When the global recession hit, shipping companies saw rates plunge by more than 90%. However, as the world has begun to emerge from the downturn, the Baltic Dry Index shows that rates have begun to recover from their lows, though they still remain far below peak levels.
As a result, dry bulk shipping stocks like Navios Maritime Partners
I spoke with the chief operating officer of DryShips, Pankaj Khanna, to gain some insight on the company's prospects for 2010. Khanna says business is good and that DryShips is poised for a better 2010 than 2009. He also says DryShips plans to take its DrillShips business public this year.
What follows is an edited transcript of our conversation.
Jennifer Schonberger: What are you seeing now? How's business?
Pankaj Khanna: Business is pretty good. The fleet increased last year by, say, 4% to 6%. Despite that, we had a pretty good market last year. In fact, the last three quarters of the year were very strong. The first quarter there was pretty much nothing going on because there was a lack of credit. The start of the year this year, things are again still very strong. The Capes [capesize vessels] are running about $40,000 per day; the Panamax is averaging about 30. So it’s not like the peak markets of 2007, but at the same time, at $40,000 per day per Cape, it’s a pretty healthy level.
Schonberger: I noticed you haven’t reported your fourth-quarter results. When are you scheduled to report?
Khanna: We haven’t announced that yet, so we can't make selective disclosure. Typically, the fourth-quarter results do not come out until some time in February. It's still early. I think most shipping companies start their reporting cycle somewhere around the 10th to 15th of February. We'll be on time as per usual. It won't be late.
Schonberger: How did your fourth quarter shape up?
Khanna: It was as per our expectations. There was nothing unexpected.
Schonberger: Will 2010 be better than 2009?
Khanna: Absolutely. [In] 2009, we faced a recession. We had the worst credit crisis the industry has faced in probably 30 years, and 2010 is shaping up to be much better than 2009.
Schonberger: How has the vessel oversupply crisis affected DryShips specifically? Have you had to delay or cancel any vessels under the current circumstances?
Khanna: Yes. We canceled several vessels at the beginning of 2009, and some through the year as well. I think we canceled 18 or 19 vessels in total. But we don't have any new buildings on order now.
Schonberger: What is your outlook for your DrillShips business in 2010?
Khanna: ... We are focused on the ultra-deepwater. We have two drilling rigs under contract. One is in contract to Petrobras
Then there are four more drillships that are under construction at Samsung. If you look at the ultra-deepwater sector, most of these projects arrive at anywhere between $50 to $55 per barrel for crude oil. With oil prices in the $70 to $80 a barrel range, most of the projects are viable.
We've seen a big increase in the tendering activity in the last two months. So we expect that in 2010, we'll probably be able to fix those four drill ships that are under construction at good rates. Rates have held up through this last year ... at $500,000 per day. At $500,000 per day, we pay off our investment in five to seven years. There are very few businesses where you can pay off your business in five to seven years and still have an asset that has another 25 years of life left.
Schonberger: I understand you'd like to eventually separate the DrillShips unit through spinning it off [in] an IPO. What's your timeline on that?
Khanna: Our time line on that is sometime this year.
Schonberger: Obviously, you're beginning to try to diversify your revenue stream from solely the dry bulk space -- with two-thirds of your business now [made up of] DrillShips. Are there other new areas you're looking to pursue?
Khanna: This wasn't the strategy of just pure diversification. The whole thing started because DrillShips was a good business. In shipping, typically you pay off the ships in 15 to 20 years. You have a business [in drill ships] where you can pay off the asset in five to seven years and still have a lot of life left. ...
Now, as you understand, there is some distress in the shipping business right now. Tankers had some bad markets last year. The rates are good now, but maybe they'll come down again to the levels we saw through the summer and into October, November, December of last year. So we may look at tankers. But dry bulk is the core business for DryShips. We've said this publicly on the conference calls in the past.
Schonberger: DryShips was highly leveraged pre-global recession, and then you had to recapitalize through a series of share issuances to shore up your debt position. Where are you in that process? Do you expect to issue more shares?
Khanna: The last time we issued any shares was May of last year ... We have $1 billion of cash on the balance sheet; why would we issue equity at this time?
Schonberger: What about plans to take on more debt?
Khanna: We only take on debt when required, and the only place where we have capacity to take on debt is in DrillShips. We have the four DrillShips under construction. Two are mostly financed; two are not. So [for] the two that are not financed, we could take on another $900 million to $1 billion in debt on those vessels.
Schonberger: Any plans to reinstate the dividend any time soon?
Khanna: We're always studying that. But at this time, with capex of over $2 billion outstanding, I don't think it would be wise to reinstitute the dividend. [After] the IPO of DrillShips and once the drill ships are all functioning, they'll be generating a lot of cash, so we may consider a dividend then -- post-IPO. But at this point, I don't think it makes any sense to reinstitute the dividend.
Schonberger: Since you are a Greece-based company, what are your thoughts on Greece's fiscal situation? And does the country's situation affect your company in any way?
Khanna: Greece's economic situation hasn't affected us as a company. We have some minor lending from Greek banks, but most of the Greek banks are still well-capitalized, and we don’t see any problems with that. Anyway, we're their creditors. We don't anticipate our business being affected by this at all.
Schonberger: What's your case for your stock?
Khanna: We think the company is very cheap, with the stock trading at $6 and change. We think our NAV on dry bulk and the cash alone is about $6. So when you buy DryShips at $6, you’re basically getting the drill ships for free. I think we're working to release that valuation by doing the IPO, as I told you.
