Friday, October 1, 2010

Signs of Life in Dryships Shares

Dryships recently sealed a breakthrough drilling contract that caused an 6% bounce in its share price early this week. Its share price was taking a beating this year largely due the employment uncertainty for the deep water drilling rigs on construction, CAPEX gap and the liabilities that dominate its balance sheet.

Dryship's acquisition  of OceanRig, a two-rig drilling company in Norway, back in late 2007 was a major gambit in its future. The company made a major shift into the off-shore drilling sector. As founded, Dryships was one of the most speculative plays in dry bulk. This transformed Dryships into more of a drilling play than shipping company, to which it added an additional two newbuilding deep water drilling rigs negotiated through Cardiff,  George Economou's private shipping company.

Unlike other its other Greek listed peers, Economou started with a much larger controlling share (45.5%) in the business, where he focused on somewhat older, mainly Panamax tonnage initially. His strategy was to build up the fleet in the then rising market by selling off this tonnage at profits and then using the free cash flow from operations and sale profits to buy newer tonnage. Most vessels were traded on the spot market. This strategy quickly made Dryships a market darling where its share price hit the roof with its share price rising from US$ 17.50 as an IPO to over US$ 120 by late 2008 with less than two years of trading.

The OceanRig transaction was done at the top of the market. This loaded the balance sheet with debt and the company put most of its fleet on period time charter for financial posturing. The 2008 financial meltdown hit the company very hard. It found itself very quickly with major loan asset covenant violations and was constrained to enter into a series of at the market supplementary share offering with considerable share dilution in 2009. George Economou's stake in the company plummeted. (Currently it is back to 14.5% after some incentive plan awards in his executive compensation plan.)  Economou held all the key corporate positions. There was rising criticism about transactions between his private company Cardiff and Dryships.

The loan covenant asset-debt coverage violations have taken months of negotiations to resolve. Just recently the company penned a pair of supplemental agreements with HSH on loan covenants laying the groundwork for amendments to its senior and junior loan facilities that carry an outstanding balance of US$ 520.9 mio. Last June, Economou announced that the company would do no further deals with his private company Cardiff.

The company has recently added some depth in its management team with the appointments of Ziad Nakhleh as Chief Financial Officer and Pankaj Khanna as Chief Operating Officer. Nakhleh was formerly CFO at Aegean Marine Petroleum Network Inc and started his career as an auditor at Ernst & Young and Arthur Andersen in Athens.  Khanna was the Chief Strategy Officer for Excel Maritime Carriers Ltd.  Mr. Khanna also previously served as Chief Operating Officer of Alba Maritime Services S.A.  Prior to joining Alba Maritime Services S.A., Mr. Khanna was Vice President of Strategic Development at Teekay Corporation.

The four well contract off West Africa will generate US$ 135 miio in revenue. Dryships still needs financing to cover its CAPEX for two of the four newbuild drillships. It has a US $350 mio ATM offer pending. It still needs contracts on the other three drillships to finish financing remaining payments of US$ 1.1 bn.  Originally Dryships had plans to spin off their drilling company but this has been constantly delayed. It is said that they want to realize at least US$ 400 mio from this transaction.  This may require more progress on the CAPEX financing gap and better contract cover.

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