In life, second chances do not come by often. This is why there is a version of the old adage, “You only get one chance to make a first impression” for almost all cultures. This tends to be the case for businesses too; investors usually have a very good memory for the failures of companies, but not always. While most companies fade away after their first big failure, there are always the select few that seem to have the nine lives of a cat.
It’s often said that the definition of insanity is doing the same thing over and over and expecting a different result. By this definition, both the management team and investors in DryShips (DRYS) must be insane. Despite years of failure, investors have continued to shell out money, hand over fist, giving the company chance after chance after chance.
Despite being one of the most traded stocks by volume on the market, it’s hard to say what DryShips really is. On the surface, the company represents itself as a diversified owner of ocean cargo vessels that operate worldwide. While DryShips owns a sizeable fleet of assorted sea-based shipping vehicles that is continuing to grow, the company has experienced a marked decline in revenue while hemorrhaging cash over the past two years. While DryShips’ valuation correspondingly declined over this period, shares rallied significantly over the past week as the company announced the acquisition of four bulk carriers for $124 million.
A Completely Unnatural Ability to Raise Capital
DryShips, for better or for worse, has never experienced any problems in continuing operations, even despite the troubling operation concerns in cash flow and revenue shrinkage. Although investors have been excited by the recovery of dry bulk shipping rates, this fails to account for the incredible ease DryShips has been able to aggressively and repeatedly conduct capital raises to grow its fleet of ships. With income statements revealing the burn rate continuing to get worse, the company’s ability to receive capital injections and invest in very expensive shipping vehicles is shrouded in mystery. By almost any standard understanding of capital markets, this is ridiculous.
DryShips’ strong access to capital makes even less sense when its industry is considered. Investors are typically wary of capital raises by shipping companies. This stems from an extensive history of such companies overinvesting in their fleets beyond their means of expansion. Terrible capital allocation is fairly common for shippers and where they frequently drown the earning potential of hundreds of millions of dollars when said companies are unable to find a profitable use for newly acquired shipping carriers.
Cash Is Dwindling, That Raise is Coming
The company reported $243 million in cash on hand at its last fourth-quarter results. Although this seems like a tremendous amount of cash, the impact is diminished by the complete lack of positive cash flow in addition to the company’s recent $124 million acquisition, implying cash levels are currently below $110 million accounting for the accelerating burn rate.
Based on current information, it seems unlikely that DryShips will be able to achieve any meaningful level of profitability over the next two years. With recent acquisitions impacting the company’s financial liquidity, one can only assume another raise is in short order for DryShips.
Mystery Investment Group Will Dilute All Shareholders
Because DryShips just seems to lack the ability to say “no” to sources of capital, existing shareholders should just expect to get diluted down to nothing eventually. This isn’t an exaggeration; look at the last two equity rounds announced within just two months of each other from December 2016 and February 2017.
When the first round was announced late last year, it was announced that the $200 million stock offering could take up to 24 months to complete, it completed in under 40 days. Less than a month after completion of the first round, an offering with the exact same terms was announced again. Representing a massive total of $400 million, completion of this financing probably blew out any previously existing shareholders.
What’s worse is that proceeds from these offerings went on to purchase speculative investments such as oil and gas tankers. This shouldn’t come at a surprise though, DryShips has an established five-year history in really destroying shareholder value, and it’s nearly an art form now.
The most important question remains, what entity provided DryShips such substantial and rapid access to capital, not once- but twice? That would be Kalani Investments Limited (“Kalani”), an “entity apparently unaffiliated” with the Company. Despite the group being capable of fully exercising $ 200 million + offering in under a month, nobody else had heard of the group until their involvement with DryShips. With little proof of Kalani actually existing in the function of an investment group, some investors suspect Kalani may actually be a puppet controlled by the head of DryShip.
So Is DryShips Actually Improving, or will it sink like the Titanic?
Like one of the seven wonders of the world, the tremendous liquidity of DryShips is a sight to behold. A number of investors have likened the company to the Titanic, a ship shrouded in mystery and intrigue that sank in the early 20th century. While DryShips hasn’t sunk yet, many seem to believe that the company will suffer the same fate.
This is highly unlikely, as seen with Ocean Rig’s bankruptcy proceedings, the CEO realizes that his public companies are incredibly important for his success. That being said, it’s hard to imagine that the company will ever become profitable or even viable as a long-term investment, given the random nature of its substantial acquisitions, and the rapid dilution from Kalani’s $200 million stock offerings. At the very least, betting on a turnaround could be like staying on the Titanic.
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Source: One Equity Stocks, LLC