DryShips: Going Extinct?

DryShips (DRYS) witnessed a noteworthy decline in its fundamentals such as revenue and net income, despite the fact that China’s iron ore imports had increased during the last quarter of the year. Its revenue for the quarter came in at $23 million, a slump of 96% compared with $598 million in the same quarter in 2014. As a result of this sharp drop in its revenue, its net loss for the quarter widened to $527.6 million or $0.79 per share from a net loss of $24.2 million or $0.04 per share in the year ago quarter.

On the contrary, the imports for dry bulk commodity such as iron ore had actually increased in the late 2015.
According to Bloomberg, China’s iron ore imports surged to a record level of 17% to 96.27 million metric tons from the previous month. In fact, China’s iron ore imports for the full year were about 2.2% higher at 952.72 million tons as compared to 2014 levels. So, there has been enough market activity, but it is the company that failed to generate revenue out of these strong imports for iron ore in 2015.

More headwinds ahead

DryShips as of late have experienced a couple of its contract being cancelled before the actual time that should impact its top line negatively this year. For instance, the company earlier this month received a cancellation notice from Petrobras for its oil spill recovery vessels, namely Vega Juniz. This contract was expected to expire on April 2017, but Petrobras planned to end it by March 9, 2016. As a termination of this contract, the company expects its EBITDA to incur a loss of $2.8 million for fiscal 2016.

Other than this, Petrobras has additionally had terminated one of its other contracts for platform supply vessels, Vega Crusader on March 6, 2016. As per the agreement, this contract was supposed to be closed on January 8, 2017, thus causing DryShips a loss of $2.2 million in its EBITDA this year. These growing numbers of contract termination is certainly a worry for the company and its investors as they directly impact its revenue, which is almost wiped out.

In addition, the company is faced with other problems such as large impairments and debt that remains a big concern for investors going forward. For instance, its vessel impairment charges and non-cash losses for the quarter came in at $119.1 million or $0.18 per share. These higher impairment charges will increase its book to bill ratio, which is not a healthy sign for a company that is at present in misery. In fact, the higher book to bill ratio will make the stock expensive going forward that will restrict the investors to buy more of the shares.

Furthermore, the continued downturn in the dry bulk segment not only depressed the freight rates, but enabled the company to take an additional debt to survive this downturn. For instance, the company has decided to suspend principal repayments of its bank facilities in an effort to maintain enough liquidity at its disposal. This means its debt will eventually increase. Moreover, holding the debt repayment during the downturn is not a healthy sign because you never know when the market recovers.

Conclusion

DryShips can only survive this downturn if the company looks for restructuring. But, the management hasn’t taken any such steps, neither have they planned. So, investing in such stocks that has lost nearly 97% of its market capitalization is not a healthy sign. Investors can consider other stocks in the industry that are performing better than DRYS.
Published on Apr 5, 2016
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

Posted in ...