DRYSHIPS INC. (NYSE:DRYS)

The stock price of DRYSHIPS INC. currently sits at $4.86 and is down 98.1% compared to the December 31, 2015 price of $255. Part of this massive decrease can be attributed to macroeconomic troubles that brewed much earlier, including the 2014 crash in oil. The oil crash significantly reduced DRYS operating expenses, but the savings were more than offset by the decrease to DRYS’ revenues. A decrease that can be attributed to increased competition within the industry.

Oil is a significant expense that DRYS and other shipping companies incur and as oil decreases, the marginal profitability of transporting goods increases and more ships/companies are willing to transport goods across seas. Competition increases and this helps push the price of shipping raw materials down (i.e./ Baltic Dry Index was at an all time low January 2016).

It is interesting to note that DRYS’ operating expenses have dropped 87% since January 2016. It is most likely due to variable costs that were kept low as DRYS shipped less, combined with cheaper oil. This decrease in operating expenses is not so much a direct result of the crash in oil, but a result of slow business that resulted from increased competition. The subsequent drop in revenues were a result of a decreasing price as seen through the Baltic Dry Index.

The reduction in the price of oil contributed to the decrease in DRYS’ operating expenses. However, this benefit was more than offset by the influx of new competitors willing to negotiate the price at which they are willing to move raw materials across seas. As oil continues to rebound, the price of shipping raw goods will rebound. This is because shipping companies will experience an increase in their operating expenses and thus a decrease to the marginal profits of each trip. As these profits decrease, the less profitable shipping companies will be pushed out. This decrease in the number of shippers will allow DRYS to charge a higher price. Investors generally seek companies that are lowering their expenses, but in this case an increasing expense (oil) is a positive factor that will help DRYS eliminate competitors without any implicit or direct actions.

The Baltic Dry Index currently sits at 946 after hitting 1200 in November. It steadily increased since January but is still more than 50% below 3Q 2014 levels. Nonetheless The Baltic Dry Index has seen a relatively positive year when looking at its YTD performance, and if the trend continues DRYS revenues will benefit as well. This index is a fair approximation for the average price that a shipping company charges and illustrates why DRYS is struggling . Historic low oil prices and a surge in competition have contributed to the significant decrease in the BDI, and as a result DRYS’ revenue from year-end 2015 to year-end 2016 dropped 56%.

Trump’s plans to rebuild America’s infrastructure signals a higher expected demand for raw materials including steel, which DRYS ships (http://www.dryships.com/pages/overview.php). This expected demand for materials caused the BDI to hit 1200 shortly after Trump’s victory. A large correction occurred shortly thereafter. Nonetheless, this should be seen as a positive signal for the shipping industry proving that the BDI is capable of large upward movement. As Trump’s plan actualizes over the next year, the index should see a rise. Subsequently, DRYS would see a boost to their top-line.

DRYS’ cash position sits at $5,614,000 while their “total liabilities plus total other liabilities” are $216,719,000.This disgusting (?) cash to liabilities ratio has forced DRYS to liquidate assets. They have sold or decommissioned seven Panamax ships since March 2016. Two ships and their respective debts were personally bought by DRYS CEO, George Economou. This can signify a number of things. First, it could signal DRYS inability to raise cash from third parties. This is further illustrated with the two new revolving “facilities” that are financed by SIFNOS and TMS BULKERS LTD, two firms controlled by George Economou. The complicated capital structure that Economou has entangled himself and DRYS in seems to be a “do or die” bet. A lack of liquidity coupled with poor net profits is a danger to the solvency of any company. One thing should be noted; if DRYS goes out of business or is unable to pay the debts owned by Economou, most assets would be seized and Economou and his firms would walk away. Investors should be aware of the conflict of interest that exist with Economou.

Second, it could be that George Economou believes DRYS stock will increase. Why would he think this? Well, one of his revolving “facility” agreement dictates that $7.5 million of DRYS outstanding loan balance can be converted into common stock. George Economou and his controlled outside entities would benefit from a DRYS stock increases after this conversion. This conversion would have the initial effect of decreasing DRYS stock price because the number of outstanding shares will increase and thus dilute the value of every share. If Economou was to exercise his controlled entities right to convert $7.5 million of debt to stock today, then DRYS would have to issue over 1.54 million additional shares.

Convertible stock will not benefit investors because the number of outstanding shares will increase. Yes, the liquidity that Economou’s controlled entities provide dictate revenues and expectations other than bankruptcy. The problem is that a large amount of shares could be issued at any time. Only Economou knows when this conversion will occur. If Economou believes DRYS stock price is undervalued, then a conversion of this debt to stock is bound to materialize in the coming weeks.

Three other ships were sold to a third party. The proceeds DRYS received were used to pay off those ship’s respective “facilities”. This is worrying because DRYS is selling ships during a period that has shown some positivity to shipping stocks. Trump’s plans have positively affected the BDI, and as oil continues its rebound, DRYS top line should benefit. The sale of these ships do come with some merits. For example the sale of these ships rids DRYS of unwanted interest expenses, long-term debt, and other small miscellaneous expenses that come with renting spaces for these enormous vessels.

This is a risky stock. Hundreds of other factors come into play when analyzing DRYS impressive nose dive.

No contributor or editor owns any sort of DRYS.

No contributor or editor plans on buying or shorting DRYS within the next 48-72 hours.