While there may be some Wall Street analysts, and famous television personalities, looking at the drybulk shipping sector and calling for an imminent rally in shipping rates based on a recent short-term rates rebound, taking a deeper look might make this a riskier play than it seems. In this video, Motley Fool industrials analyst Blake Bos looks at the drybulk shipping sector and notes that a rate rally is typical at this time of year. He points out that China is still a huge risk to this space, and investing success here requires a healthy dose of luck.
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Report this Comment On September 21, 2013, at 10:28 AM, Ostrowsr wrote:
The only confusing item in this video on DRYS is the fact that ORIG, owned by DRYS, could be sold off at any time and DRYS would be debt free, with a fleet of very young ships. Am I missing something here?
Report this Comment On September 21, 2013, at 10:53 AM, imacg5 wrote:
Well, you can't just take the the 78 million shares that DRYS owns and multiply that times 18 and say those would be the proceeds.
The last two times DRYS has sold off just 7.5 million shares the stock price of ORIG has plummeted.
So the proceeds would be less.
And it simply hasn't been George's preference to sell off the entire ORIG share and make DRYS a low debt company.
He sells off only enough to pay the bills, he has not improved the balance sheet, and does not find that a priority.
That scenario has only been a fantasy of some shareholders.
He has only paid down debt enough to be in compliance with loan covenants, not as a method to cut interest costs.
And thats too bad.
He uses as much debt as is allowed, always has.
If he had diluted more during the bubble days, the company would be much healthier now.
Perfect hindsight? Sure.
But other shippers did it, so they were right, and George was wrong.
Hindsight, and comparisons, are a fair judge of management.
Also, under the current oversupplied state of the shipping industry, I wouldn't consider DRYS fleet very young.
Eighteen of them are 10 years or older.
Not rustbuckets, but not young.
Report this Comment On September 21, 2013, at 11:38 AM, TMFBos wrote:
@Ostrowsr
While you are indeed correct on how they'd be debt free after selling the stake, it doesn't solve the problem that they're shipping business is burning through cash and isn't profitable. Unless rates rebounded strongly they wouldn't be able to invest in their fleet and would suffer dramatically and probably have to issue equity or debt. Their fleet isn't as young as it once was, but these ships do have a pretty long shelf life; ~20-25 years. The problems you run into are these new eco ships be able to operate at a much lower cost. Therefore other shipping companies can undercut you on price if they have more efficient ships and it kills margins and cash flow in the long term if you can't upgrade your fleet.
As imacg5 said, you'd also have a lot of selling pressure on the stock as well which would probably hurt the companies proceeds. All in all, i think it's one scary investment I'll be staying away from for the foreseeable future.
Cheers,
Blake
Report this Comment On September 21, 2013, at 2:24 PM, Kingla wrote:
Blake,
You continue to get this sector and partivularlty Dryships wrong. I believe the stock is up 75% since your last article which was also negative. Here's what you are missing:
1. ORIG is likely to commence with dividends which should help the cash flow at DRYS
2. The dry ship business is less than 20% of the Company and with the arrival of the new drillships will be even less.
3. The rate rally we have seen is not typical of this time of year. Maybe somewhat for Panas, but certainly not in any degree what we have seen with Capes.
It's unfortunate that you continue to scare away readers. If they followed your advice they would have already missed the big rally. Too Bad.
Report this Comment On September 21, 2013, at 7:57 PM, imacg5 wrote:
""" 2. The dry ship business is less than 20% of the Company and with the arrival of the new drillships will be even less. """
No, it isn't.
Wake up and read the SEC filings.
Or, maybe if you hear this from George, you might finally understand.
""""George Economou - Chairman, Chief Executive Officer and President
Thank you, Ziad. We're on the last slide, 19. In closing, I would like to clarify for everybody that DryShips is a pure shipping company. 2/3 of its fleet are exposed to the spot market in 2013. We're just holders of shares in Ocean Rig. It's completely different from us. In other words, DryShips does not have any access whatsoever to Ocean Rig's financial resources."""
