DryShips: Nearing the Bottom
DryShips (DRYS) reported its second quarter 2016 results on 8th August. The company reported a net loss of $ 9.1 million i.e. a diluted EPS of $0.34 per share for the quarter. This was far superior to a net loss of $14.4 billion reported for the year ago quarter. But the performance of the company was in fact far inferior to the year ago quarter. This becomes clear when we compare the results of the two periods after excluding the extraordinary income/expenses.
The trends of all the vital metrics like the revenue, the operating income, the adjusted EBITDA, net income and earnings have all been downward or disappointing for the past more than one year. The operating income has been negative for the last four quarters although there has been a drastic improvement over the same period of time. But if a company is continuously losing money in its operations itself, it means that it is not on the right track.
These are disheartening results for DryShips and its investors who have seen the stock plummet from a price of $300 only two years ago down to about half a cent at the moment. And that too after some reverse stock splits during that period which proved unable to keep the price above the minimum NASDAQ requirement of $1.00 per share.
Weak balance sheet:
In addition to the operational performance, there is more bad news making rounds these days. DryShips does not have a good looking balance sheet either. DryShips had cash of $6.2 million on its balance sheet at the end of the last reported quarter. That was down $8.8 million, or 58.7% from $15.0 million as of December 31, 2015.
DryShips is not in a position to repay its principal and interest obligations and has elected to suspend paying them for preserving cash liquidity. Imagine, the company’s management does not have any better option to preserve cash at this moment. The company is bound to discuss and restructure its debt facilities with its lenders as a result.
The company may lose access to debt and equity markets due to credit rating downgrades and the weak fundamentals at the company and industry levels.
Bleak market outlook:
And there is no support coming or going to come from the market in the foreseeable future. A study published earlier this year says that the dry bulk shipping industry as a whole is expected to witness more rough waters throughout 2016. This bleak outlook is largely the result of weak demand for iron ore and coal from China and India which is not showing any signs of recovery.
The outlook on freight rates and vessels’ market values too is not at all encouraging. Therefore, the company has rightly asserted that the “cash expected to be generated from operations or proceeds from the sale of vessels, assuming that current market charter hire rates would prevail in the twelve-month period ending June 30, 2017, will not be sufficient to cover our working capital deficit.”
The industry has seen an 18% decline in its revenue between 2014 and 2015 according to a study conducted by consulting firm AlixPartners LLP. Further, the industry’s EBITDA had fallen 168% to negative $115 million in 2015 from $169 million in 2014.
So there is no income generation, no cash generation and debts are coming due at the same time. In my view, and in the view of probably everybody out there, DryShips is basically a dead company. I think we can straightaway write off DryShips with this much information.