Monday, February 23, 2009

DryShips (NASDAQ:DRYS): Upgraded at Oppenheimer

Oppenheimer is out with an interesting upgrade on DryShips (NASDAQ:DRYS) upgrading their rating to Market Perform from Underperform following dramatic underperformance by DryShips during the last month.

The firm estimates that DryShips is at least halfway through its $500M at-the-market (ATM) equity offering, which implies that daily shareholder dilution could diminish in coming weeks. DRYS has continued risk of charter renegotiation and further equity dilution, but spot and futures rates are now above cash-breakeven costs, reducing the likelihood of default for dry bulk companies. They also observe that dry bulk stocks and DRYS have generally performed poorly over the last four days, despite improving day rates.

Past Halfway Point. Assuming the company has been selling 10% of daily volume like last time, the company has issued approximately 43M shares at an average price of $5.90/sh ($256M) since January 28 and is more than halfway through its $500M offering. In November, the stock bottomed halfway through the estimated ATM offering period.

Offering End Could Be Even Closer. If the offering has been 20% of daily volume, DRYS would have finished the offering Thursday, having sold ~84M shares at $5.98/sh. Oppenheimer assumes this amount of dilution for modeling purposes. After the end of the last 25M share ATM offering (estimated on Dec 5), the stock outperformed significantly.

Testing November Lows Despite Improved Environment. The $500 million in new equity brings DRYS closer to compliance with LTV covenants, and offsets a good portion of the share count dilution in their NAV. In addition, day rates have improved dramatically since November, Chinese iron ore imports, inventories and pricing have improved.

Notablecalls: There could be a nice trade here in DRYS:

- The market seems to be tilted to the upside, which means that mo-mo stocks like DRYS can make larger than usual moves.

- Opco's comments regarding the offering make sense and seem pretty encouraging. Especially the aspect of the stock bottoming around halfway through the offering period in November.

- The chart seems to be favoring a bounce as well.

Everything seems to be in place for a possible 10%+ move to the upside as soon as today.

PS: Yes, it's an upgrade to Perform, not Outperform. There are very few analysts out there willing to step in front of this train, so you gotta give it up to Opco's Scott Burk for taking a stand. Note that it was Opco's negative comments some weeks ago that caused DRYS to roll over.

No comments: