Apr 27, 2009

Underlying Value in Drybulk Shipping

DryShips Inc. (NASDAQ: DRYS) is a Marshall Islands registered company that was formed in September 2003. Their principal executive offices are in Athens, Greece. They are a provider of global marine transportation services for drybulk cargoes, including major bulk commodities such as iron ore, coal, and grain, as well as minor bulk commodities such as alumina, bauxite, fertilizers and cement. They own and operate a young, modern and diversified fleet of drybulk carriers that trade worldwide. DryShips is the largest drybulk company listed on a US Exchange both in terms of fleet size and revenue and one of the top Panamax operators in the world.

What attracted me into that company is their sound management. What we have here is a company with a market capitalization of about a billion dollars that has two employees: George Economou, its very involved Chairman, Chief executive officer and interim Chief financial officer, and his secretary. The company makes almost 500 million dollars in net income and capital expenditures rarely run to more than 20 million dollars. Now that is what I call cost control! The rest of the managing job is mainly contracted to affiliated companies that are also run very lean. That focus to reduce costs makes DryShips a company with very impressive profit margins and a huge return on shareholders’ equity since it has gone public. All those elements make DryShips another very promising position. There are very great prospects for the future of the company since it decided to diversify its operation near the end of the year 2008 into oil exploration.

As I talked about earlier, George Economou holds a 31% beneficial ownership in DryShips at the end of November 2008, and he has aggressively acquired about 2 million shares during the last quarter of the year, that high a stake guarantees that most of his decisions will be favorable to the shareholders. In concordance to the earnings statement of Q3 2008, he announced that one of the subsidiaries of the company will be spun-off and that each shareholder will be granted the proceeds from this transaction. That is almost an investment cinch, probably the closest thing to an arbitrage you can get on the stock market.

The company is currently facing a major debt restructuring and has issued an amount of new shares that has caused a quite an amount of dilution to existing shareholders, but I remain confident that DryShips will generate a lot of money in the coming years for the smart investors who are acquiring the common stock at the attractive prices we have had year to date.

Full disclosure: the author holds a long position in DRYS.

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