Shipping company DryShips (DRYS +0.00%) has given investors some respite from poor performance in past years, more than doubling in 2013 after having lost more than 70% of its value over the previous two years. With industry analysts now looking for a potential rebound in shipping rates after years of rock-bottom prices, the entire industry is looking up, with peers Diana Shipping (DSX 1.10%) and Navios Maritime Holdings (NYSE: NM) as well as tanker-shipping company Frontline (FRO 1.05%) also performing well. Yet the question is whether DryShips' share price can continue to grow at its current pace. Let's take a closer look at DryShips to discover why it did so well and whether it can sustain its gains in 2014 and beyond.
What made DryShips double?
Throughout most of the first part of the year, DryShips continued to struggle, as slow conditions in the industry made some of its past decisions look silly. For instance, in January, DryShips had to pay another company $21 million just to have that company accept vessels that DryShips ordered. Given the glut of shipping capacity in the industry, DryShips simply didn't want the newly built ships, and avoiding maintenance obligations was worth the price. Without the support of DryShips' Ocean Rig (ORIG +0.00%) subsidiary, which provided its parent with capital from sales of shares, DryShips would have been in much bigger financial trouble.
But in the late summer months, the Baltic Dry Index finally started to produce some excitement among companies with dry-bulk exposure, as DryShips, Navios Maritime Holdings, and Diana Shipping all soared on hopes that Chinese demand for iron ore for steel production could finally mark the end of the slump in shipping activity. Interestingly, DryShips posted some of the most impressive gains during that period, more than doubling from early August to late September before falling back somewhat.
DryShips Total Return Price data by YCharts
The reason it's surprising for DryShips to have been a bigger beneficiary from improving dry-bulk conditions than Diana Shipping and Navios is that DryShips has much less exposure to dry-bulk shipping than its rivals. DryShips is particularly well-diversified with its stake in Ocean Rig and its tanker fleet. Navios is relatively well-diversified as well, with both tankers and dry-bulk carriers in its fleet as well as its logistics business, but by contrast, Diana is a pure-play dry-bulk player.
But one interesting opportunity for the whole industry could come from the opening of the Northern Sea Route, as the Arctic Ocean has had much less sea ice in recent years than historical norms. Routing vessels through the Arctic could dramatically cut distances between key markets in Asia, Europe, and North America, and DryShips CEO George Economou has said that it could charge four times the rate for an Arctic voyage that it can collect running through the Suez Canal. Diana is arguably better positioned financially to add vessels capable of withstanding Arctic conditions, as DryShips faces a big debt load that limits its financial flexibility.
Stats on DryShips
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|---|---|
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Revenue, Past 12 Months |
$1.34 billion |
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1-Year Revenue Growth |
7% |
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Net Loss, Past 12 Months |
($328.6 million) |
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Year-Ago Net Loss |
($123.8 million) |
Source: S&P Capital IQ.
What's next for DryShips?
In its most recent quarterly report last month, DryShips was cautiously optimistic about the dry-bulk environment. That mirrors to some extent the views that Navios Maritime CEO Angeliki Frangou has expressed about vast improvement in the industry stemming from iron-ore exports that are likely to continue into 2014.
But DryShips still has big challenges ahead. Just last week, the company suspended its equity-offering mechanism, essentially closing the door to raising $200 million through secondary offerings of stock. That might sound like good news for shareholders, but DryShips is still losing money and has billions in debt to navigate.
The big question for DryShips shareholders in the long run is whether the company will retain enough of its stake in Ocean Rig to benefit from the diversification that its drilling business provides. If it does, then the huge success of Ocean Rig could help give DryShips a major competitive advantage over its less-diversified peers.
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