DryShips Re-Raises the Ante

If you've already bet everything but the kitchen sink, you might as well go all-in. That's precisely what DryShips (Nasdaq: DRYS  ) has done with its latest acquisition, as the greatest gamble in stocks continues to raise the stakes.

Under the notorious command of "Curious George" Economou, the shipper has confronted the prolonged malaise of the dry bulk shipping industry with a tireless quest for aggressive countercyclical growth. The approach has landed DryShips deep in the trash heap as risk-averse investors shun the shares, while penalizing some die-hard thrill-seekers with mountains of debt and epic dilution.

Please indulge me in this brief Foolish rant
Announced Tuesday, the company's latest move to acquire dry bulker OceanFreight (Nasdaq: OCNFD  ) for $118 million uses its 78% stake in Ocean Rig like an ATM immediately prior to that subsidiary's long-awaited IPO. Although the transaction will sacrifice only 2.3% of DryShips' Ocean Rig stake, with the remainder funded by cash on hand, it nonetheless skims from investors part of their just reward for withstanding an uncommonly grueling journey.

At the same time, OceanFreight's existing debt burden -- which is greater than its market cap even after Tuesday's 79% post-announcement surge -- compounds DryShips' already-weighty debt position. Perhaps more disturbing to this Fool was Economou's focus upon OceanFreight's low-cost credit facility of $142.8 million as a benefit of the move, particularly when combined with his mention of "further strategic acquisition opportunities." Give this guy a line of credit, and watch him find bold ways to spend it. We've seen that pattern repeat ad nauseum over the past several years. The part we have yet to witness is where shareholders have something to show for it. It reminds me of Obamanomics!

The unfathomable upside potential
With Economou's drubbing now freshly delivered above, we are clear to turn our attention to the all-important counterpart to DryShips' unspeakable risk profile. If DryShips can manage to survive this prolonged period of acute vessel oversupply -- which rival Diana Shipping (NYSE: DSX  ) expects will claim some high-profile casualties before it's through -- then the enormous wager of DryShips' ceaseless expansionary stance will likely pay off in an ultimate jackpot of explosive revenue growth.

Although this latest transaction is orders of magnitude smaller than the company's collective moves to expand Ocean Rig's fleet of top-of-the-line drillships, it nonetheless has the capacity to prove a meaningful driver of long-term growth for the dry bulk segment. For starters, the addition of OceanFreight's fleet of four Capesize vessels will give pro forma DryShips the largest fleet of the behemoths operated by any public company in the world. Along with two Panamax vessels, the six carriers from OceanFreight offer a rejuvenation of DryShips' aging fleet, and come complete with "attractive long-term charters" in tow. The additions account for about a 25% expansion in the tonnage of DryShips' existing dry bulk fleet.

Meanwhile, I believe the real hidden gem in this transaction is the accompanying set of contracts to construct five new very large ore carriers for delivery in 2012 and 2013. At around 200,000 deadweight tons apiece, these gargantuans offer DryShips some timely fleet diversification for this period when Capesizes and Panamaxes represent by far the most acutely oversupplied segment of the industry. Evidence is mounting, furthermore, that the nature of ore demand will trend toward a preference for ever-larger vessels.

Take for example the move by Diana Shipping to construct two Newcastlemax carriers of 206,000 DWT, which are purpose-built to serve the very Australian export facilities that miners BHP Billiton (NYSE: BHP  ) , Yanzhou Coal Mining (NYSE: YZC  ) , and others have joined forces to rapidly expand. China, India, and other key growth markets are creating an unprecedented scale of global demand for coal and iron ore, Rio Tinto (NYSE: RIO  ) and others are building mining operations of unprecedented scale to meet that demand, and it seems clear the ships used to transport those materials will mirror this monumental expansionary trend.

For confirmation of the trend, one need look no further than Vale's (NYSE: VALE  ) bold campaign to construct at least 35 Valemax carriers that are twice the scale of DryShips' pending VLOCs. Sitting in the water, VALE's giants are as tall as a 22-story building. If you balanced one on its stern -- good luck! -- its bow would tower over the tip of the Eiffel Tower! Vale's armada will revolutionize the overall composition of the global dry bulk fleet, and while DryShips' VLOCs may look puny by comparison, they are nonetheless a strong step in the right direction.

