DryShips: A Look at the Positive PointsDRYS) has struggled this year, but there are a few positives about the company that investors should not ignore. For instance, the volatility in oil prices has created a tailwind for DryShips' oil tanker segment, leading to a 42% increase in the time charter equivalent last quarter.
In addition, its subsidiary Ocean Rig continues to perform well. In fact, this very subsidiary has helped DryShips substantially, when the company was undergoing softness in its core business. It has significantly enhanced its financial results over the last couple of years.
However, the recent drop in the oil prices has clearly suppressed its earnings performance. The lower shipping rates is expected to continues this year that will further restrain its performance this year. But, the company has recently secured a one year contract extension for its rig Poseidon and a new contract for its rig Olympia.
Risks to consider
The increasing debt level certainly is a concern for DryShips. DryShips has total debt of $5.96 billion. This is way ahead from its market capitalization of $452.97 million and very close to its enterprise value of $5.97 billion. However, the company is taking necessary steps to bring down its debt. For example, it plans to sell $245 million of its assets including four Suezmax tankers, Vilamoura, Lipari, Petalidi and Bordeira to pay its debt. Also, it is looking to refinance its fleet that should probably have lower interest rates due to the drop in loan to value rates.
However, investors shouldn’t be harsh on its debt as the company has quite a manageable debt level. As per the value maintenance clause in the shipping loan, also known as the minimum required value-to-net-loan ratio, the company has its value to net loan ratio of 171% at the end of June.
Whereas, the market standard for shipping loans states that the position for the value to net loan ratio should be between 125% and 140%, suggesting that value of the finance assets should have been below 125% of the outstanding loan at all times.
Moreover, the company has strong and quite stable commitments with the commercial lenders. It is enjoying a clear support from the banking industry. In fact, the company has received a firm commitment from ABN AMRO and Nordea Bank. This commitment will enable the company to refinance its convertible notes. So, the investors, who are avoiding the stock for its debt purpose, should rather consider buying the stock.
DryShips could gain momentum once again going forward. The volatility in oil prices is creating demand for its business segments. It has seen improvement in its time charter equivalent rates. Moreover, the company expect these positive trends to continue this year that should enhance its top and bottom line performance significantly.
Published on Nov 2, 2015By Yaggyaseni Mittra