Wednesday, January 19, 2011

DryShips again in the limelight on possible conflict of interest issues

George Economou’s DryShips caused some surprise announcing a US $770 mio order for six suezmax and six aframax tankers. That was nothing compared to the reaction to market speculation when Morgan Stanley analysts Ole Slorer and Fotis Giannakoulis downgraded the stock raising concerns about increasing potential conflicts of interest between the public and private companies of DryShip's chairman George Economou. Economou had previously announced a firewall between Cardiff and DryShips.

Morgan Stanley Research suggests that DryShips may have overpaid by about US$ 50 mio for the six suezmax and six aframax tankers and warns that it expects tanker prices to further decline. This was a very sensitive remark because of previous concerns back in the fall of 2008 concerning the transfer of some Capesize dry bulk orders from Cardiff to the public company in view of subsequent cancelations and accompanying write-offs.

DryShips’s finance chief Ziad Nakhleh vehemently denied these allegations, asserting that not only were the orders done directly between the yard and DryShips but that Cardiff did not have any tankers on order from the yard in question. According to a well-known shipping publication," the denial sparked thinly disguised incredulity on the part of some, since during 2010 Cardiff was widely reported to have built up an orderbook of at least six aframaxes and five capesizes at South Korea’s Samsung Heavy Industries."

Prior the Morgan Stanley hiccup, DrysShip's shares had been rising on increased optimism about their CAPEX offshore funding and announcements of rig employment contracts. There has been speculation for some time about DryShip's spinning off their offshore activities at a premium for its shareholders.

Since then, DryShip's shares have stabilized at US$ 5.25 - not a very exciting level but still considerably better than the July 2010 low of US$ 3.28. DryShips was a star in the bull markets prior the 2008 meltdown with peak share levels close to US$ 130. In 2009, the company entered into a series of ATM offerings that led to massive dilution to deal with bank covenant issues.

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