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  1. Home
  2. / Investing
  3. / Transportation

As Long-Haul Shipping Sails Ahead, DryShips Keeps Sinking

There are strong indications that the market has indeed recovered.
By JIM COLLINS
Jan 19, 2017 | 02:30 PM EST
Stocks quotes in this article: DSX, DRYS, NM, NM-G, DSXN, DSX-B

As Real Money's eye on the shipping markets, I started out this morning to write a column on Diana Shipping's (DSX) announcement that it had chartered out two of its ships. One of the ships, a Capesize-class named the Santa Barbara, fetched $12,000 per day for 12- to 16-month charter from Cargill. One of Diana's ships in the slightly larger Newcastlemax class, the Philadelphia, was chartered out in mid-January 2016 for 11 to 14 months at $6,450 per day. 

Thus, on a per-ton basis, Diana's fixings show freight rates have doubled in the past year. 

That's the proof in the pudding. Forget the daily machinations of the Baltic Dry Index (down slightly today after a strong rise yesterday). It is long-term charters for long-haul cargos that determine the health of the market. A $12,000 fixing for a relatively new ship (Diana also announced the fixing of an older Capesize at a lower day rate today) shows the market has indeed recovered, and at that day rate the charter will be solidly cash-flow positive for Diana. 

So dry bulk survived. But will all the dry bulk companies? 

Again dominating the headlines -- and my email inbox -- today is DryShips (DRYS) . Shares are quoted down 27% on the day as I write this on news that management is going to effect a reverse split -- at a ratio of 1-for-8 -- as of Monday. 

The figures behind the destruction of value at DRYS are nearly beyond belief. 

Monday's reverse split will be DRYS' fourth in the past 10 months. Taken together, those splits amount to a staggering 1-for-12,000 split. I can just hear the conversations next week: 

"Hey, honey, what are these five shares of DRYS worth $45 doing in our brokerage account?" 

"Oh, that's what's left of the 60,000 shares that were worth $11.64 million as of the end of January 2016." 

OK, so nobody really has those position sizes -- no individual, anyway -- but it illustrates the point that DRYS equity value has all but disappeared. 

DRYS' CEO George Economou managed to wrangle out of three separate lending agreements near the end of last year, and entities he controls own nearly all of DRYS' debt. That debt level stood at $137 million on Sept. 30 assuming the pro-forma adjustments management used in the capitalization table in its most recent prospectus filing. Also, according to that filing, DRYS has come to agreements with its lenders to cure defaults on all but $16 million of that debt. 

DRYS' current fleet is a rather unimpressive collection of 13 aged Panamax bulkers -- all of which are trading in the spot market, an advantageous position -- and six offshore supply vessels, half of which are laid up due to prevailing low rates for ships that service oil platforms. 

Not deterred by DRYS' incredible decline in equity value, Economou purchased options (one of which has already been exercised) for DRYS to buy four LPG tankers for a total of $334 million. Those agreements are pending financing, and the rights to the ships -- nearing completion at their Korean shipyard -- are held by entities controlled by, you guessed it, Economou. 

So, I don't have any idea what's going to happen to DRYS stock, but thank you for asking. I'll stick to names like Navios (NM) -- whose Preferred Series G shares (NM-G) have tripled since I added them to Real Money's Best Idea list one year ago -- and Diana, a company that has two publicly traded fixed-income securities that I find attractive. Both Diana's preferreds (DSX-B) and senior notes (DSXN) are trading at discounts to par and offer high-single-digit (bonds) and low double-digit (preferreds) yields.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Collins was long NM and NM-G, although positions may change at any time.

TAGS: Investing | U.S. Equity | Transportation | Preferred Stocks

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