With DryShips (NASDAQ:DRYS) stock now collapsed over 40% this year and the peak dry shipping season almost upon us, maybe it's time to take a look. While nobody knows the future with 100% certainty, here are three reasons DryShips could shift directions and sail north once again.
Reason 1: The debt situation gets shored up
Looming debt problems have plagued DryShips all year -- so much, in fact, that the stock's market cap trades for around $200 million less than the 78.3 million shares of Ocean Rig UDW (NASDAQ:ORIG) that DryShips owns. The market is basically saying that the shipping business is not only worthless but is also a negative drag on the Ocean Rig UWD asset stake.
The market hates uncertainty and sometimes overshoots to the downside accordingly. DryShips has until December to meet or adjust its balloon debt payments, and a quick look at the calendar says there isn't much time. CEO George Economou stated in the August conference call, "We are examining all our financing options [including] equity, or a combination of these sources."
CFO Ziad Nakhleh added: "We have said all along that it's not a question of whether we can execute the refinancing. It's a question of how we can refinance it as cheaply as possible." Positive news on this front could flip the shipping business's value from negative to positive, which means as a higher share price assuming no change in the Ocean Rig stock value.
Reason 2: Shipping demand starts to flow like water
Global shipping rates have been in the dumps, so most dry shippers are suffering equally, and so are their stock prices. Nakhleh believes that's about to turn. He stated:
Going forward, the fact that we believe tightened the supply and demand and balance include the continued trade growth coupled with the slowing trend in new building deliveries. The strength of the iron ore, demand in steel production, the continuation of low cost iron ore supply in the market, which display some of the expensive and lower quality domestic Chinese production thus leading to increase seaborne transportation demand.
The shipping industry and its investors have been waiting for a surge in Brazilian exports to China to also surge the rates for the industry. Generally this commodity is transported by Capesize ships, but as those get filled, demand for smaller ships goes up as well. China's need for foreign-shipped iron ore has only increased as many of its domestic mines have been forced into closure because of high expense relative to current iron ore market values.
If all this translates into higher shipping rates, DryShips is ready. As Economou put it, "As far as the broader drybulk and tanker markets are concerned, we are optimistic, expect the sustainable recovery in the second half of 2014 and beyond, and believe DryShips is well positioned to take advantage of the [higher] rates in the drybulk and the tanker sectors."
Reason 3: A rising tide lifts all boats
At the risk of oversimplifying, a rally in rates and dry shipping stocks has historically led to a rise in DryShips, sometimes by the most even if it benefits the least. In terms of daily spot rates, DryShips's spot rate exposure is mostly with its small Panamax ships rather than its Capesize. It's entirely possible to see a large rise in rates for Capesize without as much of an associated rise in Panamax, or at least a delay.
Again, if history is any guide, DryShips may still rally more than other shippers on mere speculation that Panamax rates will follow. It's not necessarily a reason to buy DryShips stock, but I'd say it's a reason to reconsider shorting it, as past rallies have shown that DryShips often rises fast and high when other dry-shipping stocks rise -- for any reason. It's a potential reality that shouldn't be ignored, and it could cause DryShips stock to rise.
Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends BMW and Nike and owns shares of Nike. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.