Tuesday, October 27, 2009

Well at least one thing is growing at Dryships...(DRYS)

....And that would be shares outstanding, up 494% from a year earlier, while its core shipping revenue is down 50%. A 2year stock chart reflects the collapse in DRYS pricing power and the explosion in shares outstanding:



To be fair and accurate, Dryships'(DRYS) smart decision to expand into the offshore oil rig segment has helped, as that segment's sales grew 23%, comprising almost 50% of total revenue this quarter.

Before expanding into offshore oil rigs, Dryships was exclusively tied to the dry bulk sector, which was on FIRE in 2007, as commodity demand around the world fueled drool-inducing profits for shippers. Expecting demand to rise forever, firms like Dryships borrowed large amounts of money to enter into forward purchase contracts for new vessels, and later had to exit these contracts at large losses. Despite the race to cancel vessel deliveries, oversupply is expected to hurt pricing well into next year.


"While drybulk shipping demand is projected to remain strong for the coming years, the large orderbook remains a cause for concern, especially for 2010. Actual deliveries in the first nine months of 2009 were much smaller than were anticipated at the beginning of the year and offer some hope that cancellations and delays will alleviate the projected oversupply."

As the tide has turned, Dryships is still operating with good utilization rates, but the tradeoff has been a collapse in pricing. Though TCE (Time Charter Equivalent) rates are up off the March 2009 quarter lows, they're still off dramatically from previous peaks.

Per the title above, the one thing exploding at Dryships is shares outstanding. Maybe they'll prove that massive dilution is a better option than a total equity wipeout, which could have been the case as they deal with contract cancellations and debt payments. The problem with their profuse equity-raising is that even if you can accurately model a return to better profitability, you have no idea how many new shareholders to divide that by, as conditions may necessitate more capital-raising.




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