A Gaping Hole in the Side of DryShips

As a ship's captain, I stand ready to lend assistance to any vessel in distress. As an investor, though, I am motoring full-speed away from this sinking dry bulk shipper. 

DryShips (Nasdaq: DRYS  ) , once the high-flying darling of the dry bulk sector, struck an iceberg within a sea of debt last week and has been taking on water ever since. Just one week after announcing drastic measures to reduce capital expenditures and slashing its dividend, DryShips keel-hauled investors by announcing it was in breach of debt covenants with two of the company's many creditors, and that it plans to raise $500 million through a new stock issue.

The news sent the stock diving toward the ocean floor, and performed no favors for the remainder of the dry bulk group. DryShips jettisoned more than half its market value. Eagle Bulk Shipping (Nasdaq: EGLE  ) shares shed more than 20%, while larger competitor Genco Shipping & Trading (NYSE: GNK  ) is down more than 10% since the announcement.

With unrelenting weakness in the Baltic Exchange Dry Index, and continued tightness in global credit markets, the deafening wake-up call from DryShips last week reminds Fools that risk assessment within industry remains in a complex state of flux. Eagle Bulk Shipping's aggressive plan to build more than 30 ships looked like a great growth opportunity last summer, but as commodity demand tanked in subsequent months, several of those constructions have been placed on hold. Likewise, a rapidly changing world forced me to reconsider previously bullish stances on both Navios Maritime (NYSE: NM  ) and Excel Maritime Carriers (NYSE: EXM  ) .

Many Fools saw reasons for concern on the horizon well before they materialized for DryShips. Fellow Fool contributor Rich Smith offered DryShips as his pick for the world's scariest stock way back in October 2007. CAPS All-Star abitare nailed the call in June of 2008, pointing to Chairman and CEO George Economou's now-infamous quote about American investors and their willingness to capitalize his ventures. Longtime Fool TMFEldrehad issued a warning in July, feeling seasick after reviewing more comments from Economou that just didn't add up. By the time I voiced my concerns in November, based upon DryShips' frightening debt burden, Fools had already been warned.

I continue to view Diana Shipping (NYSE: DSX  ) as the best-positioned company in the dry bulk sector, but this remains a very high-risk space until commodity demand begins to recover in earnest.

Further Foolishness:

Despite the troubling developments and the enormous share sell-off of recent days, more than 2,000 CAPS members maintain outperform picks for DryShips. Given the severity of the challenges facing the company, these investors need your help to make the right call. Regardless of your perspective on this company, come share your thoughts within Motley Fool's free CAPS community today.

Fool contributor Christopher Barker captains yachts and writes about stocks. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of Diana Shipping. The Motley Fool has a seaworthy disclosure policy.


Read/Post Comments (13) | Recommend This Article (50)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 02, 2009, at 3:59 PM, ganec wrote:

    I totally disagree with anyone giving baseless articles against Dryships. This is a prime shipping company, very well established, many ships in operation, no defective payments and huge capabilities. Simply, the world storm which has hit the economies has also its effect on this big shipping company.

    Has anyone noticed that shipping is gradually recovering ? The BDI from its bottom of 670 has now touched the 1100 and still picking. When huge institutions like Citibank, Bank of America and so amny others have on their knees begging for rescue packages, I have nowhere heard that Dryships has ever resorted to such humiliating arrangement. Banks which have lent money to Dryships, they are absolutely secured and they must simply show some lenience and flexibility to a promising giant who is going to soon rise high.

    George GEA

  • Report this Comment On February 02, 2009, at 4:09 PM, sas5491 wrote:

    Many people made money on this stock as lest we not forget it did hit $116.43 in the past 52 weeks. Many people made money and I am sure more lost money. It is always easy to say I knew this and that after the fact. Reality is you are correect in many of your accessments, however, it is doubtful DRYS will go 11 as this is an industry problem with all the Greek shippers, and the lenders do not want to operate and pay for selling these tankers.Baltic index is predicted to rise in the near term, but I do not see major gains in any of these stocks anymore. Possible that a bounce will take DRYS to $10.....over next month. With this stock anything is possible if you have a stomach made of iron.

  • Report this Comment On February 02, 2009, at 4:10 PM, XMFSinchiruna wrote:

    I didn't realize there were still passengers on this vessel... [throws lifeline].

    In this environment of severely constrained credit worldwide, I believe any company in contravention of loan covenants carries far too much risk for the individual investor to consider. It's like heading out to sea with a cargo full of lead when you know a storm is raging. Sure, you might make it through, but the risks are not insignificant.

    This is just one Fool's opinion... anyone else care to share?

  • Report this Comment On February 02, 2009, at 7:44 PM, 28wballsofsteel wrote:

    Thanks for the lifeline. I got into this stock at 3, road it to 8, bailed then got back in at 9 sold at 11 and (GULP)

    am now in at 12.7 I was born a good swimmer and looks like I might need my skills.

    Here is the fundamental reason I didn't bail out on the way down....the BDI keeps going up. I don't know where the cross between the BDI and this stock going up is, but I think we have hit the BDI bottom. I can't imagine GE sinking another company ala Alpha.

    Riding on the Titanic...

