DryShips Fires Another Salvo at Shareholders

This may look like a fleet of drybulk carriers with a couple of semi-submersible oil-drilling ships tossed in, but shareholders can tell you it's actually a naval flotilla in disguise, firing painful cannonballs of debt and dilution.

The flotilla in question is DryShips (Nasdaq: DRYS  ) , under the devastating command of enigmatic CEO George Economou. Controversial business transactions, in which Economou has an interest on both sides of the handshake, are nothing new here. Colleagues such as Genco Shipping & Trading (NYSE: GNK  ) CEO Peter Georgiopoulos criticized the magnate and other shippers for playing "games with their shareholders' money."

DryShips' latest move feels like pouring salt into shareholders' gaping wounds. Less than two months after I took him to task for quadrupling the company's share count, Mr. Economou is tossing fiscal conservatism to the wind and directing DryShips to purchase the final 25% stake in the company's drillships subsidiary, Primelead Shareholders. The deal, which converts Primelead to a wholly owned subsidiary, is being touted as an accretive move to bring 100% exposure to future cash flow from the promising drillships industry.

I concede that the company's two existing drillships, and four similar vessels presently on order, are the new stars of DryShips' fleet, now that the dry bulk sector has entered troubled waters. With hire rates like the $575,000 dayrate paid by Petrobras (NYSE: PBR  ) for one of the existing rigs, no one is denying the cash flow potential from these assets. But the unrelenting aggressiveness of Economou's quest for growth through all stages of the business cycle gives me pause.

With a $2.85 billion cloud of debt hanging overhead, I believe the company can ill afford the $50 million cash expenditure the deal requires, to say nothing of the $280 million in convertible preferred stock that will become as many as 46.2 million common shares. The preferred shares will convert at a premium to the present share price, and also carry a dividend yield of 6.75%, payable in yet more convertible preferred shares. If you're wondering who stands to hold these new shares, you may have already guessed it: a company controlled by Mr. Economou himself is among the sellers.

I've given up trying to guess at a line that this guy won't cross, and in anticipation of the usual speculative fervor over his dealings, I've even added DryShips to my CAPS portfolio just for fun. I do not, however, consider DryShips a safe investment vehicle. I believe investors seeking exposure to deepwater drilling would be better served by the likes of Transocean (NYSE: RIG  ) or Atwood Oceanics (NYSE: ATW  ) , while Navios Maritime Holdings (NYSE: NM  ) offers similarly bold growth initiatives without the massive debt load.

Further Foolishness:

The "Dry Bulk Shipping" tag within Motley Fool CAPS lists 16 companies. Join our online community today and share your views on this sector. CAPS is free and fun!

Fool contributor Christopher Barker used to captain yachts somewhat smaller than dry bulk carriers. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. Atwood Oceanics is a Motley Fool Stock Advisor recommendation. Petroleo Brasileiro is a Motley Fool Income Investor pick. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a seaworthy disclosure policy.


Read/Post Comments (7) | Recommend This Article (25)

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  • Report this Comment On July 10, 2009, at 4:27 PM, XMFSinchiruna wrote:

    I could have been clearer with the final sentence ... I meant to distinguish Navios as a dry bulk shipper, rather than lump it in with the deep sea drillers. The point is, until DRYS spins off the drillship assets as they had previously discussed, the company is an inescapable hodgepodge spanning 2 very different maritime sectors.

    More about the potential spin-off in a future piece. :)

    Fool on!

  • Report this Comment On July 10, 2009, at 5:04 PM, imacg5 wrote:

    Chris,

    While the Primelead spinoff has been always been called a dividend for months, it was more recently called an IPO in a press release. That would change everything.

    Could it have been a mistake, or does George have that much audacity? I certainly wouldn't put it past him.

    Cardiff George paid $205 million for the rights to those two drillships. Dryships shareholders paid him $330 million to have those rights transferred to them, why didn't DRYS just purchase the rights from the start?

    Because George always gets his extra piece.

  • Report this Comment On July 10, 2009, at 6:01 PM, ADDICTED2DRYSHIP wrote:

    Don't be fooled by my user name - I like the dry shipping SECTOR - not DRYS, though I did alright, dumping at $10 and change in pre-market the day they announced the 3rd - THIRD secondary offering. (does that make it a triciary ?)

