From the way the stock of DryShips (NASDAQ:DRYS) is trading lately, you might think all of its ships have hit an iceberg. With the stock falling further and further to new 52-week lows, it may be tempting to try to pick a bottom and ride it back up. However, as cheap as DryShips may look now, here are three reasons it may get even cheaper.
Reason 1: Blame the bigger guy
I've said it or at least implied it before, and I'll do it again: DryShips stock is going nowhere unless its wholly owned and public subsidiary Ocean Rig UDW (NASDAQ:ORIG) cooperates. Since DryShips owns 78.3 million shares of Ocean Rig, every penny that Ocean Rig's stock goes down lowers the fundamental value of DryShips materially.
With Ocean Rig itself drifting down to new 52-week lows, it's only hurting that asset value and the perception of value that is DryShips stock. All other things being equal, if Ocean Rig continues to plunge, it will inevitably take DryShips stock down with it.
George Economou, CEO of both companies, complained in Ocean Rig's last earnings report, "We continue to see some softness in the market as several units are coming off contract and certain uncontracted newbuilds are being delivered." In addition, as a contractor of offshore deepwater drilling services, there may be market concern that falling oil prices lately will eventually lead to a reduction in offshore deepwater serve demand.
Reason 2: Speaking of low oil prices ...
Low fuel prices are a double-whammy for DryShips. Not only does it hurt the fundamental perception of deepwater drilling, but it also hurts the shipping market DryShips is in. According to Peter Sand, chief shipping analyst of the Baltic and International Maritime Council, high fuel prices lead to "slow steaming" to maximize fuel economy. Cheap fuel prices lead to faster-moving ships, which effectively raise the global supply for shipping at a moment's notice.
Considering Sand estimates that the global fleet is already oversupplied by between 20% and 25%, the last thing companies like DryShips need is that even more supply problems depress rates. Since DryShips stock trades often based on rates (when its Ocean Rig stake is trading flat), even lower rates mean DryShips stock could fall even lower.
Reason 3: Three times isn't always a charm
DryShips will probably announce its third-quarter results in early November. Analysts expect it to report EPS of $0.04, but that is only as the results are reported mixed in with Ocean Rig. On a stand-alone basis, the dry shipping business probably performed terribly and may cause even this mixed estimate to miss badly, as the analysts didn't adjust their numbers while the shipping rates during the quarter remained softer than expectations and lacked the normal seasonal upswing in September.
DryShips' strategy during the third quarter couldn't have been in a weaker position, either. Anticipating a red-hot market since at least back in a March interview, Economou positioned the vast DryShips Panamax fleet to operate predominantly based on daily spot prices, with the expectation that these would rise to rates much higher than fixed-rate contracts would provide.
Long story short, a disappointing grain season in South America and some stockpiling by farmers scared of their currencies resulted in a much weaker than expected export season. Brazilian exports of iron ore failed to fill the larger Capesize ships, so there was no spillover effect into the Panamax. The result was terrible rates particularly for Panamax ships, which will result in bad numbers from DryShips come November. If the market doesn't like what it sees or the outlook given, DryShips stock could be seen plunging further downward.