The final word on DryShips' stock
Although ultra-high-risk ventures are generally not my cup of tea, I have found myself unable to resist building a small speculative position in DryShips. I consider the risks far too elevated to consider wagering a penny more than I'm prepared to lose outright, but I intend to hold shares in both entities after the Ocean Rig IPO to keep my high-stakes wagers on the roulette wheel.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Diana Shipping and DryShips. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (10)

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 July 27, 2011, at 3:58 PM, imacg5 wrote:

    George Economou has been criticized often over the last three years for deals he has made between DRYS and Cardiff, a private company he owns 70% of. His sister Chryssoula Kandylidis owns the other 30%.

    He hasn't changed anyones mind with this latest deal.

    Of all the distressed shipowners, and bargain ships available in the world, he just happens to have chosen OCNF to purchase with the cash and stock of poor beaten up DRYS shareholders.

    OCNF has been on a crash coarse over the last three years as have most bulkers, but OCNF has gone through a 3 to 1 reverse split over the last year in order to avoid delisting. And most recently a 20 to 1 reverse split.

    The big winner in this merger?

    Last week the CEO of OCNF, Anthony Kandylidis, nephew of George, owned 50% of a company with a market cap of $40 million.

    This week, Anthony stands to walk away with a deal worth $67 million. Half cash, and half in OceanRig shares. Shares that DRYS owners have been waiting patiently to get a piece of, for three years.

    Those DRYS shareholders have been applauding the selling of bulk ships lately in favor of being more of a Drill Rig business.

    And instead they get this deal.

  • Report this Comment On July 27, 2011, at 4:00 PM, Hohum777 wrote:

    Nice read but

    <<For starters, the addition of OceanFreight's fleet of four Capesize vessels will give pro forma DryShips the largest fleet of the behemoths operated by any public company in the world >>

    is not true at the operating level. The 18 Capes includes the 2 Cape and 5 VLOCs newbuilds. When those vessels deliver DRYS might have the largest fleet of Capes among publicly traded companies. I think the NM fleet has 12 Capes in the water right now.

  • Report this Comment On July 27, 2011, at 4:08 PM, Hohum777 wrote:

    I agree with imacg5.

    When I saw the news announcement the immediate thought that went through my mind was a deal to help bail out the nephew. I serious wonder if George or the Kandylidis family loaded up more shares before the deal.

  • Report this Comment On July 27, 2011, at 5:09 PM, imacg5 wrote:

    The public companies pale in comparison to the hundreds owned by COSCO, or Mitsui.

    I'm not sure what the author finds attractive about Capes. It has been the most overbuilt class of ships so far resulting in Capes being chartered at lower rates than Panamax for much of the year. And the arrival of the VALE ships will put an even greater burden on Capes.

    Basset Holdings, a company owned by Anthony bought $20 million shares in 2010.

    Steel Wheel, a company owned by Anthony was awarded 9 million shares at the end of 2010 for compensation.

    And another company owned by Anthony received 35 million shares this year, for the contracts on two of those VLOC's.

    That was a very George like deal.

    The transactions can be found in the SEC filings.

  • Report this Comment On July 27, 2011, at 8:36 PM, XMFSinchiruna wrote:

    Well, I learned something from my fellow Fools today. I had not been aware of the family relationship there. Had I known, that certainly would have become a central focus of my rant above.

    Unbelieveable!

  • Report this Comment On July 27, 2011, at 8:56 PM, XMFSinchiruna wrote:

    imacg5,

    I'm not fond of Capes at the moment, but this too shall pass. Even with the Vale fleet, Capes will have a role in future transport of ore. The global fleet of them will be culled down, older vessels first, so there is some logic to countercyclical vessel acquisitions that may seem futile.

    I had not been following OceanFreight's story very closely prior to this transaction, and as such I was also unaware of the insider dealings you note above. I very much appreciate you bringing them to my attention.

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