DryShips Is Sinking Into the Abyss

There are one-hit wonders, and then there are those stocks that get hit only to come back for bigger and better gains in the future.

Determining who will fall takes more than just looking at a stock's price, so the fact that dry bulk shipper DryShips (Nasdaq: DRYS  ) plunged 17% after releasing its earnings, and has lost a quarter of its value over the past month, means that we need to dig a little deeper to see whether there's reason to hope for a recovery.

DryShips snapshot

Market Cap

$743 million

Revenues (TTM)

$1.1 billion

1-Year Stock Return

(24.2%)

Return on Investment

(3.0%)

Estimated 5-Year EPS Growth

10.0%

Dividend and Yield

N/A

Recent Price

$1.75

CAPS Rating

***

Source: FinViz.com. N/A = not applicable; DryShips doesn't pay a dividend

A mighty temblor
The shipping industry, both dry bulk and tanker, is caught between the Scylla and Charybdis of global economic malaise and capacity glut, which are decimating dayrates and causing individual shippers to founder on their shoals. General Maritime, Deiulemar, Omega Navigation, Stephenson Clark, and Sanko have all filed for bankruptcy protection this year. Two weeks ago, Overseas Shipholding Group became just the latest to join the group and it certainly looks like DryShips will be joining it in Davey Jones' locker.

DryShips reported a net loss of $51 million in the third quarter, or $0.13 per share, compared to a profit of $25 million a year ago, or $0.07 per share, as spot charter rates sank below breakeven levels. Worse, they've hit this nadir just as the shipper's long-term contracts are expiring.

Another wave of doubt washing over the decks of the industry is the strict European banking regulations that caused a number of lenders to exit the market. As capital dries up, shipping defaults pressure those lenders that remain such that they are having difficulties meeting their capex requirements.

Drilling down
Fortunately DryShips has a backup plan. It previously diversified into drilling rigs and its Ocean Rig (Nasdaq: ORIG  ) subsidiary has given it some financial flexibility. Where the dry bulk goods segment sank 48% in the quarter to $41 million as time charter equivalent rates were cut in half, DryShips' drilling business surged 26% with revenues hitting $286 million as time charter equivalent rates actually rose 17% (tanker revenues nearly tripled, but at just $9 million it's a negligible contribution).

Ocean Rig is one of the purest plays on ultra-deepwater drilling, a method that has gained attention from Transocean (NYSE: RIG  ) , Noble (NYSE: NE  ) , and Seadrill (NYSE: SDRL  ) . Earlier this year it seemed DryShips was slowly exiting the drilling market as it sold off shares of the subsidiary, but that may no longer be desirable as it's all that stands between the company staying afloat and sitting on the bottom of the ocean.

Since it still owns a 50% stake in the driller, it could be a source of additional funds should the need arise. Safe Bulkers (NYSE: SB  ) , for example, has proven to be a not-so-safe haven for income investors as it recently had to slash its dividend to conserve cash. Still, it's a relatively financially sound shipper, as is Diana Shipping (NYSE: DSX  ) . When the industry once again emerges from the depths like Leviathan breaching the surface, expect DryShips, Diana, and Safe Bulkers to still be floating.

Avast, ye scallywags!
Yet it's hard to recommend shares of DryShips at the moment, and its CEO George Economou has shown a penchant for destroying shareholder value rather than creating it, though the value of being among the last men standing should mean something.

I rated DryShips to underperform the broad market indexes on Motley Fool CAPS, the 180,000-member-driven, investor community that translates informed opinion into stock ratings of one to five stars. The stock has fallen 55% since I weighed in on it back in February compared to a nearly 3% gain in the S&P 500 and I don't see any catalyst at the moment that changes my opinion. But let me know in the comments section below if you think DryShips will sail on calmer seas in the near future.

Shake, rattle, and roll
If you're an energy investor looking for other opportunities, then you should look into one of the more exciting plays in the space: Seadrill. To learn more about the strengths and weaknesses of this company, as well as what to expect from Seadrill going forward, be sure to check out this brand-new premium report put together by one of our top Stock Advisor analysts. Click here to get started.


Read/Post Comments (4) | Recommend This Article (7)

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 November 27, 2012, at 3:02 PM, Ostrowsr wrote:

    DRYS sinking into the abyss is probably not the best title of this article since it ends up saying they will probably make it due to their drilling business. Is it not a good risk for a small amount of cash given the low price and the fact that it was once over $100 per share. Whatever happened to risk / reward ratio. What is the 50% of ORIG worth as a stand alone company, disregarding the shipping business?

  • Report this Comment On November 27, 2012, at 3:25 PM, imacg5 wrote:

    Well, first of all DRYS owns 64% of ORIG.

    And when DRYS reached it's all time high of $131, they had 44 million shares outstanding. They now have over 400 million shares outstanding.

    (Pay no attention to the 380 million listed as weighted average shares outstanding) the shares have been awarded, and will be converted.

    As with any penny stock, it doesn't matter whether the stock trades for such a low price.

    Just as with a stock that trades for $700 a share, a 50% drop, counts the same.

    And when the drilling rig sector and tanker sector had rising revenue, it was because of the delivery of more ships. Not because of improved business.

    So the expenses went up and the debt went up.

    That's a massive amount of revenue to merely end up with a loss.

  • Report this Comment On November 29, 2012, at 10:51 AM, scuneo6580 wrote:

    Let's look at the artciles published by Motley about DRYS over the last two weeks:

    DryShips Is Sinking Into the Abyss 11/27

    5 of Last Week's Biggest Losers 11/19

    DryShips Goes Negative 11/15

    Boring.

    DRYS has gone up over the last week by almost 20% - where is that article?

  • Report this Comment On November 29, 2012, at 3:15 PM, surfgeezer wrote:

    Why would you not mention SFL? An obvious comparison and after today's earnings an even more obvious better choice. NMM also spanks.

    C'mon Mötley don't talk like we are the fools.

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