Will Ebiefung

About the Author Will Ebiefung

Will Ebiefung studied finance and accounting at the University of Tennesee. He works as a freelance investment analyst focusing on equities with market caps below $100 million. In addition to writing, Will is a full-time investor focusing on web properties and debt-based securities.

DryShips Inc. (DRYS): Red Flags Keep Popping Up

DryShips Inc. (NASDAQ:DRYS) has acquired three second-hand Kamsarmax dry bulk vessels for a total of $68 million. Economou claims these assets will be “accretive” to DryShips’ earnings and cash flows. But Economou’s claim is unlikely, and this deal looks like it was done for an ulterior motive.

Evidence suggests two of the Kamsarmaxes may come from Scorpio Bulkers, a dry shipping company with no incentive to sell profitable assets. If Scorpio has no incentive to sell profitable assets, it follows that these assets are not profitable, and DryShips acquired them for a reason other than cash flow. What is this reason?

The First Red Flag

The source of DryShips’ Kamsarmax acquisitions is the first red flag. The company did not reveal the source of its new vessels, stating only that they come from an “unaffiliated third party.” But it is easy to identify the source of the first Kamsarmax. Reports from industry insiders claim that one of the three ships was purchased from a struggling Japanese company called United Oceans Group for $23 million.

It makes sense for an almost bankrupt company to sell potentially quality assets for fire sale prices. But where did the other two vessels come from, and why were they sold to DryShips for such a low price? Clues are found in Scorpio Bulkers, another publicly traded dry bulk company, that announced the sale of two of its 2014 built Kamsarmax vessels, the Charleston and SBI Cakewalk, for $45 million the day before DryShips’ press release. Scorpio’s $45 million sale doesn’t look like a coincidence, and the math adds up.

The United Oceans deal was done for $23 million, and Scorpio Bulkers reports selling two Kamsarmaxes for $45 million. $23m + $45m = $68m, the sum of DryShips’ total acquisition. It follows that DryShips may have bought two of its three new assets from a stable company with no incentive to sell profitable assets, and this conclusion raises negative implications about the real reason DryShips acquired these assets.

While a soon to be bankrupt company like United Oceans is expected to liquidate its assets cheaply, it doesn’t make sense for a functional company to sell profitable vessels at fire sale prices at a time when most dry bulk companies are looking to expand their portfolios. The fundamental question is this: What incentive does DryShips’ have to purchase two vessels from another dry shipping company when the nature of the deal implies that the vessels are not useful from a cash flow perspective?

Conclusion

There is only one other way to make money from a dry bulk vessel that doesn’t generate profit from operations, and that is by selling it for a higher price in the future. This is the same reason people buy gold or any other non-cash generating assets. For Economou, selling the vessels in the future makes more sense than using the vessels for operations because he is entitled to 30% of all proceeds from such sales through an agreement with Sifnos Shareholders.

The devil is in the details, and the details suggest Economou may be planning a swing trade at his shareholders’ expense.

 

  • J.P. Nobles

    Could all these reverse splits, and now this be a prep for a sale of the company? Shipping is coming back, or at least we hope it is. If a guy were able to perfectly time the prep and sale, a sale of the company could yield a lot of return no?

    • cjg

      If I understand it, the reverse splits, provide him with the dough to buy more ships, but he isn’t actually using these ships for the business of shipping. He is incentivized to sell these ships as he is entitled to 30% commission on the sale of each ship (Which is a strange caveat for a CEO contract).

  • Ismail ALjazaeri

    The author is basing his article on second guess with no substantiated new information. The entire industry is in crises, with some bad decision in managing DRYS, resulted this deep plunge of the stock. The company has asset, and many clients. No doubt that the stock will come back as the shipping industry will no remain at this level eternally. GE is a bad CEO, he should seriously consider hiring a world class executive to give some life to the company. I know it is not part of the Greek culture to delegate power but GE has to consider it if he want to make shareholders happy and the company healthier. :o)