Love him or hate him, but whenever DryShips (NASDAQ:DRYS) CEO George Economou hosts a conference call it is always chock-full of interesting info. The second quarter was no exception. Most notably this round were details about the company's liquidity, industry outlook, and potential opportunities that lie ahead in the coming quarters.
Show me the money
First and foremost, DryShips, just as any company, needs cash to survive. The company had some huge balloon debt payments due at the end of December of this year that if missed ran the risk of bankruptcy. According to the filings, this figure was well over $900 million.
During the call Economou stated, "We have received services from ABN AMRO and Nordea Bank to potentially refinance $450 million of notes. For the remaining amount, we are examining all our financing options [including] equity, or a combination of these sources."
Add to this $450 million refinancing another $14.9 million in quarterly dividends DryShips receives from its majority-owned Ocean Rig UDW stake, and the company is already halfway home from those two items alone. Obviously it isn't completely out of the woods yet, but these measures seem quite hopeful. As CFO Ziad Nakhleh put it in the same call, it's no longer a question of if but now "a question of how DryShips can refinance [its debt] as cheaply as possible."
Dry shipping spot rates coming to life
Coincidently, the timing of the conference call seemed to have marked the bottom of the short term rate cycle. The Baltic Dry Index, or BDI, is a basket of various dry shipping routes and market rates used to measure changes in average global daily spot rates. On the day of the conference call, the BDI closed at 755. Sixteen days later, at the time of this writing, the BDI has leaped 45% to 1,096 which is the biggest jump in months.
Since shipping is a commodity-like service, the industry generally needs to be strong in order for DryShips to prosper. As such, the second thing DryShips wants you to know is it sees the industry turning fast in its favor. Economou stated, "We are optimistic [and] expect [a] sustainable recovery in the second half of 2014 and beyond, and believe DryShips is well positioned to take advantage of the [increase] rates in the drybulk sector."
Economou doesn't just want you to take his word for it. The third thing DryShips wants you to know are the facts that back the company's optimism. Iron ore seaborne trade to China represents the biggest influence in the drybulk market these days. Cheap foreign iron ore supply is causing "expensive and lower quality domestic Chinese production" to be replaced by foreign-shipped supply.
This increasing demand is meeting a decelerating rate of new ships coming to the global market and an accelerating demolition of old ships. The supply side as well is working into the industry's favor. On top of all this, increased iron ore is expected to start shipping from Brazil and tighten up shipping supply even further. High shipping demand and lower ship supply means higher rates and higher cash flow for companies like DryShips.
This is in line with what other experts in the industry are saying. For example, in an email from Jeffrey Landsberg, Managing Director of Commodore Research & Consultancy, he stated, "Much more iron ore cargoes are set to surface in the Atlantic basin from Brazil, with a market-changing shift now under way. In particular, Vale's iron ore shipments during the second half of this year are expected to total at least 176.3 million tons, which would mark an increase of 31.6 million tons (22%) from shipments seen during the first half of this year."
DryShips to make more dry powder
The fourth and fifth things the company wants you to know is the plan to take advantage of the expected situation and how it will benefit using an example. Economou stated, "We remain committed to our strategy, which is to operate all our vessels, both dry and wet, on the spot market in order to take advantage of a sustainable recovery in these markets in 2014 and beyond."
In other words he and DryShips see daily spot rates continuing to escalate so the company won't enter any new fixed-rate contracts any time soon while letting current ones expire. DryShips owns mainly two sizes of ships -- Capesize and Panamax. Though they tend to deliver different types of commodities with Capesize transporting a lot of iron ore and Panamax transporting a lot of coal and grains, they also tend to rally together because when Capesize rates overshoot to the upside. Cargoes from single Capesize ships tend to be split into two Panamax ships.
Average rates realized in the second quarter for DryShips were $11,900 for Capesize and $6,300 for Panamax. Economou gave an example by saying, "A $20,000 per day increase in average charter rates will add another $133 million and $316 million of additional EBITDA for our shipping segment in 2014 and 2015, respectively." Rates of that magnitude were seen in 2010, so based on history those levels are far from impossible.
Finally, if everything happens successfully as DryShips expects and hopes, the company will then enter long-term fixed rate contracts in "one or two years" as a hedge to lock in a very profitable shipping business. Will everything DryShips hopes to happen actually happen? It all depends on if the rates materialize as expected then the rest of the dominoes may very well fall neatly in place. Follow the rate environment closely.
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