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) Shares Trade Below Book Value, but Remain Too Risky to Hold


DryShips Inc. (NASDAQ:DRYS) has completed its $200 million dilutive capital raise and ends the process with 152,055,576 shares outstanding and around $455 million in liquidity according to the company’s CEO, George Economou. Let’s approximate DryShips’ book value per share.

Calculating DryShips’ Book Value Per Share

On Feb 7, DryShips reported its earnings for the fourth quarter of 2016, posting cash and equivalents of around $77 million and total assets of $194 million. With $144 million in liabilities, DryShips had a book value of $50 million or $1.38 per share on a share count of 36 million.

Now, Economou claims $455 million in liquidity which can replace the $77 million in the previous calculation.

We subtract $194 million by $77 million to get $117 million and then add the recently reported liquidity of $455 million to the difference to get $572 million as a rough estimate of DryShips’ asset value.

Liabilities are largely unchanged – a benefit of DryShips’ equity dominated funding activities – so we subtract that $572 million by the same $144 million reported in the fourth quarter result for a book value of $428 and somewhere around $2.82 in book value per share.

Factors that can change this number include the $2.5 million dividend payment recorded on March 15th and the $83 million acquisition of four new VLGCs with 25% of the total due on the closing of the deal in September of this year.

Is DryShips Undervalued?

DryShips is worth $2.82 in book value per share, and this represents over 100% upside from the current stock price of $1.34. The market is giving DryShips’ stock a large discount to its book value, but this doesn’t necessarily mean the stock is undervalued. Here’s why:

  1. Dryships’ loses money from operations, and the market believes the real value of its assets is worth less than the carrying amount of those assets on the balance sheet. This makes sense because most of DryShips’ vessels lose money from operating.
  2. DryShips may report an impairment charge in the coming months. DryShips has a history of posting huge impairment charges: $700 million in 2009 after the Ocean Rig acquisition and $65m in the latest earnings report.
  3. DryShips’ cash is just as worthless as its assets because the cash will probably be used to buy more value-destructive assets and burn through even more money. This is a crucial concept for retail investors to understand.
  4. Even if DryShips’ assets generate positive cash flow or can do so at a future date, this cash flow is risky. DryShips could face the termination of one of its oil service contracts, or shipping rate fluctuations could make its spot rate dependent vessels lose money from operations.
  5. Finally, DryShips’, as a negative cash flowing company, will need to raise capital in some way – either by issuing debt and reducing its total book value or issuing more stock and reducing book value per share. DryShips deserves a discount to its current book value per share simply because this number is likely to fall in the future.

Conclusion

DryShips has completed its dilutive equity raise, and CEO George Economou has provided an update on the liquidity condition of the company. DryShip’s has a large amount of cash, and its book value per share is almost double the current stock price. However, there are many reasons why investors should not see DryShips’ large book value as a reason to buy the stock.

DryShips remains a risky investment, and its cash flow situation is still negative. Investors can expect more dilution and the possibility of impairment charges in the company’s future. DryShips’ book value per share will probably reduce in the coming months because of the company’s many headwinds.

 

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