What Do DryShips’ Results Mean For Dry Shipping?

DryShips  (NASDAQ: DRYS  ) , deserved or not, is easily the most popular dry-shipping stock. Whether that's because its name directly symbolizes the industry, or whether it owes to the stock's large market cap, when DryShips speaks or moves, investors pay attention. Following Navios Maritime Partners (NYSE: NMM), DryShips recently became the second major dry shipper whose latest earnings contained a very optimistic industrywide outlook.

Results
It's important to note that DryShips is a majority owner of public company Ocean Rig UDW (NASDAQ: ORIG  ) , owning roughly 78.3 million shares. As such, DryShips reports its results with Ocean Rig UDW mixed in, as if both were one company. Ocean Rig UDW is an oil and gas drilling company, which is very different from dry shipping.

Ocean Rig UDW announced its results at the same time as DryShips on Nov. 4, and its stock price shot up 12.19% the next day. The separate company reported adjusted net income of $39.6 million or $0.30 per share. It reported adjusted earnings before interest, taxes, depreciation, and amortization or EBITDA of $161.4 million compared to $122.5 million a year ago. This bodes very well for DryShips, since so much of its asset value consists of Ocean Rig UDW stock.

As for dry shipping, there were few surprises in the actual results. Its largest ships, the Capesizes, are contracted at fixed rates, and its smaller Panamax and Supramax ships almost all operate as a function of the spot rates. DryShips' outlook is what's most interesting. CEO George Economou stated they were "cautiously optimistic, expecting a sustainable recovery in 2014 and beyond."

This is in line with what Navios Maritime Partners said in its release and conference call. Navios CEO Angeliki Frangou said, "The drybulk environment has brightened significantly," and he saw "significant additional iron ore export capacity" supporting rates well into 2014. Navios Maritime Partners is so confident in the strength of dry shipping in 2014, that it has positioned itself to raise dividend payouts to shareholders.

DryShips' conference call contained some valuable tidbits. For DryShips specifically, CFO Ziad Nakhleh described its situation as "an optimal mix of charters." This is because the average fixed rate of its charters is at $26,000 per day, well above the spot rates for any size vessel.

However, he also said he expects the spot rates at some point in 2014 to rise even higher. This is good for DryShips' vessels that operate at the spot rate and great for the industry as a whole.

Nakhleh expects a "sustainable recovery" in 2014 and 2015 at a minimum. Additionally, as was concurred in the Navios conference call, Nakhleh pointed out the large amounts of vessels in the market that are over 20 years old which makes them generally ripe in age for demolition or scrapping. This is in the 8% to 9% range of the worldwide fleet compared to new vessel expectation of just 3.6% growth in 2014. The more shipping supply taken off the market and the less new shipping supply brought into the market, the better rates will be for shippers.

Final foolish thoughts
Dry shipping is basically a commodity business. It's all about rates. High rates lead to high fortunes. Low rates leads to low fortunes. Each shipper will be affected by many things to varying degrees including debt payments, operating costs, contract details, etc.

But in the long term, rates affect them all the most. Follow the rate environment and listen to what each management team of each shipper has to say about the industry going forward. So far, Navios Maritime Partners and DryShips seem to agree that the recovery in dry shipping is here to stay -- and that it has plenty of smooth sailing ahead.


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