DRYS : DryShips Stock Analysis and Research Report

2017-10-19 - by Asif, Contributing Analyst

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DryShips Inc., a corporation organized under the laws of the Republic of the Marshall Islands, was formed on September 9, 2004. its principal executive offices are located at 109 Kifisias Avenue and Sina Street, Marousi, GR 151 24 Greece.

Business Development

Developments related to Ocean Rig

On October 29, 2014, DryShips completed the issuance of 20,833 of its common shares (250,000,000 common shares before the reverse stock splits) in a public offering amounting to net proceeds to it of $332.9 million.

On June 8, 2015, Ocean Rig, successfully completed the offering of 28,571,428 shares of its common stock, par value $0.01 per share, at a price of $7.00 per share, resulting in proceeds of $194.1 million, after deducting placement fees. As a result of the offering DryShips lost itscontrolling financial interest in Ocean Rig, therefore, from June 8, 2015, Ocean Rig has been considered as an affiliated entity and not as a controlled subsidiary.

On June 4, 2015, DryShips reached an agreement with Ocean Rig under the $120.0 million Exchangeable Promissory Note ("the Note"), dated November 18, 2014, to, among other things, partially exchange $40.0 million of the Note for 4,444,444 of Ocean Rig's shares owned by it, amend the interest of the Note and pledge to Ocean Rig 20,555,556 of Ocean Rig's stock owned by it. On August 13, 2015, DryShips reached an agreement with Ocean Rig and exchanged the remaining outstanding balance of $80.0 million owed to Ocean Rig under the Note, for 17,777,778 shares of Ocean Rig owned by it. The agreement was approved by a committee of independent directors.

On April 5, 2016, DryShips sold all of its shares of Ocean Rig to Ocean Rig Investments, Inc., a subsidiary of Ocean Rig and as such DryShips no longer hold any shares of Ocean Rig as of the date of this annual report.

Developments related to Sifnos

On October 21, 2015, as amended on November 11, 2015, DryShips entered into a secured revolving credit facility of up to $60.0 million, or the Revolving Credit Facility, with Sifnos, an entity controlled by Mr. George Economou, its Chairman and Chief Executive Officer, for general working purposes. The loan was secured by shares that DryShips held in Ocean Rig and in Nautilus and by a first priority mortgage over one Panamax drybulk carrier and had a tenor of three years. In addition, the lenders and the borrowers had certain conversion rights the exercise of which was approved by itsboard of directors on December 11, 2015. DryShips board of directors elected to convert $10.0 million of the outstanding principal amount of the Sifnos Loan into 8,333 of its Series B Preferred Stock (100,000,000 before the reverse stock splits). Each preferred share had five votes and was mandatorily converted into common shares of the Company on a one to one basis within three months after the issuance thereof on a date selected by it, no later than March 30, 2016.

On March 24, 2016, DryShips entered into an agreement to increase the Revolving Credit Facility. The facility was amended to increase the maximum available amount by $10.0 million to $70.0 million, to give it an option to extend the maturity of the facility by 12 months to October 21, 2019, and to cancel the option of the lender to convert the outstanding loan to its common stock. Additionally, subject to Sifnos prior written consent, DryShips obtained the right to convert $8.75 million of the outstanding balance of the loan into 29,166 of itspreferred shares (3,500,000 preferred shares before he 1-for-15 and 1-for-8 reverse stock splits), which had a voting power of 5:1 (vis-à-vis common stock) and were mandatorily converted into common stock on a 1:1 basis within 3 months after such conversion. As part of the transaction, DryShips also entered into a Preferred Stock Exchange Agreement to exchange the 8,333 Series B Preferred Shares (100,000,000 before the reverse stock splits) held by the lender for $8.75 million. DryShips subsequently cancelled the Series B Preferred Shares previously held by Sifnos, effective March 24, 2016.

