George Economou has announced several additions to the DryShips Inc. (NASDAQ:DRYS) fleet in the form of four Newcastlemax dry bulk transport vessels. These assets have an average age of three years and average DWT of 206k.
The good news is that two of the Newcastlemax vessels come with a stable fixed-rate charter, and the others will operate on spot capesize rates.
There is no word available on the fixed daily rates for the chartered ships. But if the precedent set earlier in the year by Diana Shipping, with its acquisition of the M/V San Francisco (a 206k DWT) at around $12k per day, is anything to go by, these vessels could generate over $4.3m in gross revenue for the durations of the charters.
The other two ships will operate on spot capesize rates, and this means they will depend on the Baltic Dry Index. There are tailwinds here as well.
The weighted average of shipping rates surges another four percent to 1,282. The Panamax Index and the Capesize Index reach 1306 and 3765, respectively. Rising shipping rates have earned Wall Street’s attention, and Morgan Stanley upgrades several names in dry bulk – sending the whole sector upwards.
A Series of Acquisitions
Many investors will remember that this is not DryShips’ first acquisition in 2017. The company depends on what Economou calls ‘operating leverage’.
DryShips seeks to buy up as many vessels as it can while rates are low so it can ‘leverage’ its upside when the industry recovers. DryShips’ acquisition of four Newcastlemax vessels comes on the heels of a decision to exercise the option to purchase four VLGCs for $83.5m earlier in the month.
The VLGCs will also come with fixed charters to an oil major. The first deliveries are expected in September of this year.
Economou reports $455m in current liquidity. But after the Newcastlemax purchase for $124m and the VLGC deliveries for $83.5m, along with the $2.5m dividend, DryShips’ current liquidity will probably end the year with less than $250m – this without even accounting for operating expenses and other cash outflows.
Operating Leverage or Just More Risk?
The problem with operating leverage – and any leverage for that matter – is risk. Sure, everything is great if shipping rates continue to improve, but what if they don’t?
DryShips will still have to deal with its fixed expenses of maintaining and operating its ships. These expenses will be higher depending on how many ships are in the fleet. DryShips will also have to deal with its management and consulting fees along with the interest payments on its debt.
As it stands, the company is in a bad position to meet all its obligations without relying on the capital markets.
DryShips had net income of -$199m for the FY2016, $78m of this sum was lost in the fourth quarter alone. On a cash flow perspective, the situation was better – the company generated $1.43 million in free cash flow through equity dilution of $114m in cash flow from financing activities.
DryShips has had a string of good news between four new vessel acquisitions and rising rates. Additionally, DryShips stands to benefit from positive Wall Street sentiment towards the sector. However, the company is still in a risky position because everything depends on whether or not shipping rates continue their upward trajectory.
Thankfully for DryShips, the majority of its new purchases are on fixed rate charters that help hedge against shipping rate volatility. But it is still unclear whether or not these new assets will bring DryShips into profitability any time soon.
DryShips’ liquidity position is dwindling, and this should be worrisome in light of the company’s long history of dilution. The stock looks set to rally with shipping rates in the short-term, but the long-term outlook is still uncertain.