    Does anyone know what the BDI was doing when GE sunk Alpha? (might be good to know)

  • Report this Comment On February 02, 2009, at 8:42 PM, XMFSinchiruna wrote:

    My aptly-named friend,

    I think you might be right about BDI trending up from here (albeit perhaps slowly), but it would take a huge recovery in charter rates IMO to remove the 800-pound anchor of debt from DRYS's bow. Here are some more of my thoughts on DRYS over on the Fool blogs, which are a highly recommended destination for further community insight on all the stocks that are making the news.

    http://caps.fool.com/Blogs/ViewPost.aspx?bpid=139288&t=0...

    Please note, at least one analyst agrees with you, and believes this share sale was unnecessary, but I just can't condone exposure to these shares within the present environment... we have enough risk these days to be messing around with companies that have broken debt covenants. I made a similar case against Calumet Specialty Products back in November. The stock hasn't moved much since then, but I still think we could be in for more downside in that one.

    http://www.fool.com/investing/dividends-income/2008/11/07/ca...

    I hope the trade works out for you... as I quipped with respect to Teck Cominco at one point, at least downside risk is limited from here. :)

  • Report this Comment On February 03, 2009, at 8:55 AM, JakilaTheHun wrote:

    Great article.

    I liked dry bulk back in November when the prices for most of the companies were very low (IMO). Most of the drybulkers are now up 80-150% from their lows. The sector will continue to struggle for quite awhile, but I think there's a lot of long-term value to be found; particularly if we see a good pullback on some of these stocks again.

    Definitely keeping away from DRYS at this point, though.

    I like DSX as well, but I'd rather wait to see if it drops below $10 again. $8 would be even better.

  • Report this Comment On February 03, 2009, at 10:04 AM, sentinelbrit wrote:

    This is all part of the working out process. However, in this case, shareholders will have to bail the company out, not the goverment. Those dry bulk shipping companies with better balance sheets should benefit from DryShips leverage problems. This is how capitalism is suppose to work. I presume this is why GNK is up!

  • Report this Comment On February 03, 2009, at 10:39 AM, ganec wrote:

    I feel absolutely satisfied with my last night comment on Dryships. Today, a major Bank has initiated more favourable loan terms to the company and for this reason its stock shoot over the roof (from 4.85 when I wrote my comment, today it reached 6.45 or a 27% increase). The other reason that all shipping stocks climbed today is the continuous rise of BDI.

    Everybody must feel secured with Dryships, do not hesitate to get in !

    George GEA

  • Report this Comment On February 03, 2009, at 12:11 PM, XMFSinchiruna wrote:

    George? George Economou? Is that you?

    [Just kidding, BTW] :)

    I do wish you luck with that stake, but the debt burden is too heavy to pass this captain's muster..

  • Report this Comment On February 04, 2009, at 11:30 AM, bigwahoo1 wrote:

    The Baltic Dry Index has been up for the past 11 days straight. Notwithstanding the drastic drop of the past months, that is an increase of 15% in the past 11 days. It is coming back, and hopefully with a vengance. We might be a large part of the world economy, but we are not the only economy. Things such as coal and lumber and other dry raw materials don't stop just because there is a slow down in a once overheated economy.

  • Report this Comment On February 04, 2009, at 12:42 PM, ganec wrote:

    DRyships is already 7 dollars from 4.85 just 2 days ago ! What you have to say ? The BDI today comfortably passed the 1300 and still going north. The giant, shortly from now shall let Mr.Fool feeling....fool ! Just a joke but the truth is behind.

    Dryships is a safe stock for the coming months and years.

    George GEA

  • Report this Comment On February 04, 2009, at 1:06 PM, XMFSinchiruna wrote:

    toss of the coin... heads this time, tails next. The point is that as a long-term investment strategy, picking debt-laden corporations in a struggling operational environment in a context of frozen credit markets is simply not a recipe for success.

    Some investors have done well no doubt trading the short-term volatility in bank stocks like BAC and C... confidently picking their lows and selling a few bucks later. Those finding success with such strategies, though, must know that fortunes can change just as quickly.

    I hope you're right about DRYS. I hope the stock recovers all the way back to it's 52-week high eventually and makes whole again all the investors who at beneath $5 per share were painfully in the red. I'm certainly not here to begrudge anyone's trading success... just the opposite... I wish for all to succeed. Congratulations on a quick double... some might say I'm missing out on such opportunities, but I simply don't have the risk tolerance for a trade like that.

    The exact same arguments could have been made for TCK stock after the company announced major restructuring to respond to debt concerns... after all, TCK is a major presence in base metal mining and prices for copper and other metals have recovered somewhat from recent lows... but a similar bet on TCK after the announcement would have gotten me absolutely nowhere.

    As in a game of 8-ball, one shot does not a successful player make. Winning players have a strategy for success that works against every opponent.

  • Report this Comment On February 19, 2009, at 6:34 PM, XMFSinchiruna wrote:

    That was a quick ride... like climbing up the face of a rogue wave. The stock is back below $4 today 2/19, so I hope some Fools heeded my caution and cashed out near the crest.

    Anyone?

    Incidentally, I would much rather have been wrong if it meant that Fools nursing stakes in DRYS could have been made whole.

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