On April 5, 2016, the Revolving Credit Facility was further amended, in connection with the sale of all of the shares DryShips held in Ocean Rig to Ocean Rig Investments, Inc. whereby Sifnos agreed to, among other things, (i) release its lien over the Ocean Rig shares and (ii) waive any events of default, subject to a similar agreement being reached with the rest of the lenders to Dryships, in exchange for a 40% LTV maximum loan limit, being introduced under the Revolver. In addition the interest rate under the loan was reduced to 4% plus LIBOR. On April 5, 2016, DryShips paid Sifnos $45.0 million from its proceeds of the sale of the Ocean Rig shares to Ocean Rig Investments Inc.

On September 9, 2016, DryShips entered into an agreement to convert $8.75 million of the outstanding balance of the Revolving Credit Facility into 29,166 Series D Preferred shares (3,500,000 shares before the 1-for-15 and 1-for-8 reverse stock splits ). Each preferred share has 100,000 votes and shall not be convertible into common stock.

On October 31, 2016, the Revolving Credit Facility was amended to increase the maximum available amount by $5.0 million to $75.0 million and to give it an option within 365 days to convert $7.5 million of the outstanding loan into its common shares.

On December 30, 2016, Sifnos entered into the New Revolving Facility of up to $200.0 million with the Company. The New Revolving Facility is secured by all of its present and future assets except the MV Raraka. This new loan carries an interest rate of LIBOR plus 5.5%, is non-amortizing, has a tenor of 3 years, has no financial covenants and was arranged with a fee of 2.0%. In addition, Sifnos has the ability to participate in realized asset value increases of the collateral base in a fixed percentage of 30%.

Other Developments

On October 21, 2015, DryShips entered into an agreement to acquire Mezzanine Financing Investment III Ltd. ("Mezzanine") and Oil and Gas Ships Investor Limited (Oil and Gas), which owned in aggregate, directly or indirectly, 97.44% of the issued and outstanding share capital of Nautilus Offshore Services Inc. ("Nautilus"), for a purchase price of $87.0 million plus the assumption of approximately $33.0 million of net debt. As part of the acquisition cost, DryShips also paid $3.6 million for the working capital of Nautilus as at September 30, 2015, as agreed between the parties. In addition, on November 24, 2015, Mezzanine, entered into an agreement with VRG AS, which owned the remaining 2.56% issued and outstanding share capital of Nautilus, and acquired its equity stake.

On June 8, 2016, DryShips entered into a securities purchase agreement with an institutional investor for the sale of 5,000 newly designated Series C Convertible Preferred Shares, warrants to purchase 5,000 Series C Convertible Preferred Shares and 310 common shares (148,998 before the reverse stock splits). As of November 18, 2016, the 5,000 Series C Convertible Preferred Shares and the 5,000 Series C Convertible Preferred Shares issued due to the exercise of the respective warrants have been converted into 177,886 common shares (1,423,091 before the 1-8 reverse stock split).

On November 16, 2016, DryShips entered into a Securities Purchase Agreement with Kalani Investments Limited ("Kalani"), for the sale of 20,000 newly designated Series E-1 Convertible Preferred Shares, preferred warrants to purchase 30,000 Series E-1 Convertible Preferred Shares, preferred warrants to purchase 50,000 newly designated Series E-2 Convertible Preferred Shares, prepaid warrants to initially purchase an aggregate of 46,609 common shares (372,874 before the 1-for-8 reverse stock split - with the number of common shares issuable subject to adjustment as described therein), and 13 common shares (100 before the 1-for-8 reverse stock split). As of December 12, 2016, the initial 20,000 Series E-1 Convertible Preferred Shares, the E-1 and E-2 Convertible Preferred Shares issued due to the exercise of the preferred warrants and the prepaid warrants have been converted and/or exercised into 3,991,579 common shares (31,932,629 before the 1-for-8 reverse stock split).

On December 23, 2016, DryShips entered into a common stock purchase agreement, or the 2016 Purchase Agreement, with Kalani. The 2016 Purchase Agreement provided that, upon the terms and subject to the conditions set forth therein, Kalani was committed to purchase up to $200.0 million worth of shares of its common stock over the 24-month term of the purchase agreement and would receive up to an aggregate of $1.5 million of shares of its common stock as a commitment fee in consideration for entering into the 2016 Purchase Agreement. A s of January 31, 2017, DryShips completed the sale to Kalani of the full $200.0 million worth of shares of its common stock under the 2016 Purchase Agreement, which then automatically terminated in accordance with its terms. Between the date of the 2016 Purchase Agreement, December 23, 2016, and January 30, 2017, DryShips sold an aggregate 31,769,940 shares of its common stock to Kalani at an average price of approximately $6.30 per share. DryShips net proceeds from the sale of these shares were approximately $198.0 million, after deducting estimated aggregate offering expenses.

