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WIKI ANALYSIS
DryShips Inc. (NASDAQ:DRYS) is a Greek holding company that charters vessels for shipping dry goods overseas. The company is the second largest dry bulk shipper listed in the United States, operating around 40 ships with a combined capacity of over 3.3 million dead weight tons[1]. The average useful life of these vessels is 25 years.[2] Dry bulk vessels deliver commodities such as iron ore (used for steel production), grains and coal throughout the world.
Business Overview
DryShips makes most of its revenues by chartering its vessels to other companies that pay a contracted daily rate to use the ships. The company pursues shorter-term spot contracts as opposed to secured long-term ones, giving DryShips greater exposure to up- and down-swings of daily rates. Its short term strategy is also apparent in its fuel costs, which are paid by DRYS in short-term contracts (and paid by the charterer in long-term contracts).[1]
Business Growth[3]
- Revenue: Revenue increased from $819.9 million in 2009 to $859.7 million in 2010.
- Net Income: Net income increased from a loss of $12 million in 2009 to a profit of $190 million in 2010.
Business Segments
Drybulk Carriers (around 55% of revenue[4])
The operation of a fleet of around 40 drybulk carriers with a combined deadweight tonnage of 3.3 million dwt is the main business operation of DryShips.[1] The fleet is used to carry and ship coal, iron ore, and grains, as well as bauxite, phosphate, fertilizers and steel products.[1] All of the carriers are managed by Cardiff Marine, Inc., an affiliate of DryShips', and the carriers are employed through a variety of leases, such as period time and bareboat charters and in the spot charter market and drybulk carrier pools.[1]
Drilling Rigs (around 45% of revenue[4])
In May 2008, DryShips acquired Ocean Rig ASA, which manages two ultra-deep water, harsh environment, semi-submersible drilling rigs that are known as the Leiv Eiriksson and the Eirik Raude.[1] Also, in April 2008, DryShips, through its subsidiary DrillShips Invesment, Inc., acquired two drillships. These comprise of the drilling rigs segment that generates almost 50% of DryShips' revenue.
Key Trends and Forces
World Economic, Population, and Infrastructure Growth All Increase Demand for Dry Bulk Commodities
Economic and infrastructure growth often go hand in hand, but populations grow independently of both. Either way, increases in any of these causes increases in dry bulk trade. Economic growth causes demand for all ranges of inputs to increase. Population growth causes demand for food and electricity generation materials to increase. Infrastructure growth causes demand for steel and ore to increase. All three of these are moved over seas by dry bulk carriers. This is clearly a slight oversimplification, but it helps illustrate the absolute necessity of the service dry bulk shippers provide to global commerce. As mentioned above, nearly 40% of all ocean trade is conducted in dry bulk. If there are more buyers (companies who need to move the materials) coming to the market, the sellers (companies like DryShips who possess dry bulk vessels) can demand higher rates to move the necessary cargoes.
Fleet Supply Determines Pricing Power for DryShips
This is determined by the amount of available ships, their capacity, and their utilization rates. Additionally, the average age of the fleets determines where they are in the life cycle. The average ship lasts 25 years, and if a majority of ships approach that number, supply decreases in the short term as replacements are built. Also, supply is heavily influenced by delivery of new vessels.
Ease of Capital/Financing To Buy New Vessels
Low interest rate environments are beneficial for fleet and operations growth. DryShips, and other companies which have significant capital costs associated with growth, find it cheaper to finance bigger expenditures. This translates into less invested capital when a ship is built, and DryShips pays less interest to buy more vessels. The one caveat is that low interest rate environments typically come by to recessions that do not reduce liquidity in the credit markets.
Dry Bulk Shipping Rates (reflected in the Baltic Dry Index) Illustrate DryShips Revenues
This index is an average of Spot Market prices for various sizes and routes of shipping dry goods. The "BDI" provides a glimpse of the worldwide demand for DryShips and the rest of the dry bulk shippers' services. DryShips historically has an incredibly short term bias on its contracts, and has operated its entire fleet in the spot market at times. An investment in DRYS is effectively an intrinsic bet on the prices of the BDI. This is evident in the high correlation of the stock price to the BDI this past year. Higher rates directly translate into more income. [5]
Factors Affecting Dry Bulk Charter Rates
- Commodity Demand - This is determined mainly by industrial production and energy demand. If commodity demand is strong, BDI rates increase regardless of spot rates for those commodities. Companies that have contracted out spot rates show increased demand through paying more for shipping of the materials. As more coal and steel are being demanded by China, the rates for dry bulk shipping increase.
