Capital Link 2nd Annual Shipping Conference
Metropolitan Club
New York City
March 20, 2008
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.
There is only one major problem with Drybulk and for that matter any equity play. After 70 years of success the “uptick rule” was removed – not because it needed an upgrade, not because it interfered with another piece of legislation, but because it quietly was lobbyed away by large hedgefund operators so they could act inappropriately within the market place & profit. They have stolen billions of dollars in the past year out of the market through their shorting activity! I represent an investment group and have agreed to act as the catalyst to find out who in the SEC was responsible for this less than ethical sanction. I have contacted the SEC and am waiting for an initial response which will serve as the trigger mechanism for exposing this significant broach of ethical boundarys, even if it has to be taken as far as the oval office.
Let me give you a brief overview to help understand who I am and why I view this act inappropriate at the least.
Back in the day I had a friend that I considered a great American he was a congressman that was the head of the “Ways & Means Committee” for “Rochester New York” I believe around 1968, anyway a long time ago – his name is Barber B. Conable Jr. and he went on to fill a void in the “World Bank”. His ethical boundarys and values were those which I tried to model my own after, and I am still trying to live by those standards. I currently am retired and reside in Canada with my family although I still conduct business in the U.S.
I spent a great deal of my adult life living, working, and paying taxes in the U.S.A. and there is nothing I would deny her for the life she provided me, so you will have to forgive me if I am so angered by this scurrilous act against the ordinary middle class investor who’s only goal is to try and raise his/her standard of living and family’s security level. Somewhere in this scenario there are officials that must answer for thier actions in this matter. Everyone can help by simply contacting their congressman & asking for an honest, relevant explanation as to why the uptick rule was removed?
I know this site is meant for things other than what I have put forward here, but I hope my efforts will benefit the investor on main street God bless America and keep safe all of her people.
Joseph E. Intine
Typo Correction:
Should have read:
• 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?”
Hi Joe thanks for your comments. I know there are many here who agree with you.
By way of background:
The Uptick rule is a former financial regulations rule, relating to the trading of securities in the United States. The rule was eliminated by the SEC, effective July 6, 2007. ‘Uptick’ is the name generally given to Rule 10a-1, under the Securities Exchange Act of 1934, which states that short selling is only permitted following a trade where the traded price was higher than the previously traded price (uptick).
On the March 20, 2008 episode of Mad Money, Jim Cramer launched his campaign to reinstate the Uptick Rule. Citing the wild swings of the market since its elimination, Cramer pointed out that the SEC eliminated the rule during a bull market, when liquidity was not a problem. Cramer believes that, without the Uptick Rule in place, short sellers are devaluing perfectly solid stocks. As a former hedge fund manager, Cramer admitted to making millions short selling with the Uptick Rule in place. Without an impediment such as the Uptick Rule to slow down the pace of short sellers, Cramer believes it puts the market at risk for the very problems that lead to the Great Depression.
Hi Joseph and thanks for you comments.
Apperantly, it was SEC that saw the results of its own pilot program as favorable – and proceeded by officially approving the elimination of the ‘uptick’ rule as of July ‘07.
Yet, the very essence of the ‘uptick’ rule was to prevent powerful financial entities and the rest of the investing crowd , from artificially driving stocks down and then buying them back at bottom prices. Coincidentally, both ETF’s… SPY and Q’s have never been subject to the uptick rule. Clearly, there is some confusion here in SEC’s way of thinking and the moral stance it has taken in relation to this important issue, since its implications are rather vast. Additionally, a look at the VIX index as of July of fiscal ‘07 – coincided with a high level of volatility – proving rule’s negative effects. Yet, nothing was done to reverse it.
I think , we can’t categorically deny uptick’s rule effect or better the manipulation of solid companies, getting punished for simply standing on solid fundamentals while those with negative returns and bound for pink status , have remained almost intact since last november when the decline started.
Perhaps, we’ll never know for sure, since we don’t have the real data – if the elimination of the uptick rule is the direct cause the markets have gained an ability to move down faster. One thing is for sure however, at least partially, that the elimination of the rule has contributed in diminishing markets ability to resist manipulation.
tx for a very informative piece D….appreciate it.
thanks dn for putting together all Shipping Conference articles. Lots of work involved for sure. very much appreciated.
Hello my friends :)
;)