Replies to post #12297 on Langlui's Big Board and Options Plays

[langlui]

thanks yayaa. Oh i have totally missed your post on DRYS on Oct 15th!

DryShips Looks Too Good to Pass By
Tuesday October 14, 12:59 pm ET
BySham Gad, RealMoney Contributor

http://biz.yahoo.com/ts/081014/10442216.html?.v=1

Since I wrote about the dry-bulk shipping sector a couple of weeks ago, the overall industry has tanked along with the historic 25% weekly decline in the Dow. In fact, commodity stocks have been hit far harder, and most dry-bulk shippers are down an additional 50% to 60% in two weeks. We are now reaching valuations where the parts are vastly worth more than the whole.

One particular business, DryShips, is particularly intriguing, because the company plans to spin off an ultra-deep-water business that could command a share price in excess of the current stock price today, meaning you would get one of the largest dry-bulk shipping fleets for free.

Even more intriguing, the current market value is now at levels where a liquidation sale of the shipping fleet would easily exceed such value. This valuation is happening only because massive amounts of distressed selling, along with a shutdown of inter-bank lending, has sent equity prices to the most irrational levels since 1974.

It's important to remember that unlike Internet stocks, which lost nearly 80% to 90% of their value in the dot-com bust, what's happening today is affecting businesses that are making good money. You have got businesses that were trading at 8 times earnings last month now selling for 2 times forward earnings, meaning that if profits decline by 50%-75% next year, you still have a fantastically cheap business. In the case of DryShips, the story is even better.

The Asset Play

DryShips currently owns 49 ships. The company's market value is currently around $1 billion, or more than 70% less than what it was just a year ago. Remember that dry-bulk shippers move the goods that move the global economy -- grains, metals -- so it's not hard to see why the stock price has tanked. But it has simply tanked too far relative to the company's assets (not to mention the possible earnings -- more on that later). Here's an abbreviated look at what its balance sheet looked like, as of June 30, 2008:

DryShips Balance Sheet 
   
 Cash $ 294  
 Total current assets 456  
 Vessels, net 1,985  
 Drilling rigs 1,392  
 Other assets 853  
 Total Assets $4,980  
 Total Liabilities 3,032  
 Total Equity $1,948 

Over the years, DryShips has generated earnings through two engines: shipping revenue and asset sales. The acquisition and disposal of ships is very important to shipping companies, as they are always looking to lower the average age of their fleets. Historically, DryShips has been able to book gains of 50% to 60% on sales of ships. And since accounting rules stipulate that vessel values are to be classified net of depreciation, we can assume that the book value of the ships above is understated by 50% to 60% on the basis of real market data of the sales.

This would suggest a true book value of about $3 billion to $3.2 billion, or equity value of nearly $3 billion to $3.2 billion, or three times the current market value. The company currently owns two ultra-deep-water drilling rigs that are valued at $1.4 billion. These prized rigs are in ultra-high demand because of the increasing need for their super-deep drilling capabilities. It takes years to build them, and big oil companies such as Petrobras contract them out before they are even built. We'll assume no premium to book value for them, but odds are high that if DryShips put them up for sale, they could easily fetch a premium.

But that's not all.

The Spin-Off Play

DryShips has announced that it plans to spin off its newly developed ultra-deep-water business as a stock dividend to existing shareholders later this year or early 2009. Each existing DryShips shareholder will get one DryShips share and one Primelead share, the new name for the UDW business.

Primelead currently operates two UDW rigs and will have a total of six rigs over the next two years. On the basis of comparative valuations of Transocean, Ensco and other UDW players, management forecasts an equity value of $2.5 billion to $2.8 billion for Primelead.

This past quarter, the first in which the drilling rigs were working, two rigs produced operating profit of $30 million. Normalizing this out for six rigs over a year would mean operating profit of $360 million ($15 million times 6 rigs times 4 quarters), so an equity value of $2.5 billion is not rich.

DryShips will own 75% of Primelead after the spin-off. Divide this 75% interest (about $1.9 billion) into 62 million shares (DryShips currently has 42 million shares outstanding but has recently announced issuance of 20 million shares to fund new vessel acquisition), and you get a $30 share price for Primelead.

Today, DRYS trades for about $22 a share. In other words, Mr. Market is valuing the shipping business for less than nothing. Even if Primelead commands a market value of $15 a share, the shipping business is worth a great deal more than $5 a share.

For the first half of the year, DRYS has earned over $7 a share in earnings. The third quarter has seen shipping rates decline precipitously. When I look back at 2005, a time in which charter rates were a notch higher than they are now, DRYS earned about $3 a share for the year with half the shipping fleet.

You don't need to be a genius to make money in this market now. You just need to realize that a business like DRYS is beyond cheap -- it's a steal. Sooner or later, you will make money at these prices.

[3xBuBu]

let's see how these dividends play out