Reverse Stock Splits

On February 22, 2016, a committee of its board of directors determined to effect a 1-for-25 reverse stock split of shares of its common stock. The reverse stock split occurred, and shares of its common stock began trading on a split adjusted basis on Nasdaq as of the opening of trading on March 11, 2016. On July 29, 2016, its board of directors determined to effect a 1-for-4 reverse stock split, and shares of its common stock began trading on a split adjusted basis on Nasdaq as of opening of trading on August 15, 2016.

On October 27, 2016, a Reverse Stock Split Committee of its board of directors determined to effect a 1-for-15 reverse stock split of shares of its common stock. The reverse stock split occurred and shares of its common stock began trading on a split adjusted basis on Nasdaq as of the opening of trading on November 1, 2016

Vessel Acquisitions and Dispositions

During 2014, DryShips (i) took delivery of one second hand Capesize vessel with an attached time charter, Raiatea (ex. Conches), for a purchase price of $53.0 million; (ii) canceled the construction of the four newbuilding Ice class Panamax vessels and received all installments previously paid to the shipyard of $11.6 million, plus interest, which resulted in a loss of $1.3 million; and (iii) through its previous majority owned subsidiary, Ocean Rig, took delivery of the Ocean Rig Athena.

During 2015, DryShips (i) sold its entire tanker fleet, for an aggregate sales price of $536.0 million; (ii) DryShips sold five of its drybulk carriers and 14 drybulk vessel owning companies for an aggregate price of $389.3 million, (iii) acquired Nautilus, which indirectly through its subsidiaries owns six offshore support vessels and (iv) through its affiliate, Ocean Rig, which was its majority owned subsidiary until June 8, 2015, took delivery of the Ocean Rig Apollo.

On February 15, 2016, DryShips announced that the previously disclosed sale of three vessel owning companies failed. On March 24, 2016, DryShips concluded a new sales agreement for those entities. Thus, during 2016, DryShips sold four of its drybulk carriers and six drybulk vessel companies for an aggregate price of $108.3 million.

Recent Developments

DryShips and its vessel-owning subsidiaries expect to enter into new separate agreements with the TMS Entities for services, including executive management services, effective as of January 1, 2017, based on the terms agreed to in the New TMS Agreement. In connection with the new agreements with the TMS Entities, DryShips terminated at no cost with effect on December 31, 2016, the consulting agreements with Fabiana Services S.A., or Fabiana, Vivid Finance Limited, or Vivid Finance, and Basset Holdings Inc., or Basset Holdings, entities controlled by its Chairman and Chief Executive Officer Mr. George Economou and its Chief Financial Officer and President Mr. Anthony Kandylidis. The all-in base cost for providing the increased scope of services will be reduced to $1,643 per day per vessel, which is a 33% reduction from the prior rate, basis a minimum of 20 vessels, decreasing thereafter to $1,500 per day per vessel. The term of the agreements with the TMS Entities is expected to be 10 years.

On January 12, 2017, DryShips agreed to enter into the LPG Option Agreement with companies controlled by Mr. George Economou, to purchase up to four high specifications VLGCs capable of carrying LPG that are currently under construction at HHI. Each of the four VLGCs is expected to be employed on long term charters to major oil companies and oil traders. Under the terms of the LPG Option Agreement, DryShips has three months to exercise four separate options to purchase up to the four VLGCs at a price of $83.5 million per vessel. If DryShips exercise all four options, the total purchase price of the VLGC fleet will be $334.0 million and the vessels will be delivered in 2017. The transaction was approved by its independent directors based on third party broker valuations. If acquired, the vessels will be managed by TMS Cardiff Gas, a company controlled by Mr. George Economou, on the same terms as the previously announced new TMS agreements.

