Can DryShips Stock Sail Higher, or Is It Lost at Sea?



DryShips Inc. (NYSE:DRYS) isn’t exactly a household name. It’s an industrial company whose stock has moved between a dollar and change and five dollars for the last few years. It relies heavily on increased global trade and manufacturing and thus has struggled since the Great Recession. The company specifically provides ocean transportation services for drybulk and petroleum cargoes, and offshore drilling services. The company operates through Drybulk Carrier, Tanker, and Offshore Drilling segments. During the last quarter it owned a fleet of approximately thirty-eight drybulk carriers, comprised of twelve Capesize, twenty-four Panamax, and two Supramax vessels. The stock caught my eye as it is trading at $3.41. The last time I checked in with the stock is was trading in the mid to high $2 range. Is the stock breaking out and is the climate improving for this sector?

Well, in its most recent quarter, the company recorded a net loss of $34.6 million, or $0.08 basic and diluted loss per share, for the three-month period ended March 31, 2014 as compared to a net loss of $116.6 million, or $0.30 basic and diluted loss per share, for the three-month period ended March 31, 2013. This is a huge improvement. Adjusted earnings were $201.2 million for the first quarter of 2014, as compared to $112.0 million for the same period in 2013. This is quite a turn-around even though the company is still losing money.

But how is each segment performing? Well for the drybulk carrier segment, net voyage revenues (voyage revenues minus voyage expenses) were $45.3 million for the quarter compared to $36.9 million for the year ago quarter. For the tanker segment, net voyage revenues amounted to $22.3 million compared to $10.8 million for the same period in 2013. For the offshore drilling segment, revenues from drilling contracts increased by $114.4 million to $360.8 million compared to $246.4 million for the same period in 2013.Total vessels’, drilling rigs’ and drillships’ operating expenses and total depreciation and amortization increased to $179.6 million and to $107.3 million, respectively, for the quarter up from $144.9 million and $82.7 million, respectively, for the same quarter last year. Total general and administrative expenses increased to $49.1 million. Interest and finance costs, net of interest income, amounted to $114.3 million compared to $56.9 million for last year’s quarter. So, while revenues are up, so are expenses.

Chairman and CEO George Economou stated, “While charter rates for larger drybulk carriers under-performed during the first quarter of 2014, forward charter rates and asset prices are holding up resiliently, underscoring the bullish market sentiment. The charter rates earned by our tankers during the first quarter of 2014 were above cash breakeven levels, and contributed to our free cash balances. Following a period of oversupply the recent volatility in the tanker and drybulk sectors is a clear sign of a more balanced supply and demand. We continue to expect a sustainable recovery in charter rates during the second half of 2014 and beyond.As of the end of the first quarter, DryShips has about 2,723 spot days remaining in 2014 and 3,613 spot days in 2015 for its crude oil tanker fleet and about 7,023 spot days remaining in 2014 and 12,208 spot days in 2015 for its drybulk fleet. DryShips is therefore uniquely positioned to take full advantage of the expected market recovery.

“We believe our operations are fully funded through 2014 and, while our at-the-market equity offering is still ongoing, we have shown that we utilize the program in a disciplined manner. In the coming months, we expect to conclude various financial initiatives to fund the maturity of our convertible notes which we expect to take place in December of this year.Turning to the offshore side, Ocean Rig continues to execute on its business plan. Ocean Rig’s modern fleet, strong balance sheet and solid contract backlog of $5.0 billion, provides it with the foundation to implement its previously announced value creation initiatives as evidenced by the recent dividend announcement which has a direct benefit on DryShips.”

Looking ahead, drilling and other oil related activities continues to pick up. However, the cost of fuel for the tankers has also risen as an expense. I think the company is on the right track, and it has funding to last through 2014. The company also has a solid backlog. Given that the stock has already made a large move, it is tough to get behind at current levels. Thus, I have a hold rating on the stock, and given the earnings trajectory, I assign a $3.25 price target for 2014.

Disclosure: Christopher F. Davis holds no position in DryShips and has no plans to initiate a position in the next 72 hours. He has a hold rating on the stock and a $3.25 price target.

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