It's easy to get get bummed out daily by disappointing rates in the dry shipping industry. I'm guilty of it myself. While I don't always agree with the always-optimistic executives at DryShips (NASDAQ:DRYS), its latest earnings report and conference call offer rational insight that suggests a rapid rise in global market shipping rates may be here shortly.
Why DryShips needs rates to go up -- and fast
DryShips has some debt obligation problems it needs to solve with its creditors by the end of this year. The better the state of the dry shipping market, the better the chances that DryShips can score leniency or better-negotiated terms.
DryShips is following a strategy to let its fleet operate based on daily spot rates as much as possible rather than enter into fixed-rate contracts. By doing this, each dollar increase in rates is a dollar that falls directly to DryShips' bottom line, all things being equal.
DryShips has 7,023 operating days with spot rate exposure available for the remainder of the year. For 2015, it has 12,208 days. The more confidence that current or future creditors have in DryShips making money, the better off the company will be.
First-half showers bring second-half flowers
In the first-quarter call, CEO George Economou admitted that rates during the first half of the year have been disappointing, but market sentiment has remained steadfast. As evidence, he pointed to global long-term-contract rates and asset prices, for things such as used ships, all holding steady. Since these things tend to be priced based on a longer-term, future outlook, they signal much stronger sentiment than the temporarily low daily spot rates suggest.
Economou believes that oversupply is finally balancing with demand, and DryShips expects a "sustainable recovery" for the second half of the year. DryShips is so confident that it is betting as much of its fleet on it, having it "positioned to take full advantage of the expected market recovery."
DryShips' stance during the conference call was that the main reason for the delay in a rate rally can be summarized in one word: weather. Weather-related disruptions affected shipments on the high seas. Winter weather delayed certain construction projects in China. A late rainy season in South America delayed the harvest and shipping season. This just means, DryShips reasons, that those shipments will be more robust in the third and fourth quarters.
Bring on the rally
The bottom line, when all is said and done, is that DryShips displayed in its quarterly presentation the expectation of a 7.4% rise in shipping demand with a supply growth of only 5%. With the old supply and demand rules being enforced, the imbalance that is tilted in demand's favor should send shipping rates higher, meaning increased shipping profits. Yet none of this, as DryShips implies, includes the best-case scenario: the scrapping "potential" of so many old ships being removed from the world supply.
The exciting thing, according to DryShips, is that the market is now at a point of "very little" oversupply. Economou explained during the Q&A session on the call that the market operates very tightly. He looks forward to it being the other way around shortly, when the market is a little under-supplied and rates shoot up just from the smallest increases in demand.
Foolish final thoughts
I have to admit, Economou makes some very compelling arguments in his interviews, conference calls, and press releases for a dry shipping rally. I usually take company executives' words with a grain of salt while they are busy raising money or negotiating with their creditors, but Economou and DryShips backs their words with hard evidence, and follows up with action. I, for one, will be watching the daily rates very closely to see if they start to show signs of the reversal that DryShips is expecting. The gambler in me may be tempted to hop on board for a ride.
Nickey Friedman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.