Investors in DryShips (NASDAQ:DRYS) are having trouble keeping their heads above water this year. Between its majority owned subsidiary Ocean Rig RDW (NASDAQ:ORIG), and the so far disappointing drybulk market, it's been one let-down after another that has the stock down 40% this year.
Ocean Rig gets most of the blame
As a reminder, DryShips owns over 59% of Ocean Rig. At the time of this writing, the Ocean Rig stake is worth $1.26 billion, which is slightly more than the market cap of DryShips alone. What this means is that DryShips stock is very dependent on the price performance of Ocean Rig stock.
If Ocean Rig's stock price were to, for example, double, it would almost certainly cause a dramatic upward move in the price of DryShips. Likewise, if Ocean Rig were to tank by, say, 50% it would likely cause a hard downward move in DryShips stock. With Ocean Rig down 16% this year, it's not helping DryShips.
Over promise, under deliver
Given that the market cap of DryShips stock is less than its Ocean Rig stake alone, the market is giving zero or even a slightly negative value to the dry shipping business. If this business were performing better, perhaps the market would reward the stock price instead of punishing it.
Part of the problem has been overoptimistic forecasts by CEO George Economou and other executives. "We anticipate the freight market to be hot over the next three months," Economou stated during an interview back in March, "Time to celebrate after a six year downturn in the shipping markets." The freight market didn't get hot. It's not hot. And a DryShips stock has crashed. Keep the celebratory champagne on ice for now.
Seasick macro picture
To be fair to Economou, many analysts and company executives were also expecting a hot freight market by now. Old ships were expected to be scrapped, reducing the global fleet supply at the same time that shipping demand increased from cheap iron ore supplies being sent to China. It may still be on the way, but it hasn't happened yet, and DryShips and other shipping stocks have suffered.
Panamax shipping rates in particular have suffered because of a global oversupply situation and weaker-than-expected grain shipments from South America. DryShips has taken the unfortunate strategy of positioning its Panamax fleet to earn revenue based on the floating daily spot rates rather than the security of long-term fixed-rate contracts. With Panamax rates at particularly low levels, DryShips is suffering.
Cheap fuel no good
Another factor that may be hitting the macro picture that you won't often see talked about is a shift from "slow steaming." Believe it or not, cheap oil prices actually hurt dry shipping rates. I know it sounds counterintuitive that cheap fuel is bad for shipping. The reason is that the cheaper oil prices we've been seeing lately mean it is more economical for ships to travel at higher speeds (and sacrifice gas mileage), make more trips in a given timeframe, and thus increase the available global fleet supply, which in turn works to suppress rates. Add to the fact that ships are becoming more fuel efficient, then the problem of supply is only magnified further as they switch from slow steaming to faster moving.
We need to see a dramatic rise in daily spot rates, especially for Panamax, to see a seriously reversal in the fortunes of DryShips. Best case, though, is if Ocean Rig's stock experiences a sustained rise (for any reason) as that is the majority of DryShips' value. That, or improved shipping fundamentals, will likely be necessary to halt the slide in the share price.
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.