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Dryships: The Saga Continues

by: The Stalwart October 09, 2008 | about stocks: DRYS    
The Stalwart

The Stalwart

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Apologies for those who find the subject of Dryships (DRYS), well, rather dry. This is a follow-on from the post "Never Enough Lessons on Forward PE". I basically added a comment on Seeking Alpha explaining what one starting point might be for valuing a highly cyclical, asset-heavy company like Dryships, and wanted to include it here at The Stalwart.

As for how might someone value dryships? Well let's think as if one were actually in the industry looking to expand your fleet. An industry player can either buy ships in the market or buy a company that owns ships. If you get far more ships for your buck buying DRYS than buying in the market, then I think that's a decent starting point, but we must be very careful since even dry bulk (and rig) asset prices can fluctuate quite substantially. Thinking from an industry buyer perspective would be simply thinking about the value of a dry bulk company as the actual players in the industry do. I promise you they don't forecast 1 year of earnings and then calculate a multiple. Wall street analysts frequently do, and companies put simple multiples in their investor presentations, but trust me actual shipping players don't make decisions like this. DRYS has rigs and bulk vessels, plus perhaps some additional value from its organization and customer relationships. But you would probably want to be getting DRYS at a price where you were getting its assets at a good discount to market prices, as this would give you some cushion. (these asset prices can fall, so good to have a margin of safety). Just don't forget that DRYS has a lot of debt, so you would want your adjusted NAV (adjusted to include a margin of safety vs. asset price declines) to be much higher than Enterprise Value (not market cap).

Disclosure: Again, I have never owned Dryships nor have been long or short the stock in any manner.

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This article has 4 comments:

  •  
    Oct 09 02:44 PM
    Interesting insight.

    I just looked at their balance sheet and the book value of their equity was around $28 at the time of their last annual report (end of March). Given that they have made substantial positive cash flows from operations recently, that might have improved slightly from that point. With the stock trading around $22, it would seem as if this proposed method of valuation would end up giving you almost exactly the current price.

    However, if they are still bringing in substantial cash flows for the next few quarters, I'd argue that this undervalues them a little bit. Then again, they are more levered than I'd like to see.
    Reply
  •  
    Oct 10 12:18 PM
    "DRYS has rigs and bulk vessels, plus perhaps some additional value from its organization and customer relationships."

    You glossed over a very important asset. The two drill rigs owned by DRYS are chartered via long term charters (one charter is 3-5 years) at an average day rate of $600K/day. In addition, about half of DRYS vessels are now booked to long term charters some as long as 10 years. And finally, DRYS has a lock on 4 new build Ultra Deep Water - Nasty Weather Drill Rigs. The waiting que for these is 4 years. Two of the Drys drill rigs are set to be delivered in 2010. There are now only 89 of those in existance. Those assets could be easily turned today for a $200M profit given that the day rate less operating cost is $500K/day. I have worked through several valuation exercises based only on an estimated real liquidation valule. Using various figures for the ships, rigs, contracts and new build holds, I conclude that the minimum liquidation value is $60/share. It is interesting to note that at this moment, newer used ships available for immediate delivery are selling for more than the contract price of a new build similar vessel to be delivered 2 years down the road. With the exception of 2 vessels, all of DRYS vessel are newer vessels.
    Reply
  •  
    Nov 19 09:43 PM
    I'll bite beegdawg007. Why are they trading in the $5.00 area today with all those positive comments you made ?
    Reply
  •  
    Nov 20 10:21 AM
    DRYS is at $3.94 ...and sinking!!OUCH!


    On Nov 19 09:43 PM littledog wrote:

    > I'll bite beegdawg007. Why are they trading in the $5.00 area today
    > with all those positive comments you made ?
    Reply
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