There is no doubt DryShips
Drilling at the wrong time
One of the big issues investors have with DryShips is four drilling rigs currently under construction. The company is making a transition to compete with offshore drillers like Transocean
But there are some positives that might occur in the long run. If a relief well is required for every well, demand for drilling rigs should increase. There's also the abundant oil available in deepwater. Over the past 20 years, deepwater has gone from almost zero production to more than 6 million barrels per day. Even taking into account the Deepwater Horizon tragedy, we can't afford to give up on deepwater drilling altogether.
My contrarian view tells me this will be a bottom for demand of deepwater drilling rigs. By this time next year, there should be some resolution to drilling in the Gulf, and business will go on as usual.
Fighting over supply
Dry bulk shipping, with its cargo of unpackaged dry materials (generally commodities), is a business based on global economic growth. Economic expansion leads to more demand for ships and higher rates for shippers such as DryShips, Eagle Bulk Shipping
Where DryShips has done well is signing lucrative long-term contracts in high-rate environments. It's true some of its ships are contracted at below $15,000/day, but these contracts are short term. Three contracts ending in 2018 average $56,100/day, and eight contracts ending in 2013 average $43,500/day.
The concern has to be recent weak dry bulk prices. An increased supply of ships and decreasing demand struck at the same time during the Great Recession, crushing pricing. This year didn't help, when it looked as if Europe was going to fall off a cliff. The Dry Bulk Index, an index of shipping rates, fell more than 50%, hurting margins for all shippers. But since mid-July, the index has jumped sharply as fears of a double-dip and European contagion have subsided.
Even with all of these issues, DryShips has had more than 98% fleet utilization and a 14% increase in time charter equivalent pricing during 2010. These numbers suggest conditions are improving.
Preparing for the worst
DryShips prepared some interesting assumptions about its new drill ships in its second-quarter presentation. Even if it has to sell the ships at a loss, it will get cash back after paying off the debt on these ships. We'll use H1837 as an example (numbers are in millions of dollars).
Contract Price (695) – Sale Price (650) = Loss On Ship (-45) + Payments Already Made (360) – Debt (115) = Refund due to DRYS (200)
If we use these numbers and adjust the balance sheet, it looks something like this:
|
Adjustments |
|||
|---|---|---|---|
|
Cash |
$864,189 |
$694,000 |
$1,558,189 |
|
Other Current Assets |
$125,387 |
$125,387 |
|
|
Total Current Assets |
$989,576 |
$1,683,576 |
|
|
Fixed Assets |
$4,920,059 |
($1,366,000) |
$3,554,059 |
|
Other Non-Current Assets |
$73,410 |
$73,410 |
|
|
Total Assets |
$5,983,045 |
$5,311,045 |
|
|
Long-Term Debt |
$2,720,976 |
($420,000) |
$2,300,976 |
|
Other Current Liabilities |
$196,729 |
$196,729 |
|
|
Other Non-Current Liabilities |
$183,123 |
$183,123 |
|
|
Stockholders Equity |
$2,882,217 |
($252,000) |
$2,630,217 |
|
Liabilities + Stockholder Equity |
$5,983,045 |
$5,311,045 |
Source: Company press release; numbers in thousands.
Of course, management projections like this should be taken with a grain of salt, but it's interesting to see what they think the balance sheet might look like in the "worst case" scenario of selling all four brand-new drilling rigs.
There are other issues I haven't gotten into like financing the new rigs and upcoming debt maturities. The $2.7 billion in debt is my biggest concern in a bad shipping and financing environment. I'm not trying to suggest DryShips is a sure thing, far from it. If you don't have an appetite for risk, Dianna Shipping
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