DryShips, Inc. (NASDAQ: DRYS) a diversified shipping company, has started off on the first round of its acquisition strategy by buying six more vessels. After strengthening its balance sheet at the end of last year, the company planned to rebuild its depleted fleet. Fifty companies entered the acquisition market buying lots of vessels thanks to the generosity of investors who provided fresh capital and provided the opportunity to acquire vessels at historically low prices. After the recent acquisition of six vessels, the company is ending the first phase of its rebuilding strategy and hopes that the transformation will position the company to generate significant future earnings. The latest deal is large and diverse and the company will spend $260 million on six vessels, including one Aframax tanker and three Karmsarmax dry bulk vessels. In addition, the company will exercise the options to buy the two remaining newbuild Very Large Gas Carriers that it had secured earlier in the year. After the completion of this six vessel transaction, the company will have acquired 14 vessels since the start of the year, paying a total of $ 663 million. Seven of the ships are dry bulk carriers bringing the strength of its fleet back to 20 vessels and in addition, they own three oil tankers, including two Aframax and one Very Large Crude Carrier. Moreover, there are three VLGCs on the way and the fleet looks well diversified. Building this larger fleet will have benefits as well as potential disadvantages.
One of the advantages of diversification is the ability to cash in on the differences in spot market rates across various vessels. For instance, the company commenced the year with a dry bulk fleet of 13 Panamax vessels which it expects can capture spot rates of $10,000 per day in 2017. However, for the new additions of Newcastlemax and Kamsarmax it expects to capture $16,000 per day and $12,000 per day respectively. Meanwhile, the crude oil carrying vessels are expected to earn $18,000 per day for the Aframax vessels and $30,000 per day for the VLCC. Based on these assumptions and combined with the fixed-rate charters on charter vessels, the rebuilt fleet could generate EBITDA of $ 70 million annually compared to the negative EBITDA of the previous year. This is probably a higher earning rate than what the company could have achieved with the acquisition of just more Panamax vessels.
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Diversification has its disadvantages because it is costs more to maintain a diversified fleet. That is why oil tanking company North American Tanker believes that a key success factor will be its strategic decision to only own Suezmax tankers because it has been able to hold cash break even, to $11,000 per day. This compares to rivals such as Frontline where the cash breakeven rates are as high as $17,300 per day and sometimes went into negative cash flow territory while the former was still cash flow positive. DryShips could have problems with its higher costs because unlike its competitors, it lacks scale advantages to compete in a weaker market.
The cost of equity dilution
Recently, the stock was down almost 30% and down by more than 96% since the start of the year despite the strengthening of the balance sheet and the fleet expansion. The company has tried a number of things to kickstart the stock price. In early January, the company announced expansion into the gas tanker market and this deal was notable with long term time charters with a total backlog of $390 million compared to the total purchase price of $334 million. In total, the company spent $660 million on fleet expansion but this expansion of capital involved issuing a large amount of stock to outside investors. Unfortunately, amortization is in the cards because the company has recently signed an agreement to sell up to $226.4 million in stock to an unaffiliated investor. The pressure from additional dilutions could continue to depress stock prices, though, the company hopes that the annual EBITDA generated by the expanded fleet will be seen positively. Unfortunately, though dry bulk rates are improving, there are still headwinds affecting tanker rates.
The bottom line
DRYS just reached an agreement with Sifnos Shareholders Inc., an entity controlled by the Company’s Founder, Chairman and Chief Executive Officer, Mr. George Economou, to amend the Revolving Facility Agreement with Sifnos. As part of the amendment, the Sifnos Facility will cease to be secured by all the Company’s present and future assets, and the maturity will be extended from 3 years to 5 years.
The company has announced yet another reverse split to boost the stock price and this time gives investors one share for every four shares that they currently own. The plunge in the stock price is unlikely to be boosted by the reverse split because it is already completed several reverse splits last year and this year. It seems clear that the only boost to the stock price would be very substantial improvement in earnings.
Source: Broad Street Alerts Editor
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