Name Change Needed – DRYS Goes Wet

It should come as no surprise that George Economou’s DryShips was in the news. First, there was the announcement that the private placement of shares in Ocean Rig UDW was successfully closed with total gross proceeds of $500 million raised. Not only was it a success from the perspective of the capital raise, the company achieved a superior market valuation, both in terms of the rigs themselves as well as in relation to its peers, according to Scott Burk of Oppenheimer.  But perhaps more importantly, the company now has a balance sheet which is self-sustaining.

This news was immediately followed by the company’s announcement that the Board of Directors had approved a share purchase program for up to $25 million of common stock of Ocean Rig for the first quarter of 2011. The maximum share purchase price is capped at $17.50, the offering price of the shares.

But why stop there? In furtherance of its diversification strategy, the company announced that it had entered into agreements with Samsung to purchase twelve high specification newbuilding tankers at a cost of $770 million. The order consists of six Aframax tankers, of which four will deliver in 2011 and two in 2012, and six Suezmax tankers, of which one will deliver in 2011, two in 2012 and three in 2013. Given the delivery dates involved, the majority of these were clearly re-sales, which is further affirmed by the favorable payment terms of approximately 70% of the contract price per vessel due at delivery. On the other hand, as Erik Nikolai Stavseth of Arctic Securities points out Samsung is involved in the construction of its drillships and the tanker order must be viewed in the context of the total relationship with the shipyard.  The company has paid in $120 million from its cash as the down payment on the tankers and intends to finance the balance from cash on hand and bank debt. Ultimately, the intention is to position the company for a spin-off or IPO.

The deal has engendered much discussion among the analysts, particularly with respect to the price paid and the original contracting party. DryShips tried to head off discussion of the former by describing the vessels as having high specification and over $3 million in extras per vessel. Nevertheless, Pareto, Oppenheimer and Morgan Stanley suggest that the company paid a premium of $11 million, $38 million and $50 million respectively for the entire package based upon their analyses. The bigger question arose when the observant analysts noted that Mr. Economou’s private company, Cardiff Marine, had a similar order in place, raising the question as to whether the vessels were in fact purchased from Cardiff or were purchased directly from Samsung. Management made it clear that the transaction was done directly with the shipyard.

While speculation on such a move initially centered on containers, DryShips’ need to resolve Ocean Rig’s financing and the speedy recovery in the container space foreclosed that opportunity. While near-term prospects for tankers do not look bright, most analysts believe, as does Mr. Economou, in an improving medium and long-term outlook. In the interim, DryShips is a diversified holding company with interests in dry bulk, crude oil tankers and offshore drilling.

At Long Last, the Spin-off (Partial and Private) of Ocean Rig

After announcing the successful completion of its $350 million ATM offering on Friday, DryShips announced that its wholly owned subsidiary, Ocean Rig UDW, intends to offer through a private placement approximately $500 million worth of Ocean Rig’s common shares in exchange for a 20% to 22% stake. The transaction has an extremely short time-line with the deal expected to close this month.  The offering will be made to Norwegian private investors, and other qualified investors outside of the U.S. In addition there will be a concurrent private placement in the U.S. under 144A to qualified institutional buyers. Nevertheless, based upon the choice of managers, DnB NOR, Fearnley Fonds and Pareto, and the tight time frame, we expect the focus to largely be in Norway, where the “offshore” is part of investors’ DNA. The net proceeds of the offering are expected to be used to finance the construction costs of the four drillships under construction in Samsung, to exercise the recently announced options to construct a further four UDW drillships, and general corporate purposes.
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Ravenous Equity Appetite for Follow-ons Continues

Safe Bulkers Inc. joined the long line of recent issuers announcing last week that it would utilize its existing shelf registration and offer 9 million shares of it common stock in a follow-on offering. The offering will provide a green shoe of a further 1.35 million shares to cover overallotments. And, in order to minimize dilution, Vorini Holdings, Inc., the controlling shareholder (82%) of the company, has agreed to purchase 1 million shares at the offering price. Net proceeds will be used for vessel acquisitions, capex and for other general corporate purposes, including debt repayment.
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Here Come the IPOs

This week two IPOs, one dry and one wet, hit the road with well-known sponsors. First was the Genco inspired BDI play, Baltic Trading Limited, which was followed by Mr. Marinakis’, of Capital Products Partners fame, large tanker vehicle, Crude Carriers Corp. These followed quickly on the heels of the recent Scorpio offering.

