Dry bulk stocks have experienced material gains year-to-date. Both DryShips Inc. (NASDAQ:DRYS) and Diana Shipping Inc. (NYSE:DSX) are up by 18% and 37%, respectively, since the start of the year as compared to only a 15% rise in the S&P 500 Index. Many traders are betting that the dry bulk industry is on the verge of a turnaround.
For those who don’t know, the dry bulk industry was one of investors’ favorite industries back in 2008 when the demand for iron ore and coal was rising at enormous rates in China. However, the management teams at these dry-bulk companies made the worst decisions of their lives when they started ordering new vessels, believing that the rate of growth would remain as high for the next decade.
The result has been a disaster. The industry has been plagued by oversupply problems as China didn’t grow to fuel enough demand. DryShips Inc. (NASDAQ:DRYS), which traded at $120 in 2008, now trades just below the $2 mark! However, the question is if the recent rally is indicative of a turnaround in the industry. If yes, then it can easily be the most lucrative industry to invest in this year.
Is dry bulk the most lucrative industry to invest in this year?
Let’s see what the companies had to say in their recent earnings results.
DryShips Inc. (NASDAQ:DRYS) reported an adjusted 1Q loss of $0.10 per share, which was above consensus estimates of a loss per share of $0.11. The operating profit fell $15 million short of expectations, driven by higher tanker-voyage costs and lower-than-expected profits from Ocean Rig UDW Inc(NASDAQ:ORIG).
While addressing dry-bulk orderbook concerns, DryShips Inc. (NASDAQ:DRYS) announced the sale of its position in four new-build dry-bulk ships, which helped it to eliminate a net ~$149 million in upcoming capital expenditures, which were largely due in 2013. These transactions eliminate the bulk of the speculative orders in DryShips Inc. (NASDAQ:DRYS)’s fleet and should ease investors concerns regarding further capital commitments, which have now been reduced to ~$144 million over the next two years.
As far as liability restructuring is concerned, DryShips Inc. (NASDAQ:DRYS) has ~$1.1 billion in excess capital based on cash-on-hand of $192 million and un-pledged Ocean Rig UDW Inc(NASDAQ:ORIG) shares owned by DryShips at a current market value of ~$1.1 billion, netted against ship commitments of ~$144 million. This rough math suggests excess cash is sufficient to meet DryShips’ convertible notes of $700 million due in 2014.