Monday, February 18, 2008

Comments on DryShips DRYS

If one looks at the current graph of the DRYS at the time this article is posted, it appears a bubble situation. A lot of bubble has already evaporated. Peter Georgiopoulos of Genmar/ Genco recently challenged George Economou, saying that the market has to separate the 'goats from the sheep'. He was angered by the sudden Economou move to the oil rig business contrary to the purported mission of DRYS and rumors about a finder's fee for the bring the business to the company. Against this backdrop, let me comment on DRYS:
  • George Economou is a veteran very successful, but maverick ship owner. In the bond boom of the late 1990's, Economou did a controversial bond issue with aging bulk carrier assets that then led to a default on the first payment. He renegotiated and the bondholders took losses. Since then he made a tremendous comeback.
  • Economou gives the impression of the traditional private entrepreneur who has unbeatable instinct and does as he pleases, rather than the corporate manager who operates by mutual consent. Right now, he holds most of the officer positions in DRYS – CEO, CFO, etc. The BoD members evidently do not play a strong role. Privately he is seeking to fill these positions and restructure his management team.
  • Economou maintains a private company shipping Cardiff as well as being CEO in DRYS. This is a common situation in Greece. The Greek owners often have both a private shipping company, a management company and a publicly-traded company. There are potential conflict of interest issues with both the private shipping company and the management company, which manages the vessels in the public company. Tsakos (TEN), for example, has had for years a similar structure with a private management company and has succeeded to establish a high level of investor confidence.
  • DRYS has enjoyed a large profit margins in 2007 for two reasons: there are many units spot enjoying good rates and there have been good at resale profits. The company performance in 2007 is to be commended. Economou succeeded to get the timing right for the bulk carrier boom. Shareholders have benefited, but there is no guarantee of future performance.
  • On the other hand, with the company leverage rising, there is increased default risk if the market suddenly turns sour. Finally, it is possible that DRYS is expanding faster than their free cash and this may lead to growing liquidity problems. These last points are from third-party sources and subject to further examination.

As a postscript to this article, DRYS has recently enjoyed a recovery in share price. Latest quarterly results show a doubling of profits, which is excellent for free cash flow and will lower leverage so long as this lasts. One of the benefits of having a large number of units in the spot market is the advantage of higher earnings from the rate volatility.

Economou seems to be making some smart moves, particularly the acquisition of Heidmar for a broader commercial base. With current high oil prices, the oil rig business gambit may eventually pay off .

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