Why DryShips Suspended Its Equity Offering

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. 

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  • Report this Comment On December 06, 2013, at 6:48 AM, imacg5 wrote:

    The capital expenditures that DRYS has coming in 2014 is the $153 million owed on the four ice class Panamax ships on order. They don't have financing in place for them.

    The reason that they may not need the money is because the shipyard is far behind on the completion date, and DRYS is hoping to get a full refund of their deposits and negate the deal, should the shipyard not deliver the ships on time.

    DRYS still has huge debt payments, and the recent rise in Panamax spot rates is not enough to help that shortfall. And, the seasonal rate increase will be short lived.

    DRYS is expecting to start receiving a dividend from ORIG some time this year. That would cover half their interest and finance expense each quarter.

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