    Double bagged Ship Finance, from $6 to $12 - unloaded when crude started to fall. Like DRYS, SFL has a mix of dry bulk, drill rigs PLUS chemical & oil tankers, as well as providing oil services. Unlike DRYS - they seem to take their fiduciary responsibilities seriously and PAY the dividend, currently at over 12%.

    Not sure why, but some people just refuse to unload DRYS. Since bailing, I've made a cumulative total of over 67% investing in other names, including many TRUSTWORTHY companies within the same sector (SFL, FRO, SBLK, GNK, EGLE, NM) while the DRYS die hards are down about 50%. I keep telling a certain trading board they don't HAVE to try and regain their huge losses in the same company they lost it in. Guess slick George is correct in his sentiment towards (some) U.S. investors... and slithering along side a snake of a CEO isn't somewhere I want to be long term.

    George cancels ship purchase orders - and pockets millions in cancellation fees. George structures the Primelead purchase to make tens of millions more. Seems he and Cardiff are making out well, the only ones hurt have been the shareholders.

    So as things stand with Primelead - more dilution imminent, true that IF DRYS is still around in 2 years the revenues will increase, assuming oil has recovered by then, and none of the rig builds get cancelled. BUT - after so much back to back bad behavior by the CEO - who's to say George won't try to pick the pockets of DRYS shareholders AGAIN ?

    One more thing that no one seems to consider - what if the global economy doesn't recover as soon as they're predicting? The boatload of waivers for the loan covenants DRYS has breached - DO eventually expire. The way he likes to play fast and loose with everyone else's money - they might not be so willing to renegotiate next time - and Primelead - could end up being a real shiny hood ornament for a car that gets repossessed. (but if it goes under - they'll take the hood ornament too)

  • Report this Comment On July 11, 2009, at 2:44 PM, multi007 wrote:

    I am one of those DRYS stock owners. Bought at $5, watched it double. Watched it pull back to even. Reason I didnt sell at the double bag is - my idea is to buy and hold this stock with a 5 year time frame. Unless they declare bk, its a great long term play. Note: Im also long (5 years) MGM, AA, LVS, HIG, BAC in possitions initiated 4 months ago, and that I add to them every month.

  • Report this Comment On July 11, 2009, at 6:14 PM, imacg5 wrote:

    Well you bought it cheap enough, there isn't much downsize, but there is a great possibility that it will be dead money, especially if you don't take the profits when they come.

    I don't get the significance of the 5 year plan, dry bulk is very transparent, you can see what the next year will hold but not after that, when the rates fall you must get out.

    Are you aware that the Dry Bulk sector is very cyclical, and for that matter the oil drilling segment of DRYS is too. There will be no added revenue from the rigs until 2011, and the rates and revenues from dry bulk will be poor for the next year. And George has continually stripped money from DRYS and given it to Cardiff, what makes you think he will stop that? He made some brilliant moves for DRYS shareholders until May 2008 then he stopped, put all his efforts into Cardiff and it's balance sheet, and screwed DRYs at every turn for the next year. I could spell out every move, but it would take three pages. I sold some DRYS at $111 and got completely out at $99.

    You may not get a piece of Pimelead and you can't be sure how many outstanding shares there will be. How will you value that?

  • Report this Comment On August 10, 2009, at 11:00 AM, AZ123 wrote:

    Any updates on DRYS spinning off Ocean Rig later this year?: (this is from February)

    DRYS has announced that it is planning to spin off its Ocean Rig holdings as a new company by issuing shares as a dividend to its shareholders. The regular dividend has been cancelled. However, I have not heard that this dividend has been cancelled. The proposed spin off was supposed to occur in Q1 of 2009. However, I have confirmed with DRYS’ Investor Relations that the spin off has now been delayed until 2H 2009. Its format is best described by the DRYS announcement,

    After we file all appropriate documents with the SEC, and once approved, we will spin-off the entity to our shareholders as a dividend. We hope to do so in the fourth quarter of 2008 or in the first quarter of 2009. This is not an IPO, as we will not raise any new equity. Simply, each shareholder in DryShips, as of the record date, will end up owning a share in DryShips and a share in the new spun-off entity, which they can then keep or sell on a U.S stock exchange, and the market will then determine the ultimate value of those shares.

  • Report this Comment On August 10, 2009, at 11:02 AM, AZ123 wrote:

    Clarification: That blurb is from a writer from Seeking Alpha, back in late January/early February, not me. I didn't contact DRYS' Investor Relations. lol

    Sorry for any mix ups.

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