DryShips Is a Risky BetDRYS) has faced a lot of trouble in the past year or so due to weakness in the commodity markets. As a result, the company had reported a significant year-over-year decline in its top line and a weak bottom line performance last quarter, primarily due to the ongoing weaker global demand for key commodities including drybulk and petroleum cargoes.
However, DryShips is focused on optimizing its debt-laden balance sheet by signing long-term payment agreements and suspending the payment of quarterly dividends to its key stakeholders.
What’s DryShips up to?
At present, the company is focused on the delivery of its tankers to their new vendors. Also, DryShips has already offered 2 Aframax tankers and 3 Suezmax tankers and it estimates to provide the rest of the five tankers soon.
The Time Charter Equivalent, or TCE which is a shipping performance measuring index rate for its drybulk fleet was nearly $10,813 per day per vessel during the second quarter of 2015 as against $12,064 per day per vessel in the second quarter of 2014. However, TCE rate for the company’s tanker fleet improved significantly from just $15,650 per day per vessel in the second quarter of 2014 to a notable $43,221 per day per vessel in the second quarter of 2015.
The benefits gained from delivering new tanker fleet to its key customers were somewhat offset by the year-over-year reduction in TCE rate for the company’s drybulk fleet. Still, exceptional year-over-year growth in DryShips TCE rate for tanker fleet is believed to deliver sustainable long-term growth for the company.
During the third quarter till date, DryShips has successfully delivered Petalidi, Bordeira, Lipari, Belmar and Saga tankers to their new vendors.
DryShips is believed to focused on maintaining a strong relationship with its key customers by timely delivery of new vessels to its strategic customers and quick settlement of the outstanding balance for enhancing its share in the key Ocean Rig agreement.
Falling demand will be a tailwind
The continuously falling drybulk demand and the declining GDP growth of China will be a headwind for DryShips. Iron ore imports in China for the second quarter of 2015 fell 4% year-over-year to 226 million tons. In addition, the coal imports of China have declined significantly owing to the Chinese government keen on minimizing air pollution.
The weakening of the Chinese economic growth is forecasted to notably bring down the demand for all the key commodities with all the major vendors piling up their inventories and therefore, DryShips need to diversify its markets while optimizing the core operations to reduce costs.
As a result, DryShips is strategically downsizing its fleet count by entering into vessel selling contracts. The company has decided to sell 17 of its core vessels including, 4 Panamax and 13 Capesize bulk carriers at a total cost of $377.0 million.
However, there is notable vessel demolition activity in the end market and the continuous decline in development orders for new vessels with only 3.4 mdwt of fresh orders being given to the yards. Going forward, Supramax, Panamax and Cape fleets are estimated to enhance just by 7.1%, 2.0% and 0.3% respectively, given the accelerated fleet demolition activity and continued weaker demand environment.
But, despite right-sizing of the fleet by DryShips, analysts are negative about the growth prospects of the company given several of its weaknesses.
Hence, it is clear that DryShips is a risky investment, which is the reason why investors should stay away from the stock as its performance could degrade further going forward due to numerous headwinds.
Published on Oct 9, 2015By Vinay Singh