Please ensure Javascript is enabled for purposes of website accessibility

Has DryShips' Growth Just Begun?

By Matthew DiLallo – Jul 5, 2017 at 7:35AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The diversified shipping company has recently taken delivery of 11 vessels and has six more on the way.

DryShips (DRYS) spent much of last year jettisoning vessels from its fleet to raise cash and shore up its balance sheet. Overall, the company unloaded 10 dry bulk ships and its stake in an offshore drilling company. By doing so, the company put its finances back on solid ground by the end of the year, which positioned it to start rebuilding its fleet with new vessels so it could grow off that new base.

That is just what it has done since the beginning of the year, going on a buying binge by purchasing 17 ships that expanded its dry bulk carrier business and diversified its operations into oil tankers and gas carriers. These ships have the capacity to deliver significant earnings growth over the coming year if everything goes according to plan.

Bulk carrier leaving the loading terminal.

Image source: Getty Images.

Patching up the leak

One of the reasons DryShips needed to sell off so many ships last year is that it lost a boatload of money due to sinking shipping rates. Overall, it reported a negative $42.3 million in adjusted EBITDA last year, which was an abrupt reversal from the prior year, when it generated $469.1 million of adjusted EBITDA. The company would go on to tally another loss in the first quarter, reporting a negative $7.4 million in adjusted EBITDA after spending $2 for every $1 it collected in revenue.

That said, DryShips expects that the 17 ships it has bought so far this year will eventually plug the gaping hole in its cash flow statement. Several of the ships it acquired either came with (or DryShips subsequently signed) time charters that will lock in a predictable cash flow stream. For example, the company has purchased four gas carriers this year that all came with long-term time charters that represent up to $392 million of future revenue potential. 

Big ship with escorting tugs leaving port at sunset.

Image source: Getty Images.

Adding it all up

When adding the cash flow from these contracts with what it anticipates its unchartered vessels can earn on the spot market, DryShips estimates that its rebuilt fleet can produce $77 million of EBITDA on an annual basis. That would mark a huge shift from last year's loss.

That said, this earnings growth won't come all at once. According to comments by CEO George Economou in early May, the company expects that "our earnings and cash flows will build up during the second half of 2017." Driving that view is the fact that DryShips has been slowing taking delivery of its recent purchases over the past several months. As of its latest update, the company had taken control of 11 vessels and should take delivery of the other six later this year. Because of those staggered deliveries, DryShips' earnings should steadily grow over the next several quarters if shipping rates cooperate.

Meanwhile, the company continues to raise cash, which gives it the financial flexibility to make additional vessel acquisitions. In late May, for example, DryShips announced that it received a firm commitment for a senior secured credit facility of up to $150 million using its four gas carriers as collateral. That left the company with another 32 vessels that currently are unencumbered, which it estimates could allow it to raise up to $250 million in additional debt funding if it leverages those vessels at 50% of their market value. If DryShips is successful in raising that financing, it could make additional accretive vessel acquisitions later this year without needing to make another highly dilutive equity offering, which have been a massive weight on the stock this year

Investor takeaway

After gutting its fleet last year, Dryships has quickly rebuilt it in 2017, which due to the makeup of its fleet should drive steady earnings and cash flow growth in the second half of the year. Meanwhile, with the ability to start securing its ships with debt financing, it should have the capital to buy more vessels and further increase its earnings capacity. 

That said, while DryShips' growth days appear to be about to begin, investors have paid a high price for this growth via dilution. The company has issued hundreds of millions of dollars in stock over the past several months so it could buy all these ships. As a result, the company has flooded the market with new shares, which has put significant pressure on the stock price. Because of this, DryShips' stock might continue heading lower while the market digests the boatload of new shares it issued this year.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

DryShips Inc. Stock Quote
DryShips Inc.
DRYS

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
327%
 
S&P 500 Returns
105%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.