Last Call to Abandon Ship

You know those dreams where you try to scream, but no sound comes out? That's how I feel when I watch investors climb aboard this vessel in distress. 

Enormous waves from the financial tsunami continue to churn up the ocean of risk for companies with substantial debt, which led me to announce a gaping hole in the side of DryShips (Nasdaq: DRYS  ) in early February. Shares have moved sideways since, although with gut-wrenching volatility. 

DryShips released earnings this week, permitting a timely reality check for the battered shipper. The company lost a cool $1 billion in the fourth quarter, after a $700 million goodwill impairment from the Ocean Rig acquisition. Even after backing out a barrage of special items, the $0.43 per share in adjusted earnings missed analysts' estimates by $0.23.

Although the company acquired waivers for some of the covenants it had recently breached, others remain pending, which forced the reclassification of $1.8 billion from long-term to short-term debt. Meanwhile, massive share dilution continues to absorb buyer interest, as the company completes a $500 million share offering and doles out 6.5 million shares in lieu of cancelled ship orders.

Now, for the surprising counterargument
With all of those warnings and caveats in place, we are now free to discuss the flipside: DryShips could potentially survive these debt burdens and reward intrepid investors with substantial long-term gains. Such a scenario sits well outside of my personal comfort zone of risk to reward, but I understand that Fools eager to recapture capital might be game for a high-risk speculative play. If DryShips were to gain waivers for the $1.8 billion in short-term debt, this company's story could shift rather abruptly.

Key to this counterposition are the remaining charter contracts secured during the pre-collapse era of drybulk rates, and the recent three-year contract signed with Petrobras (NYSE: PBR  ) for one of its semi-submersible drilling rigs. The $630 million contract yields an estimated dayrate of $575,000 for the rig, which compares favorably to the record rate booked by Transocean (NYSE: RIG  ) last summer.

While DryShips could potentially survive to thrive, I continue to prefer the relative safety of less-impaired drybulk shippers such as Diana Shipping (NYSE: DSX  ) and Navios Maritime Holdings (NYSE: NM  ) . Investors seeking exposure to offshore drilling, furthermore, might be better served by pure-play specialists like Transocean or Atwood Oceanics (NYSE: ATW  ) . If you must climb aboard DryShips, please be aware of the risks.

Further Foolishness:

Despite its troubling developments and weak performance, more than 2,400 CAPS members maintain outperform picks for DryShips. Given the severity of the challenges facing the company, these investors need your help to make the right call. Whatever your perspective on this company, come share your thoughts within The Motley Fool's free CAPS community today.

Petroleo Brasileiro is a Motley Fool Income Investor recommendation. Atwood Oceanics is a Motley Fool Stock Advisor selection. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Christopher Barker captains yachts somewhat smaller than drybulk carriers. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of Diana Shipping. The Motley Fool has a seaworthy disclosure policy.


Read/Post Comments (7) | Recommend This Article (42)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 27, 2009, at 3:31 PM, mjonesy1985 wrote:

    I can't decide if I should sell my DRYS or not???

  • Report this Comment On March 27, 2009, at 3:38 PM, mjonesy1985 wrote:

    I think ill stay on the ship. They will get their debt taken care of and benefit from the chinese stimulus.

    HOLD!

  • Report this Comment On March 27, 2009, at 3:48 PM, XMFSinchiruna wrote:

    It's no straightforward call either way.. best of luck! :)

  • Report this Comment On March 27, 2009, at 4:33 PM, jazzz1 wrote:

    I bought DRYS, but reduced my risk by selling CALLs. Bought for about 5 1/4 and sold 2011 5 calls for about 3. Net cost was under 2 1/2. It limits my potential gains, but also limits my risk. As long as they make it through, I think the stock will be higher than 5, and I'll have doubled my money in less than 2 years. Given my recent returns, I'll take it. :-) Good luck to us all!

  • Report this Comment On March 27, 2009, at 4:39 PM, clanza875 wrote:

    As long as you consider it a speculative play and dont put too much of your overall portfolio into DRYS you should be fine. Upside potential is a 5+ bagger but you can only lose what you put in. Its a no-brainer.

  • Report this Comment On March 30, 2009, at 6:24 PM, SideShowMel0329 wrote:

    I bought in @ $22 thinking the BDI was at (or near) bottom. Boy was I wrong. It was definitely the worst buy I made in 2008, but I haven't sold yet. DRYS seems to be doing well in renegotiating its loans, and with the new PBR contract, I'd say their safe from BK.

    I'm hoping for a merge or a buyout (maybe someone will overpay for them?). That's a long shot. What will probably happen is that I'll be sitting on these shares for 5 years or so until we're well out of this recession.

  • Report this Comment On May 11, 2009, at 11:31 AM, silverminer wrote:

    Side Show,

    Far worse than a long shot, the chances for a buyout of DryShips = 0.000%!

    Who in their right minds would want a piece of that debt?

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Related Tickers

4/17/2014 2:48 PM
DRYS $3.15 Up +0.02 +0.48%
DryShips, Inc. CAPS Rating: ***
ATW $47.60 Up +0.35 +0.74%
Atwood Oceanics CAPS Rating: *****
DSX $11.85 Up +0.20 +1.72%
Diana Shipping, In… CAPS Rating: *****
NM $8.51 Up +0.19 +2.28%
Navios Maritime Ho… CAPS Rating: ****
PBR $13.95 Up +0.46 +3.41%
Petroleo Brasileir… CAPS Rating: ****
RIG $40.67 Up +0.09 +0.22%
Transocean, Inc. CAPS Rating: ****

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