DryShips, Inc. (DRYS): Macros Look Strong, But Liquidity Can Pose a Threat

DryShips felt the impact of fluctuating dry bulk shipping spot rates, as 33% of the company’s fleet is exposed to spot rates. Dry bulk shipping rates fell this month due to several factors such as:

1. This year, the Chinese New Year falls on January 31, and because of the holiday, most of China and Vietnam will be shut down from January 29 through February 6. Due to the holidays, shipping to Asian countries slowed down for the month of January, which consequently impacted shipping rates. It is a seasonal trend, and the shipments are expected to improve beginning next month.

2. Another cause for the price fall is coal shipment suspension in Colombia, from where Europe imports 20% of its coal. Colombia passed a rule requiring coal producers to build a direct ship loading facility at the port instead of using cranes and barges in order to reduce pollution. Loading facilities are expected to be installed by March this year, which will normalize the shipment.

Since mainly short-term factors are influencing spot prices, the situation will improve once these situations normalize. The outlook for dry bulk trade is expected to be positive this year. In 2014, dry bulk export demand is expected to grow 8% compared to fleet growth of 6%, so demand is expected to exceed the supply of vessels which will reverse the trend.

With rising global dry bulk trade, shipping spot rates will also improve, and DryShips is in a good position to take advantage of the rising rates due to its exposure to spot rates. Out of its 24 Panamax vessels, 16 are operating on the spot rate basis. Its two Supramax vessels are also operating on the spot rate basis.

Most of the company’s Capesize vessels are currently in long-term contracts on a fixed rate basis, and the majority of these vessels’ contract periods will end in 2018. Operating on a fixed rate basis will help the company in the current low spot price scenario, as Capesize vessel spot prices fell about 50% this month compared to last month. The current Capesize spot price is about $11,000, but its 10 vessels are operating at price of more than $20,000. When shipping spot rates are falling, using a fixed rate is an advantage for the company, but as prices are expected to rise in coming months, the company will only receive the benefits of rising prices from its Panamax and Supramax vessels.

Spot rates’ impact on other dry shippers

DryShips has two main competitors, Genco Shipping & Trading (GNK) and Diana Shipping (DSX). Spot rate volatility will have a different impact on each of these companies. Genco has 53 vessels and 42 of these vessels operate on spot rates or link to the spot rate. These 42 vessels include 9 Capesize, 8 Panamax, 12 Supramax, and 13 Handysize and Handymax vessels. Therefore, volatility in spot rates for all five classes of vessels will affect the company’s revenue. On the other hand, all 36 of Diana Shipping’s vessels operate on the fixed rate basis, providing the company with stable revenue, despite movement in the spot rate prices.

DryShips, on the other hand, is nimble enough to be able to adjust to price volatility since its Capesize vessels are in fixed rate contracts, while Panamax and Supramax operate on spot rates.

New equity offering to improve financial position

DryShips has shown intentions to resume its $200 million market price equity offering program, which it suspended in the beginning of December last year. The company stated that the reason behind this offering is to repay some or all of this year’s mandatory debt repayment of $150 million. DryShips already issued 6,892,233 equity shares under the program which generated gross proceeds of about $24.1 million. With the remaining $175 million, analysts are expecting the company to issue about 37 million shares. With the potential share offerings, dilution may have a negative impact on the share price over the short-term.

However, additional equity will help the company improve its liquidity position. At the end of the third quarter in 2013, the company had $678.6 million of cash and cash equivalents. The additional proceeds through equity sales will further strengthen the company’s financial position.

Potential events can change the company’s liquidity position

The company’s four new Panamax vessels are expected to be delivered this year. However, the company stated that the vessel developing company, Rongsheng, is facing difficulties, and there is a high probability that the vessels may not be delivered. If delivery occurs, the company has to allocate about $98 million for the remaining contracts.

Also, the company’s convertible notes worth $700 million are going to mature in December this year. The company suggested that it will try to extend maturity by refinancing through the note holders, but even if it doesn’t refinance due to additional equity sales, the company will be in a better position to redeem the notes.

Conclusion

Due to short-term factors, shipping rates are currently on the lower side, but the rates are expected to rise due to positive dry bulk trade outlook. Since almost one-third of its fleet is exposed to the spot rates, DryShips will reap the benefits. However, the company’s liquidity position may change in the coming months due to events like new vessel deliveries and maturing convertible notes. The company has also stated its intention to resume its equity sales, which will further increase dilution risk.

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