Friday, June 11, 2010

Danger! Danger!

Danger! Danger!
Will Robinson

Dick Tufeld as The Robot
“Lost in Space”
1965-1968 Television Series

A year ago in January 2009 (“Dividend Love” January 6, 2009), I could have used the danger sniffing robot featured in the early space travel television drama, Lost in Space. As we contemplated recommending a dividend play on DryShips, Inc. (DRYS: Nasdaq), The Robot could have called out “Danger! Danger!” As it was, I heard no such warning and made a dividend yield call on DRYS just a week or so before the company cut its dividend entirely.

The balance sheet and cash flows looked strong enough to withstand a protracted economic downturn. DryShips had $329.1 million in cash on its balance sheet at the time. The consensus estimate indicated a decline in sales, but projected earnings still appeared sufficient to support capital spending and the dividend. Apparently, management saw a much bleaker picture.

Analysts had been looking for $963 million in 2009 that the time we made the DRYS dividend yield recommendation. DryShips ended up reporting a loss of $25.2 million on $819 million in sales. That must have been what management could see that the rest of us could not. Maybe not….

We all know the P&L is not the only place to take a company’s temperature. DryShip’s cash flow statement tells a different tale. Operations generation $286.2 million in cash during 2009, just over half the cash flow generated in the previous year. DryShips cut back capital spending to $63.1 million in 2009. The dividend, if left unchanged at $0.80, would have required approximately $35.0 million - on the shares outstanding at the time.

DryShip’s management had other plans in mind. They issued another 71.2 million shares and raised $500 million in April 2009. The nominal dividend could not have been sustained on the higher share count of 184.8 million.

Management spent the rest of 2009 rearranging convertible debt on the balance sheet, but leverage is largely unchanged. The Company finally tapped into the capital raised in the equity offering primarily to support efforts to build-up the company’s ultra-deep water oil and gas drilling segment. DryShips had plans to spin off the deep ocean drilling segment in an initial public offering.

DRYS shares were trading near $6.60 at the beginning of 2009, and have traded in a very narrow band around $4.50. The small recovery made near the beginning of 2010 has been erased subsequent to BPs (BP: NYSE) deep water disaster in the Gulf of Mexico.

Thinking about it, BP, DryShips and every other deep water driller could use one of those robots: Danger! Danger Tony Hayward! Warning! Warning! George Economou!

The author of the Small Cap Strategist web log, has a beneficial interest in DRYS and no other company mentioned in this article.


1 comment:

oilman said...

Terrible blog. Really? You couldn't have typed anything better? You didn't get paid to write this did you?

CCC- That's your score.