BDI Proxy
This was one of the first opportunities we had to watch a road show presentation on the great equalizer, “RetailRoadshow” (http://www.retailroadshow.com/index.asp), a website designed to put retail investors on a level playing field with the institutions. The presentation of Baltic Trading Limited was expertly handled, as one would expect, by Peter G. and John Wobensmith, who will respectively fill the positions of Chairman and President of the new company.
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Equity Appetite Remains Strong

On Monday, Capital Product Partners announced that it planned to offer 5.8 million common units in a public offering. The transaction was priced the next day at $8.85 per common unit ,a discount of 6.25% from the prior day’s closing price. Proceeds will be used to acquire the M/T Atrotos, a 48,000 DWT product carrier built in 2007 from its sponsor, Capital Maritime & Trading, for $43 million and for general corporate purposes. Chartered  to Arrendadora Ocean Mexicana for $19,900 net per day, the vessel is sub-chartered to Petroleos Mexicana for five years. Operating costs for the period are fixed at $3,575 per day, which is a very competitive cost even for a modern ship.
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Oppenheimer’s 4th

We had the pleasure of attending Oppenheimer’s 4th Annual Industrials Conference this week. Reflecting difficult and uncertain markets, the tone was muted and at least at the open presentations interest has seemingly flagged. Like the owners waiting for the perfect distressed deal, investors, too, seem to be circling and asking the difficult questions. Can you maintain your dividend? How low will asset values fall and so on? We wouldn’t call it bearish but it was certainly circumspect. Here are some of our takeaways. As always we leave the analysts to do the heavy lifting on the numbers.

The early morning slot went to Capital Product Partners LP with Iannis Lazaridis presenting the company. Despite the continued deterioration in the product markets, CPLP’s strategy of long-term employment continues to pay-off with 3rd quarter results in line with expectations. Distributable income was down due to lower revenues from a lack of profit sharing and higher interest costs attributable to the increased margin agreed in the recent loan amendment.

However, the company now has to face the difficult market with eight vessels coming off hire in 2010. MR spot market rates are at the lowest level in 20 years and consequently period activity is reduced.

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Open House in the Equity Markets

Having previously done a follow-on offering of 3 million shares back in January, which raised net proceeds of approximately $107.5 million, including the over allotment, Nordic American Tanker Shipping (“NATS”) again seized the opportunity and initially announced on Tuesday, after the market closed, an underwritten public offering of another 3.5 million common shares, pursuant to its effective shelf registration. The company also granted the underwriters a 30-day option to purchase an additional 525,000 shares to cover over allotments. The shares closed at $36.08 on Tuesday. Subsequently, due to investor demand, the offering was increased to 4 million shares with the greenshoe option increased to 600,000 shares. The price was set at $32.00 per share, which reflects an 11.31% discount to the closing price on Tuesday.

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Even the Analysts Wonder

We arrived at work last Friday morning to the rather surprising news that DryShips, clearly seeing the opportunity, had once again gone out into the equity market. The company announced its second ATM Equity Offering through Merrill Lynch for up to $475 million of the company’s common shares. Back in January, DryShips had entered into an earlier agreement to sell up to $500 million, which it completed last month selling a total of approximately 95.7 million shares, generating net proceeds of ~$487.5 million after commissions. An ATM equity offering allows the company to issue common shares at any time and at the company’s discretion.

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Dribbling Dilution

In a short commentary on DryShips, Scott Burk of Oppenheimer noted that the near-term upside, derived from the cash flow benefits of the newly announced Petrobras contract on the drilling rig Leiv Eriksson, would likely be dampened. He surmises that management would likely “…sell stock into strength from this announcement under its ATM offering.” What we found more sobering was Mr. Burk’s estimate that while this $500 million offering could be completed by mid-April, DryShips would likely need additional equity to comply with LTV covenants by August 2009. The analogy that comes to mind is the Chinese water torture.

WKSI No More

Perhaps one of the least painful but aggravating aspects of the share price collapse of the shipping stocks is the loss of one’s “well-known seasoned issuer” or WKSI qualification. When the company’s market cap falls below $700 million, the company no longer is a universal filer but must register as you go. For perspective, as of Tuesday, only Teekay, Teekay LNG, Nordic American Tankers, Diana Shipping and Alexander & Baldwin were qualified. OSG just missed at $641 million.

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