DryShips Is Sinking Into the Abyss

There are one-hit wonders, and then there are those stocks that get hit only to come back for bigger and better gains in the future.

Determining who will fall takes more than just looking at a stock's price, so the fact that dry bulk shipper DryShips (DRYS) plunged 17% after releasing its earnings, and has lost a quarter of its value over the past month, means that we need to dig a little deeper to see whether there's reason to hope for a recovery.

DryShips snapshot

Source: FinViz.com. N/A = not applicable; DryShips doesn't pay a dividend

A mighty temblor
The shipping industry, both dry bulk and tanker, is caught between the Scylla and Charybdis of global economic malaise and capacity glut, which are decimating dayrates and causing individual shippers to founder on their shoals. General Maritime, Deiulemar, Omega Navigation, Stephenson Clark, and Sanko have all filed for bankruptcy protection this year. Two weeks ago, Overseas Shipholding Group became just the latest to join the group and it certainly looks like DryShips will be joining it in Davey Jones' locker.

DryShips reported a net loss of $51 million in the third quarter, or $0.13 per share, compared to a profit of $25 million a year ago, or $0.07 per share, as spot charter rates sank below breakeven levels. Worse, they've hit this nadir just as the shipper's long-term contracts are expiring.

Another wave of doubt washing over the decks of the industry is the strict European banking regulations that caused a number of lenders to exit the market. As capital dries up, shipping defaults pressure those lenders that remain such that they are having difficulties meeting their capex requirements.

Drilling down
Fortunately DryShips has a backup plan. It previously diversified into drilling rigs and its Ocean Rig (ORIG) subsidiary has given it some financial flexibility. Where the dry bulk goods segment sank 48% in the quarter to $41 million as time charter equivalent rates were cut in half, DryShips' drilling business surged 26% with revenues hitting $286 million as time charter equivalent rates actually rose 17% (tanker revenues nearly tripled, but at just $9 million it's a negligible contribution).

Ocean Rig is one of the purest plays on ultra-deepwater drilling, a method that has gained attention from Transocean (RIG -2.69%), Noble (NEBLQ), and Seadrill (SDRL). Earlier this year it seemed DryShips was slowly exiting the drilling market as it sold off shares of the subsidiary, but that may no longer be desirable as it's all that stands between the company staying afloat and sitting on the bottom of the ocean.

Since it still owns a 50% stake in the driller, it could be a source of additional funds should the need arise. Safe Bulkers (NYSE: SB), for example, has proven to be a not-so-safe haven for income investors as it recently had to slash its dividend to conserve cash. Still, it's a relatively financially sound shipper, as is Diana Shipping (DSX -1.03%). When the industry once again emerges from the depths like Leviathan breaching the surface, expect DryShips, Diana, and Safe Bulkers to still be floating.

Avast, ye scallywags!
Yet it's hard to recommend shares of DryShips at the moment, and its CEO George Economou has shown a penchant for destroying shareholder value rather than creating it, though the value of being among the last men standing should mean something.

I rated DryShips to underperform the broad market indexes on Motley Fool CAPS, the 180,000-member-driven, investor community that translates informed opinion into stock ratings of one to five stars. The stock has fallen 55% since I weighed in on it back in February compared to a nearly 3% gain in the S&P 500 and I don't see any catalyst at the moment that changes my opinion. But let me know in the comments section below if you think DryShips will sail on calmer seas in the near future.