 4Q, time for analysts to sort out the 3Q balance sheet, and second half spot rate increases to have their beneficial affect on revenues.

To answer the author's question, absolutely DRYS shareholders should expect a turnaround. Although it may not be reflected in the share price, a lot of changes have already taken place and will take place over the next several weeks that will have a very positive affect on the shares.