Wednesday, February 11, 2009
Can DryShips weather credit storm, sail smoothly?
Wednesday, 11 February 2009
Almost two years, Greek shipping company DryShips Inc. was the darling of the dry bulk sector, with its share price and earnings consistently outperforming those of its peers. But all that changed with the global credit crisis and an ill-timed fleet expansion. DryShips, which had borrowed about $3 billion in the last two years to fund an ambitious fleet growth strategy, was caught in the whirlpool of the credit crunch, forcing it to cut capital spending and suspend its dividend to save cash.
In January, the company said it might be in breach of certain loan covenants, and it has since been negotiating with bankers to restructure its debt.
To date, it has obtained covenant waivers for roughly $1 billion.
The company's share price bears testimony to the sinking fortunes of the dry bulk industry. Its shares have plummeted about 90 percent over the last year, mirroring the Baltic Dry bulk index (BDI), which has also lost roughly the same percentage of its value.
DryShips was once the largest U.S.-listed shipping company with a market capitalization of about $5 billion. At the height of the bull run in the shipping sector, its shares touched a lifetime high of $131.07.
In contrast, the shares closed at $6.50 Monday on Nasdaq, with market capitalization of about $389 million.
Of the 13 analysts covering the stock, eight have a "sell" rating, and two analysts each have "buy" and "hold" ratings, according to Reuters data.
BUY ON SECTOR FUNDAMENTALS
"We have a 'buy' on the sector and we think things are improving -- BDI is up 14 days in a row. We are positive on the dry bulk shipping sector and, as a participant in the sector, DryShips would have an upward earnings bias," analyst Douglas Mavrinac of Jefferies & Co said by phone.
"That is the reason why we have a 'buy' on it and secondly, the stock is cheap.
However, Mavrinac said DryShips is not one of his top picks. "The biggest issue in our view is DryShips' management has made decisions that we don't fully understand.
"For example, they filed this massive shelf two weeks ago to raise $500 million and based on our calculation they don't really need it. Other companies had loan-to-value covenant breaches as well and no one else diluted their shareholders as much as DryShips did.
"It requires you to take down your estimate for earnings and cash flow, and your resulting price target, but the stock is so cheap that even the reduced price target keeps it attractively valued."
SELL ON DEBT
"I have a 'sell' rating on DryShips since December. They still have a lot of debt that is coming due over the next two years that they need to raise cash to meet it, whether from their operations or equity offering," analyst Gregory Lewis of Credit Suisse said by phone.
"As long they are continuing to raise equity in the open market, I think they are acting prudently because they are using the ability to raise equity to help fund their existing debt repayments.
"My biggest question is with this $500 million worth of equity, what is your share count going to be? And is this the last tranche they are going to do? Because keep in mind they raised 25 million shares at the end of last year.
"Following this transaction will that be all the equity you need to raise? And then I will not be surprised if their answer is 'no'.
"They have debt that they need to pay and they are going for dilution because they don't have a choice."
SELL ON DILUTION
"They are doing a $500 million share offering and so we thought that was going to be highly dilutive for current shareholders. That's when we downgraded it," analyst Scott Burk of Oppenheimer & Co said.
"Structurally the company just needs a lot of capital because they have significant amount of new building (of ships)," he added.
"Until DryShips is done raising cash we think the shares are likely to have pressure on them. The only reason the shares are doing as well as they are today and over the last week or so is just because (freight) rates have been going through the roof."
Source: Reuters
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