DryShips Sees Calmer Waters Ahead
December 17, 2008 by Ray McDonald
DryShips Inc. (NDAQ: DRYS) hasn’t exactly been smooth sailing over the past year, but many experts believe that calmer seas may lie ahead. The commodities shipper has made cuts to its capital expenditures to preserve capital while many iron-ore miners have been selling more on the spot market. Chinese producers have been purchasing more while India’s decision to lower or abolish taxes on ore exports has also increased shipments for the sector.
DryShips also announced that it would be cancelling its proposed acquisition of four panama dry bulk carriers from companies owned by chief executive George Economou. The aggregate purchase price of $400 million would have represented a significant cash outflow given the significant deterioration of the dry bulk market since the time the agreements were made. However, the company was able to convert its down payments that would have been otherwise lost into a one year option to purchase.
Investors are happy to see the contract canceled as it frees up cash flows to support the firm’s strong 7.19 percent dividend yield as dividends are usually the first things to be cut when companies experience a cash crunch. Meanwhile, many traders believe that short sellers are covering their positions, taking profits off the table, and moving to greener pastures. As a result, DryShips shares moved sharply higher over the past week.
Investors interested in leveraging their position in DryShips while reducing risk may want to take a look at long-term options called LEAPS (long-term equity anticipation securities. Currently, investors can purchase $10 January 2011 call options for just $6.20 per contract. This means that for $620 right now, investors can have the right to 100 shares at $10 anytime over the next 765 days.
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