What: Shares of dry bulk shipper DryShips (NASDAQ: DRYS ) jumped 7% in early trading today after the company suspended a $200 million stock-issue program.
So what: In early October, DryShips announced plans to raise capital by selling shares worth $200 million in an at-the-market offering through sales agent Evercore. Under the agreement, DryShips had the flexibility to sell shares through Evercore in the market as-and-when needed, allowing it to tap higher prices. Pursuant to the plan, DryShips raised $20.2 million by selling shares during October. The company didn't give out numbers for November, and the program stands suspended for now.
Now what: While DryShips didn't mention the reasons behind the suspension, existing investors are happy to escape dilution. But that comes at a price. DryShips is saddled with more than $5 billion in debt, and its operating profits have a lot of catching up to do.
For perspective, DryShips' shipping division loan payments were two-and-a-half times its adjusted EBITDA, or earnings before interest, taxes, depreciation, and amortization, during the third quarter.
The shipper's losses have expanded 70% to $199 million for the nine months ended September 30, 2013. That has left DryShips high and dry with negative free cash flow -- a situation unlikely to change anytime soon.
DryShips projects its 2014 funding requirement to be $150 million, and issuing shares is one of the ways the shipper can take care of that. The suspension could mean one of three things:
- The plan isn't working out as DryShips expected.
- The shipper has found out an alternative funding vehicle.
- It doesn't require as many funds anymore.
The market is probably betting on the last reason. In addition to expectations of a shipping rate rebound next year, analysts have a few good reasons to feel more confident. For one thing, DryShips' EBITDA improved slightly during the last quarter. If the trend continues, it will reduce its requirement for urgent funds. Also, DryShips successfully struck a deal with some lenders last quarter which allows it to defer payments and save $55 million in capital costs for 2014.
Thus, improving cash flow or another debt restructuring could explain the equity issue suspension. If that's the case, an update should come through soon, which could send DryShips stock soaring. But the real good news will be if the company terminates the program. Remember, it has only suspended the share issue, and still has the option to reactivate it.
Stay cautious, because today's euphoria may not last long.
Forget DryShips -- check these stocks if you crave huge profits
Dryships is in a dire state, but some companies are poised to soar from record oil and natural gas production in the United States. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a comprehensive look at three energy companies set to soar during this transformation in the energy industry. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza." Get your hands on this report before the rest of the market catches on. Simply click here to access your report -- it's absolutely free.