On January 18, 2017, its board of directors determined to effect a 1-for-8 reverse stock split of shares of its common stock. The reverse stock split occurred, and shares of its common stock began trading on a split adjusted basis on Nasdaq as of the opening of trading on January 23, 2017. On January 19, 2017, DryShips acquired its first VLCG under the LPG Option Agreement, currently under construction at HHI, for a purchase price of $83.5 million. DryShips financed the closing price of $21.9 million by using part of its undrawn liquidity under the New Revolving Facility, consequently increasing the outstanding balance of the New Revolving Facility to $142.9 million. The $61.6 million balance of the purchase price for the VLGC is payable in installments until the vessel's delivery from HHI. The VLGC is expected to be employed on a fixed rate five-year time charter with an oil major. The charterer has options to extend the firm employment period by up to three years. DryShips expect to take delivery of the vessel in June 2017.

On January 30, 2017, DryShips successfully completed the previously announced $200.0 million common stock offering, in which DryShips raised net proceeds of $198.0 million, pursuant to the 2016 Purchase Agreement DryShips entered into on December 23, 2016. The 2016 Purchase Agreement was then automatically terminated in accordance with its terms. DryShips issued 32,028,079 shares of common stock (as adjusted for the 1-for-8 reverse stock split), including shares issued as commitment fee, to the Investor at an average price of approximately $6.30 per share.

On February 10, 2017, DryShips entered into an agreement with an unaffiliated third party to acquire one 113,644 DWT Aframax tanker currently under construction in South Korea. DryShips expect to take delivery of this vessel sometime in the second quarter of 2017. The vessel is expected to be employed in the spot market. Also, on February 14, 2017, DryShips entered into an agreement with an unaffiliated third party to acquire one 320,105 DWT Very Large Crude Carrier built in 2011. DryShips expect to take delivery of this vessel sometime in the second quarter of 2017. The vessel is expected to be employed in the spot market. The total gross price for the two vessels will be about $102.5 million.

On February 16, 2017, DryShips made the first scheduled installment of $0.7 million according to the agreement concluded on November 18, 2016, under its loan agreement dated June 20, 2008.

On February 17, 2017, DryShips entered into a common stock purchase agreement, or the 2017 Purchase Agreement, with Kalani. The 2017 Purchase Agreement provides that, upon the terms and subject to the conditions set forth therein, Kalani is committed to purchase up to $200.0 million worth of shares of its common stock over the 24-month term of the purchase agreement and receive up to an aggregate of $1.5 million of shares of its common stock as a commitment fee in consideration for entering into the 2017 Purchase Agreement. A s of March 6, 2017, DryShips has sold $142.1 million worth of shares of its common stock to Kalani pursuant to the 2017 Purchase Agreement. Between the date of the 2017 Purchase Agreement, February 17, 2017, and March 10, 2017, DryShips sold an aggregate 103,867,307 shares of its common stock to Kalani at an average price of approximately $1.75 per share. DryShips estimated aggregate net proceeds from the sale of these shares was approximately $180.3 million, after deducting estimated aggregate offering expenses.

On February 27, 2017, DryShips announced that its board of directors decided to initiate a new dividend policy to pay a regular fixed quarterly dividend of $2.5 million to the holders of common stock. With respect to the quarter ended December 31, 2016, its board of directors declared a dividend of $2.5 million to the common shareholders of record as of March 15, 2017 and payable on or about March 31, 2017. The dividend per share amount to be paid by the Company will be determined based on the number of shares outstanding on the record date. On March 10, 2017, DryShips acquired its second VLGC under the LPG Option Agreement, currently under construction at HHI, for a purchase price of $83.5 million. DryShips financed the closing price of $21.9 million by using part of its undrawn liquidity under the New Revolving Facility, consequently increasing the outstanding balance of the New Revolving Facility to $164.7 million. The $61.6 million balance of the purchase price for the VLGC is payable in installments until the vessel's delivery from HHI. The VLGC is expected to be employed on a fixed rate five-year time charter with an oil major. The charterer has options to extend the firm employment period by up to three years. DryShips expect to take delivery of the vessel in September 2017.

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