Capital Link 2nd Annual Shipping Conference, Part Two: The Dry Bulkers: DRYS and Demand for Dry Bulk
George Economu, the DryShips, Inc. CEO, made some compelling arguments in support of his premise that DryShips, Inc. (Nasdaq: DRYS) is the best buy in the Dry Bulk:
• Strong balance sheet with $680 million liquidity.
• 63% of 2008 vessel days unfixed.
• 17% more operating days then in 2007.
• DRYS market cap is 84% greater than average of the other dry bulkers with market caps in excess of $1 billion.
• Yet DRYS had 333% more earnings in 2007 than the average of the others.
• DRYS should earn $651 million in 2008, 325% more than the average of the others.
• Even in 2009, DRYS should earn $459 million, 168% more than the others.
• The combined market cap of all the others is 172% greater than that of DRYS, yet the combined net income of all the others is only 17% greater than DRYS. “Why pay 172% more for only 17% more earnings?”
But the main topics that most wanted to know dealt with his strategies going forward. Here are some questions and answers you may find of interest.
Q. Is the 6 million new shelf registration going to market or was it just replenishing the shelf?
A. ·· Just replenishing the shelf. The 6 million shares that were sold were at an average price of about $83/share, above the net asset value of the company (about $75/share). No plans to go to market with these shares in the first half, and most certainly not when the stock price is below NAV.
Q. Are the proceeds raised in the recent stock sale of going to be used for the drill ships? [DRYS has options expiring in a few days (March 24, 2008) for 2 drill ships at a cost of $800 million per vessel. There are 2 more that he personally has options on].
A. ·· Some of the money may be, but not most. [He would not say what the rest of the money will be used for, but said would not be used to pay down debt because debt levels already low. Also said there are no other asset classes that are of interest to him right now. Also said (in panel discussion on Merger and Acquisition) that there are no attractive targets right now and best way to grow is to acquire ships rather than other companies. Makes no sense to do a merger when the stock values are trading below NAV. My guess is he will use it to either acquire ships or acquire other shippers’ stock at below NAV, in addition to buying drillships.]
Q. Is the recent interest in Ocean Rig (OCR) and drill ships a sign that dry bulk is no longer of interest, or the best use of investment dollars?
A. ·· No, it is simply a decision to put some of the significant cash generated by DRYS to work in attractive opportunities. The drill ships, if acquired, would generate a cash on cash return of 17.5%. Because they would be leveraged the actual return on equity would be greater. “Can you do better?”
Q. Will you use OCR to manage the drill ships if they are acquired by DRYS?
A. ·· That is a possibility.
Q. Will DRYS keep its vessels in the spot market or go out longer?
A. ·· Would not say. But he seemed to imply that he would “maybe” go out longer. There are several things that lead me to believe that he may be going long on his charters, or may intend to do so.
“Better to stay spot, but there are times when time charters might be better. Currently we are in an environment when you should at least think of it.”
After this comment another dry bulk CEO stated “If George is going long, I am going longer.”
The fleet deployment lists in the handouts, while almost identical to those used in the Q4 conf. call, had the last two columns showing the charter amount and length of charters deleted.
He did not say he was going to stay spot. Stated would do what is necessary to insure shareholder value in the next 3 – 5 years.
Q. Is the newbuild Cape on target for delivery about July 1, 2008?
A. ·· Yes.
General comments on demand for dry bulk shipping
Here are some assorted comments from various dry bulk CEO’s:
• Should be strong March and April because of resolution of iron ore negotiations. Should be strong fall.
• Non Japanese ships over 10 years old cannot trade Japan.
• US coal exports increased from 40 to 60 million tons, should continue to increase. Weak dollar not all bad.
• India has the same population as China but the same economy as the Netherlands. It is an untold story in future demand. As India develops, it will reduce its iron ore exports and consume them instead, forcing China to replace with ore from further away, requiring greater ton mile demand.
• China continues to urbanize and industrialize. It currently builds the equivalent of 3 Manhattans a year. This requires roads, rails and buildings. Ton miles should increase at a rate of 8-10% per year.
• The Chinese have an advantage to underestimate demand. Demand will be higher than predictions.
• Shipping fundamentals are very strong. There is a disconnect between the stock market and shipping.
• 50% of dry bulk is related to steel.
• Only 12% of the Chinese economy is involved in export. Of the Chinese exports, only 20% of that 12% is to the U.S. The key drivers are energy, mining and infrastructure.
• There are huge trading desks that follow the Baltic Dry Index and trade the shippers accordingly. These desks have been successful shorting the stocks because general market fear has kept buyers away. But long term fundamentals are strong, and are causing charterers to come in and enter into charters for 3- 5 years out.
