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?
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.