April 28, 2017, marked the “new era” of DryShips Inc. (NASDAQ:DRYS) according to the company’s CEO, George Economou in a press release reporting the delivery of the first of its recent acquisitions.
We are very excited to have started taking delivery of our previously announced acquisitions and also continue to grow our fleet with a new acquisition of one more modern vessel. The DryShips new era has officially started and is expected to be accretive to our earnings and cash flows.
The latest vessel to join the DryShips fleet is a brand new Aframax tanker. This is a medium-sized crude tanker with a dead weight tonnage of 113,644. Such vessels are typically used to transport crude oil from its extraction point to a refinery.
In addition to the vessels currently in service, DryShips expects the delivery of four Newcastlemax dry bulk vessels and five Kamsarmax dry bulk vessels in the 2nd quarter of 2017 – one of the Kamsarmax vessels is expected in the 3rd quarter. On top of this, DryShips expects the delivery of one VLCC, another Aframax, and four more VLGCs.
By the time DryShip’s fleet is complete, the company will be largely diversified out of the dry bulk sector and no longer dependent solely on the Baltic Dry Index. But what does all this mean from a cash flow perspective? First, let’s look at the company’s financial condition.
DryShip’s Financial Condition
DryShips last reported first quarter earnings on May 19th 2016. In this report, the company posted net income of $55.4 million and adjusted EBITDA of negative $15.6 million – a number DryShips will have to beat this year to show YoY improvement. Adjusted EBITDA for the full year of 2016 was negative $42.3 million.
With all these moving parts, from volatile shipping rates to vessel acquisitions and spotty fleet utilization, it would be impossible to calculate an accurate EBITDA estimate for DryShips in the full year of 2017. Thankfully, the company has provided some guidance that can be used to get a more accurate picture of what is going on.
In the April 3rd press release Economou outlines a scenario that could theoretically lead to his company generating up to $70 million in EBITDA this year:
On an annual basis, assuming all the vessels we have agreed to acquire have been delivered, that vessels employed in the spot market are fully utilized and earn $16,000 per day for Newcastlemaxes, $12,000 per day for Kamsarmaxes, $10,000 per day for Panamaxes, $18,000 per day for Aframaxes and $30,000 per day for very large crude carriers (“VLCCs”) and that the rest of the vessels in the Company’s fleet that are employed under time charters earn their respective fixed rate, we expect the Company’s fleet will generate EBITDA of approximately $70 million.
The above quote gives, perhaps, the best possible framework investors can use to decide whether or not to invest in DryShips based on objective fundamental criteria. But Economou makes several assumptions with varying likelihoods of fruition. The first assumption – that all the acquired vessels will be delivered – is reasonable. However, the assumption immediately following it is unrealistically optimistic.
While the acquired vessels will most likely be delivered, it is unrealistic to assume they will all be employed in the spot market. In the 2016 annual report, DryShips reports utilization of 89% in the dry bulk fleet, 73% in the offshore support fleet, and many of its tanker vessels appear to have been idle for most of the year. Unless the spot market dramatically improves, DryShips’ fleet probably won’t come close to full utilization in 2017.
The daily rate assumptions are even more unrealistic. The following chart compares DryShips’ projections with the current daily rates in the Panamax and Capesize index components of the Baltic Dry Index.
To be fair, the Baltic Dry Index is an average of daily rates across the world, and it doesn’t specifically account for specialized vessels like the Newcastlemax and the Karmsamax. These are assumed to fall under Capesize, largest DWT category in the Baltic Dry Index.
Nevertheless, the point is clear. Even if DryShips manages to achieve an unlikely full utilization in its dry bulk fleet, the current spot rates are not high enough to justify Economou’s projected EBITDA of $70 million. DryShips is still far from profitability, and the company’s new acquisitions will not do much to change its cash burning situation.
Disclaimer: The author has no position or business relationship in any stock or company mentioned in this article, and he has no plans to initiate. The author is not receiving compensation for this article expect from Smarter Analyst. This article is intended for informational and entertainment use only, and should not be construed as professional investment advice.