Shares of Shipping Stocks Move Big Today on Industry Consolidation, Analyst Downgrades

Frontline limited is buying DHT Holdings, Costamare gets downgraded, and DryShips surges because...

Tyler Crowe
Tyler Crowe
Jan 30, 2017 at 3:22PM
Energy, Materials, and Utilities
Picture of cargo ship at sea

Image source: Getty Images.

What happened

Today has been a busy day for shipping stocks. Shares of oil tanker company DHT Holdings (NYSE:DHT) are up 11.3% as of 1 p.m. EST today after the company received a nonbinding proposal from Frontline Ltd (NYSE:FRO) to acquire it. Shares of Frontline are up less than a percent on the news. Also, shares of container-ship vessel owner Costamare (NYSE:CMRE) are down 9.8% after last week's earnings resulted in an analyst downgrade. And, of course, no day on the stock market is complete without a double-digit move from dry-bulk vessel owner DryShips (NASDAQ:DRYS) for absolutely no reason whatsoever. Shares are up 13% today.

So what?

So let's start with the big news: Frontline looking to acquire DHT Holdings. This shouldn't come as a surprise, really, as Frontline and its affiliate companies have been building a position in DHT for some time. It currently owns 16.4% of shares outstanding and is looking to buy out the remaining in an all-stock deal of 0.725 shares of Frontline for every share in DHT.

Today, that would value DHT at about $5.12 per share. Shares have jumped on the news, but they haven't quite reached the offer price because it is a nonbinding offer. There are several hurdles that will need to be overcome, such as DHT's board of directors adopting a plan to issue shares in the company to existing owners if Frontline were to increase its offer. Basically, the board doesn't want to be bought out, at least not at the price Frontline is currently offering.

For Costamare, this is a bit of a head-scratcher. The company beat revenue, EBITDA, and normalized earnings expectations for the quarter, but losses related to an asset held for sale meant that the company's $0.20 per-share loss was below expectations for GAAP earnings. Analysts at Credit Suisse downgraded the stock from "neutral" to "underweight" on the news. According to the analyst that issued the downgrade, continued pressure on charter rates throughout the year coupled with a very high amount of idle vessels means that it will be incredibly challenging for Costamare to find charters for its 32 vessels up for recharter this year.

As far as DryShips is concerned, it just doesn't take much to move this stock double-digits anymore. Last week, the company's stock completed its fourth reverse stock split in the past year, most likely to keep its share price high enough from being delisted. Also, on Jan. 20, the company announced the purchase of a very large gas carrier. With this move, it will shift from just being a dry bulk shipper and become a more diversified company, but in making the acquisition it ate up all available liquidity, which will likely put the company in a cash crunch. A lot of shareholders abandoned ship last week, with shares dropping 58% over the past five trading days, so this move looks like another one of those day-trader feeding frenzies. 

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Now what?

Just about every move today is a non-issue for investors. For Frontline and DHT Holdings, the combination of the two companies would consolidate a pretty fragmented industry and would likely give the combined company some pricing power. However, it sounds as though the emotions between the boards of directors aren't looking great, and the deal may not happen in its current form.

For Costamare, this downgrade seems more like some short-term industry issues that could resolve themselves over time. The analyst report even says that the company has done a commendable job of cutting costs and that it should be able to handle an industry downturn.

For DryShips, its stock is completely toxic for long-term investors. I'm sure there is someone out there saying that things can't get any worse from here, but they have been saying that for five years now with a 99.99% loss to show for it.

DRYS Chart

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If you care about your investing dollars, then don't put a penny in DryShips.