- Seasonal Pressures - Weather has a significant impact on both demand and logistics. For demand, cold weather increases the demand for coal and other energy creating raw materials. For logistics, cold weather frequently causes ice to block ports and low rivers to prevent travel. Both of these cause increases in the BDI. Conversely, a mild winter or early ice breakup in cold water parts cause decreased in the BDI.
- Bunker Prices - Bunker oil is the name for the oil a ship uses for fuel. Bunker fuel accounts for between a quarter and a third of vessel operating costs. These higher oil prices are reflected in higher BDI prices. So just as higher oil prices put a damper on Airline company margins, they squeeze margins for dry bulk operators.
- Choke Points Nearly half of the world's oil passes through a few narrow shipping lanes. This includes the straights of Hormuz and Malacca, the Bosporus and the Suez and Panama canals. These choke points cause natural caps in ship supply; i.e.- only a certain amount of ships can pass through them each day. If something disrupts this flow, the BDI increases.
- Market Sentiment - Because of the time lag in forecasting demand for raw materials, market opinion can greatly affect the freight exchange. [6] The January 2008 halving of the index's value can be attributed to many companies forecasting lower global growth and cutting their production/demand targets.
- Port Congestion -This acts as another great buffer against supply increases lowering index prices. The actual infrastructure of these ports prevents more ships entering the market. The ports simply cannot handle more traffic. Until changes occur at these vital terminals, there is upward pressure on dry bulk prices. Shipping industry analysts [1] are actually developing an index to standardize and make available this incredibly vital data.[7]
Competition
Most of DryShips' competitors offer very similar services. However, all of them operate largely in specific regions and thus are dependent on both global and region-specific economy.
Diana Shipping: Diana Shipping owns and operates 18 dry bulk shipping vessels with a capacity of over 2 million deadweight tons. Diana's fleet is one of the newest in the world, being over nine years younger than the average merchant fleet. The company earns its revenues by chartering its vessels to other companies for periods of two to five years for a fixed daily fee. The chartering of these vessels involves the delivery of commodities like iron ore and wheat throughout the world.[8]
Genco Shipping: owns around 30 dry bulk vessels, ships used to transport non-liquid goods such as grain or coal. The company has grown at a breakneck but seemingly sustainable pace. Genco's ships, which have a total shipping capacity of approximately 2,615,000 deadweight tons (dwt), move mostly iron ore, coal, grain, and steel products.[9]
Excel Maritime: Excel is a provider of worldwide sea borne transportation services for dry bulk cargo, including among others, iron ore, coal and grain, referred to as major bulks, and steel products, fertilizers, cement, bauxite, sugar and scrap metal, referred to as minor bulks. The Company’s fleet consists of around 40 vessels and, together with seven Panamax vessels under bareboat charters, it operates more than 45 vessels. In addition, the Company has also assumed five joint venture vessel-owning companies, six shipbuilding contracts for six Capesize vessels. Its subsidiaries include Maryville Maritime Inc. (Maryville), Point Holdings Ltd. and Bird Acquisition Corp.[10]
Eagle Bulk: Eagle owns one of the largest fleets of Supramax dry bulk vessels in the world. Dry bulk vessels are ships specifically designed to move dry cargo, like steel and coal, across long distances, like from the U.S. to China. Supramax vessels are a class of large container ship with a carrying capacity of 50,000 to 60,000 deadweight tons (dwt). Because Supramax vessels are defined by their relative small size, they can access many more ports than their larger compatriots. Eagle's entire fleet can hold a little less than a million dwt. The company takes that capacity and charters its ships for periods of 1 to 3 years, and in doing so skirts some of the day to day volatility of the international shipping market.[11]
Navios Maritime: Headquartered in Piraeus, Greece, Navios Maritime Holdings is a Dry Bulk Shipping company with holdings including Navios Maritime Partners LP, Navios GP LLC, Kleimar NV, Horamar Group, Corporacion Navios Sociedad Anonima ("CNSA") and Navios South American Logistics Inc.
References
- ↑ 1.0 1.1 1.2 1.3 1.4 1.5 Wikinvest SEC Files: DRYS 2009 20-F, Item 4
- ↑ 2008 DRYS 20-F, pg. 46
- ↑ Wikinvest SEC Files: DRYS 2010 20-F, Item 3
- ↑ 4.0 4.1 Wikinvest SEC Files: DRYS 2009 20-F, Notes to the financial statements
- ↑ Bloomberg BDI Data
- ↑ http://www.balticexchange.co.uk/default.asp?action=article&ID=3
- ↑ http://www.g-ports.com/gp_Congestion.aspx
- ↑ Wikinvest Stock Summary: DSX
- ↑ Wikinvest Stock Summary: GNK
- ↑ Google Finance Profile: EXM
- ↑ Wikinvest Stock Summary: EGLE
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