Report this Comment On September 21, 2013, at 8:16 PM, imacg5 wrote:
""3. The rate rally we have seen is not typical of this time of year. Maybe somewhat for Panas, but certainly not in any degree what we have seen with Capes.""
Either study the seasonal rallies in the BDI, or don't.
Then just wait until Christmas, to find out what you are missing.
China always restocks iron ore inventories at the ports in the Fall. This year, the inventories fell 10 million tons below average.
So the restocking is even more pronounced.
It's all about Capes, iron ore is always about capes, with some split loads for Panas.
The amount of iron ore being shipped to China over the last two months is unsustainable.
There is not a similar demand for steel.
This does happen, quite often.
That oversupply of ships didn't sink.
The glut is estimated at 20%-30%.
The economies of the world didn't just increase like that.
The BDI is spot rates only.
And spot futures say that rates will fall around January, like they always do.
Report this Comment On September 21, 2013, at 8:29 PM, imacg5 wrote:
Someday ORIG will have a dividend.
They are allowed to make it 50% of the previous years net income.
They will need to preserve cash for the new builds. Maybe it will help with that $21 million in interest payments.
Report this Comment On September 21, 2013, at 9:46 PM, imacg5 wrote:
I don't think anyone said don't trade these stocks, or stay away.
Just be careful, and wary.
This is a seasonal rally.
And fundamentals have nothing to do with it.
FREE is up, and they are in deep trouble.
EGLE is up 40% this week, and they have all Supramax, whose rates are only up 1% for the whole year.
Either study the iron ore and steel industries, or wait until December, and be one of many people asking:
"What Happened?"
Report this Comment On September 23, 2013, at 6:21 PM, Kingla wrote:
Imacg5,
Pretty condescending comments and unfortunately not accurate in my view. Last year at this time the BDI declined so seasonal increase? No not really. Clearly demand driven and yes will no doubt decline somewhat, but we haven't seen this sort of increase in years. Also I can read the SEC filings, which don't reflect the % of the business that is drillships. Actually on a market basis it is greater than 100% of the whole, with the Dry bulk business valued at less than zero. You can't look at the balance sheet because the ships are not carries at market.
Anyway we can agree to disagree. My comments were more for Blake anyway who so far has been dead wrong. I think he has done his readers a disservice.
Report this Comment On September 24, 2013, at 7:24 PM, imacg5 wrote:
Yes it is demand driven.
It's Seasonal demand.
It is also speculative deliveries by the iron ore miners.
When miners flood Chinese ports each fall, they grab as many Capes that are on spot that they can.
Only about 20% of the worldwide fleet of Capes are available for spot charter.
The rest are on period charters.
During this seasonal rush to deliver the port congestion delays the loading and unloading, which also keeps more Capes from being available.
The massive glut of ships didn't suddenly become too small. It just isn't available at this time.
Word from the Chinese steel industry is that the steel companies are in no rush to buy iron ore, because they simply aren't selling enough steel.
Report this Comment On September 24, 2013, at 7:53 PM, imacg5 wrote:
This increase is not unprecedented.
Why don't you use some numbers to back your claim.
In Sept of 2012 the BDI dropped to 667
In Oct, 2012 it rose to 1109.
And by Feb, 2013 it fell again to 740.
In July of 2011 the BDI was 1330.
In Sept, of 2011 the BDI was 1795.
In Oct, 2011 the BDI was 2136.
And by Feb, 2012 the BDI fell to 647.
In Dec, 2010 the BDI rose to 2100.
By Feb, 2011 it dropped to 1064.
You don't see a seasonal demand here?
These dry bulk stocks are a great trade, I've been trading them for 6 years.
Blake is doing a service to warn readers about "investing" in them.
Two years ago TBSI, a company with 50 ships, went up 80% in one month, and then went bankrupt.
The market continually gets fooled by these stocks, and the "Jim Cramers" that tout them.
Most of these companies have problems that will not be helped by this rally in rates.
People should be very wary.
I'm only condescending to people who decide to lecture an author about being wrong, when they are the ones that haven't done their homework.
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