When companies raise capital to pay down debt or grow their businesses, it can be viewed many ways by investors. Sometimes, de-risking the business is a good idea and can make the company more attractive to shareholders long-term. And sometimes, raising capital to expand operations or make investments for the future is a good idea.
DryShips (NASDAQ:DRYS) has announced two big capital raises in the last few months, and neither one has been viewed positively by investors. There may be good reasons when you look at the company's history.
The never-ending equity rounds
Dryships has raised funds in a number of ways over the past year, but there were two very notable deals in the last two months, raising $400 million by selling shares to Kalani Investments Limited. On Jan. 31, 2017, the company announced that it had completed a $200 million stock offering to Kalani, which was only announced on Dec. 27, 2016 and was an offering that could have taken up to 24 months.
Fast forward to Feb. 17, 2017, and DryShips announced another $200 million stock offering to Kalani "over a period of 24 months." Sound familiar? We don't know exactly how many shares were sold or what at what price, but given the fact that shares have traded between $2 and $4 much of this time and only 36.3 million shares were outstanding at the end of 2016 we know that the offerings were incredibly dilutive to existing shareholders.
Where the cash is going
When fourth-quarter 2016 results were released, management touted the $243 million of cash on the balance sheet as a point of strength. But they also knew the cash wouldn't stay there long.
DryShips acquired a Very Large Gas Carrier (ship category for the uninitiated) for $83.5 million in January and has another three vessels on option at the same price. In total, $334 million may be spent to get into the gas transport market.
Then, on Feb. 21 2017, the company announced the acquisition of two oil tankers for $102.5 million. Management touted the low prices being paid for the vessels, but it's not certain the company can make a great return selling the vessels into the spot market.
Why investors should doubt DryShips
As I mentioned earlier, share sales aren't necessarily bad for a company, but the cash needs to be used wisely. DryShips is taking incredibly dilutive share offerings and using the money to buy natural gas and oil tankers that may not ever generate a solid return and management doesn't have a history of generating returns. The chart below shows that, over the past five years, DryShips has a history of destroying shareholder value. What reason do we have to think that will change?
I also recently highlighted that CEO George Economou has a long history of self dealing with DryShips, and he doesn't have a good history of creating shareholder value either. So share offerings that might be seen as a positive for some companies should likely be seen as a negative for DryShips until proven otherwise.
Given DryShips' history of destroying shareholder value, I don't see a reason to assume the new funds will be invested wisely. And management has shown they're willing to dilute shareholders at a moment's notice with new share or debt offerings. That's not the way to build long-term value, and it's a big reason to avoid the stock.