Note: I was going to do the tankers but decided to get my notes on the dry bulkers done first. Next I will review Excel, Navios, and Starbulk, not necessarily in that order.
• Strong balance sheet with $680 million liquidity.
• 63% of 2008 vessel days unfixed.
• 17% more operating days then in 2007.
• DRYS market cap is 84% greater than average of the other dry bulkers with market caps in excess of $1 billion.
• Yet DRYS had 333% more earnings in 2007 than the average of the others.
• DRYS should earn $651 million in 2008, 325% more than the average of the others.
• Even in 2009, DRYS should earn $459 million, 168% more than the others.
• The combined market cap of all the others is 172% greater than that of DRYS, yet the combined net income of all the others is only 17% greater than DRYS. “Why pay 172% more for only 17% more earnings?”
But the main topics that most wanted to know dealt with his strategies going forward. Here are some questions and answers you may find of interest.
Q. Is the 6 million new shelf registration going to market or was it just replenishing the shelf?
A. ·· Just replenishing the shelf. The 6 million shares that were sold were at an average price of about $83/share, above the net asset value of the company (about $75/share). No plans to go to market with these shares in the first half, and most certainly not when the stock price is below NAV.
Q. Are the proceeds raised in the recent stock sale of going to be used for the drill ships? [DRYS has options expiring in a few days (March 24, 2008) for 2 drill ships at a cost of $800 million per vessel. There are 2 more that he personally has options on].
A. ·· Some of the money may be, but not most. [He would not say what the rest of the money will be used for, but said would not be used to pay down debt because debt levels already low. Also said there are no other asset classes that are of interest to him right now. Also said (in panel discussion on Merger and Acquisition) that there are no attractive targets right now and best way to grow is to acquire ships rather than other companies. Makes no sense to do a merger when the stock values are trading below NAV. My guess is he will use it to either acquire ships or acquire other shippers’ stock at below NAV, in addition to buying drillships.]
Q. Is the recent interest in Ocean Rig (OCR) and drill ships a sign that dry bulk is no longer of interest, or the best use of investment dollars?
A. ·· No, it is simply a decision to put some of the significant cash generated by DRYS to work in attractive opportunities. The drill ships, if acquired, would generate a cash on cash return of 17.5%. Because they would be leveraged the actual return on equity would be greater. “Can you do better?”
Q. Will you use OCR to manage the drill ships if they are acquired by DRYS?
A. ·· That is a possibility.
Q. Will DRYS keep its vessels in the spot market or go out longer?
A. ·· Would not say. But he seemed to imply that he would “maybe” go out longer. There are several things that lead me to believe that he may be going long on his charters, or may intend to do so.
“Better to stay spot, but there are times when time charters might be better. Currently we are in an environment when you should at least think of it.”
After this comment another dry bulk CEO stated “If George is going long, I am going longer.”
The fleet deployment lists in the handouts, while almost identical to those used in the Q4 conf. call, had the last two columns showing the charter amount and length of charters deleted.
He did not say he was going to stay spot. Stated would do what is necessary to insure shareholder value in the next 3 – 5 years.
Q. Is the newbuild Cape on target for delivery about July 1, 2008?
A. ·· Yes.
General comments on demand for dry bulk shipping
Here are some assorted comments from various dry bulk CEO’s:
• Should be strong March and April because of resolution of iron ore negotiations. Should be strong fall.
• Non Japanese ships over 10 years old cannot trade Japan.
• US coal exports increased from 40 to 60 million tons, should continue to increase. Weak dollar not all bad.
• India has the same population as China but the same economy as the Netherlands. It is an untold story in future demand. As India develops, it will reduce its iron ore exports and consume them instead, forcing China to replace with ore from further away, requiring greater ton mile demand.
• China continues to urbanize and industrialize. It currently builds the equivalent of 3 Manhattans a year. This requires roads, rails and buildings. Ton miles should increase at a rate of 8-10% per year.
• The Chinese have an advantage to underestimate demand. Demand will be higher than predictions.
• Shipping fundamentals are very strong. There is a disconnect between the stock market and shipping.
• 50% of dry bulk is related to steel.
• Only 12% of the Chinese economy is involved in export. Of the Chinese exports, only 20% of that 12% is to the U.S. The key drivers are energy, mining and infrastructure.
• There are huge trading desks that follow the Baltic Dry Index and trade the shippers accordingly. These desks have been successful shorting the stocks because general market fear has kept buyers away. But long term fundamentals are strong, and are causing charterers to come in and enter into charters for 3- 5 years out.
Note: I was going to do the tankers but decided to get my notes on the dry bulkers done first. Next I will review Excel, Navios, and Starbulk, not necessarily in that order.
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1:47 a. m.
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