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DryShips (DRYS)Stock (Dry Bulk Shipping Industry, Shipping Industry, Transportation Industry)
 DryShips Inc. (NASDAQ:DRYS) is a holding company that charters vessels for shipping dry goods overseas. The company is the largest dry bulk shipper listed in the United States, operating 47 ships with a combined capacity of over 4.2 million dead weight tons. Dry bulk vessels deliver commodities such as iron ore (used for steel production), grains and coal throughout the world. Dry bulk shipping accounts for 36% of sea-based trade; in comparison, liquid bulk cargo--such as petroleum--accounts for about 38% of overseas shipping.[1] 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). [2] In 2006-2007, China and India's growing appetite for steel, grains, coal and other commodities was the biggest driver of growth for the dry bulk industry. This caused the dry bulk rates to skyrocket, reflected by the industry benchmark Baltic Dry Index (BDI), appreciating nearly 400% in the two year period. DryShips in particular benefited from this short term run up in rates because of their targeted exposure to spot markets. This leverage led to stock price appreciation of nearly 1000% (not a typo) in the two year period.
[edit] Business Financials[edit] Income Statement Analysis
DryShips revenue and earnings growth has been staggering. This is almost entirely due to the massive appreciation of daily shipping rates for dry bulk cargo. This was reflected in Baltic Dry Index's meteoric rise in 2007. This index is explained in the Trends and Forces section below. Management effectiveness in procuring vessels and maintaining low operating costs was a factor, but the real impact of management is its direction on charter duration. Industry magnate George Economou angled DryShips to be almost entirely exposed to the Spot Market for dry bulk shipping. This was very advantageous in a market such as 2007 where demand greatly outstripped supply and short term rates were accelerating. On the other hand, in the market from October 2007 to January 2008 the BDI shed half of its value. This dragged down expectations of future revenues for DRYS and the stock price fell accordingly. DryShips failed to lock in any of these historically high rates for the long term and operated in the spot market for most of the first quarter of 2008. But the market turned in February and worldwide demand for the commodities dry bulkers move exploded. The BDI recovered all of its value and hit all time highs in May. This time around DryShips locked in 14 vessels to long term contracts from 4-10 years out. This will give DRYS a much less volatile and more secure cash flow structure. [edit] Secured Charter Structure
[edit] Balance Sheet/Assets
[edit] Hostile Takeover of Ocean Rig ASADuring the 4th quarter of 2007, Dryships began accumulating shares of Norway based Ocean Rig ASA.[4] The company owns and operates two deep water drilling rigs and has contracted delivery for two more in 2011.[5] On 22 April 2008, DRYS announced that they now possessed a majority of the shares outstanding, and were proceeding with the mandatory tender offer to buy the entire company. [6] According to CEO George Economou, the move into a different industry was intended to "capitalize on the shortage of premium ultra deep water drilling assets" and use some of Dryships's substantial excess cash flow.[7] The acquisition is on track to close on June 11 and the board of directors at Ocean Rig has offered their support for the deal.[8] The acquistion should cost Dryships approximately $1.2 billion. Economou intends to spin off part of the drilling subsidiary to DRYS shareholders within a year.[9] The new subsidiary will be the only pure ultra deep water drilling company listed on the U.S. exchanges. Jefferies Group (JEF) head maritime analyst Douglas Mavrinac believes this new segment to be worth as much as $67 a share. This then places the actual dry bulk business segment at a valuation of just one times 2008 earnings. He reiterated his buy and put a price target of $160 on the shares.[10] [edit] Key Trends and Forces[edit] World Economic, Population, and Infrastructure Growth All Increase Demand for Dry Bulk CommoditiesEconomic and infrastructure growth often go hand in hand, but population growth may persist regardless of the other two. Either way, increases in any of these will cause increases in dry bulk trade. Economic growth will cause demand for all ranges of inputs to increase. Population growth will cause demand for food and electricity generation materials to increase. Infrastructure growth will cause demand for steel and ore to increase. All three of these must be moved over seas by dry bulk carriers. This is clearly a slight oversimplification, but it helps illustrate the absolute necessity of the 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. [edit] Fleet Supply Determines Pricing Power for DryShipsThis is determined by the amount of available ships, their capacity, and their utilization rates. Additionally, the average age of the fleets will determine where they are in the life cycle. The average ship lasts 25 years, and if a majority of ships approach that number, supply will decrease in the short term as replacements are built. Also, supply is heavily influenced by delivery of new vessels. A significant back logged demand for new vessels drives up prices, and in 2008 this situation exists with many new orders that won't be delivered before late 2009. With this backed up supply, BDI prices soared in 2007. With rates for the largest dry bulkers fetching nearly 10x that of a comparable VLCC Oil Tanker, many companies converted tankers into dry bulk carriers.[11] As conversions and ships contracted to be built at the beginning of the price run up in 2006 come on line, the upward pricing pressure of a fleet in which 41% of its ships are over 20 years old will ease.[12] [edit] Ease of Capital/Financing To Buy New VesselsThe current low interest rate environment is very beneficial for fleet and operations growth. DryShips, and other companies which have major capital costs associated with growth, will find it cheaper to finance major expenditures. This translates into less invested capital when a ship is built, and DryShips will pay less interest to buy more vessels. The one caveat is that there must be ample liquidity in the credit markets if the company hopes to utilize these low interest rates. [edit] Dry Bulk Shipping Rates (reflected in the Baltic Dry Index) Illustrate DryShips RevenuesThis 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 will directly translate into higher current profits. [edit] Factors Affecting Dry Bulk Charter Rates
[edit] Competition DryShips2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available [edit] References
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