DryShips (NASDAQ:DRYS) has had a rough run in the past few weeks. The stock price has declined by over three quarters in the last one month. However this rapid decline in the stock price hides the strong key metrics which the company boasts. The company has a number of drybulk carriers and offshore vessels which provide transportation of different goods including steel, coal, agri-food and more. Currently, it has $422 million in cash and cash equivalents which equates to around $9/share. The book value of vessels is $194 million. It also has third party loans of $16.5 million and a fully drawn Sifnos loan facility of $200 million.
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For the 47 million shares outstanding the net asset value per share comes to $8.50 whereas the stock is trading at $1.90. This means that the stock is trading at a discount of 80%. One of the driving forces behind this big discount is the recent announcement of equity purchase agreement with Kalani investments limited. The rapid decline in stock price in the last few weeks means that the recent efforts to raise $45 million through Kalani have failed.
Likelihood of a price surge
At the core of the problems of DryShips is the $188 million equity purchase agreement it has with Kalani. The management is trying to rapidly complete this process but the fall in trading volume in the last few weeks means that it would take months to complete the current offering. The only way out for the management is to make sure that the price reaches close to its ideal net asset value per share of $8.50.
In order to achieve this there would need to be a boost in investor sentiment. The dividend policy of allocating $2.5 million should certainly help. However more important than the dividend and huge discount is the fact that in the past few sessions no new shares have been issued by the company. It looks that the management would first like to see the stock stabilize and reach a better price point before activating another round of dilution.
We can soon see momentum traders starting another bull run for the company which can lift the stock price rapidly.
Rise in Baltic Dry Index
The index is close to 1300 and the demand side looks pretty strong for 2017. Two major factors lifting the BDI is the forecast of higher coal imports from China, especially from U.S. and Australian producers after it rejected recent shipments from North Korea. Cyclone in Australia has also impacted the supply of coal from Australia which should increase demand of U.S. coal. This will lead to improvement in panamax component of BDI.
DryShips has 13 Panamax vessels where it uses the spot rate. An improvement in the price will certainly help the company post better results. Due to rapid dilution these factors might not be very important in the short term but they can certainly help in lifting investor morale once the latest capital raising activity is over.
Risks involved in initiating a long position
There might be a good chance of a price surge in DRYS stock. This can be a perfect time to jump in the stock but there are some risks involved. The primary concern is the fact that there is still $188 million remaining under the equity purchase agreement with Kalani which the management would like to complete as soon as feasible. Any new long position should keep this risk in mind before starting a trade.
In the end if the management is able to boost investor confidence it will certainly lead to a quick price surge. After the recent fall in stock price we are near the rock bottom in terms of valuation. At the current price point the stock is a good option for a momentum trade and if sentiment around the stock improves in the next few weeks, there is a high probability of a sharp increase of stock price to its net asset value per share of around $8.50 which would represent 300% – 400% jump in prices.