The Saga of Dryships Inc.

5 min readNov 14, 2018

What’s the worst performing stock you can think of right now?

If you’re like me and follow business news with a taste for schadenfreude, chances are the first ticker that comes to your mind is HMNY — otherwise known as Helios & Matheson, the parent company of the financial dumpster fire that is MoviePass. Even with the ludicrous 250-to-1 reverse split that HMNY underwent in July, the stock is still currently trading at less than $0.02 per share. In market cap terms, Helios & Matheson’s valuation plummeted from $234m in January to around $13m now — a 94% loss in value.

“October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” — Also Mark Twain

As bad as that sounds, however, the MoviePass debacle pales in comparison to the clusterfuck of a company that you’ve probably never heard of: DryShips Inc.

Based in Athens, Greece, DryShips currently describes itself as a company that “owns and operates ocean-going cargo vessels worldwide”. To most people that may sound like the most boring possible description of a company you could think of, but those who have ever followed shipping markets will know that the industry has been through one hell of a rollercoaster ride over the past few years.

Let’s turn the clock back to 2014 and take a look at the state of the world economy: oil is beginning its freefall that will eventually lead to a 70% drop in value for crude while the Shanghai composite is entering a bubble that will rise 150% and promptly burst, sending shockwaves across global markets. The world economy is not exactly having a great time:

Shanghai Composite (Red), Total Stock Market Index (Blue), Shipping Index (Orange), and Crude Oil (White) between 2014 and 2017.

Although low oil prices would at first seem like a good thing for shipping companies (cheaper fuel to power the ships, right?), the reality is that cargo ships simply sail faster and sacrifice fuel mileage in favor of raw throughput. In other words, the effect of cheap oil is a greater overall shipping supply that operates at a lower fuel efficiency, resulting in slimmer margins. This high supply, combined with lower demand due to an uncertain and volatile Chinese economy, were dire for the shipping industry and resulted in DryShips’ revenue plunging from a peak of $600 million to just $10 million in a little over two years.

It gets worse. Not only was DryShips losing money through its shipping business, but it also owned a majority stake in an offshore oil drilling company called Ocean Rig that started to bleed from the oil crash. In 2014, DryShip held 59% of Ocean Rig equity that was valued at a whopping $1.26 billion — greater than the entire market cap of DryShips’ stock. This meant that the market was giving DryShips’ actual shipping business a negative valuation. In the eyes of investors, DryShips was essentially a holding company being propped up by its Ocean Rig investment while hemorrhaging cash from its shipping operation. Normally, this wouldn’t be a huge deal as long as DryShips kept a conservative balance sheet and its biggest holding (Ocean Rig) didn’t completely collapse.

Unfortunately, turns out DryShips was $4 billion in debt. Oh, and this happened:

Ocean Rig completely collapsing (Red line = DryShips Inc.)

Oops. The crash in oil was simply too much for Ocean Rig to handle, causing its market value to get decimated and bringing DryShips down with it. Ocean Rig was also highly indebted to DryShips at this point, and in 2015, it raised cash by selling shares in an attempt to pay this debt down which further diluted its stock value.

These don’t sound like the smartest business arrangements. If DryShips had a majority stake in Ocean Rig, why would it allow its investment to be diluted? In fact, this wasn’t even the first time this happened — in 2012, DryShips offered $100 million worth of new Ocean Rig stock to raise money for itself, diluting the shares of its subsidiary company for a quick buck to pay down debt. This became a common theme for both companies and the stock became so devalued that DryShips had to resort to several reverse stock splits (eight to be exact) from 2016–2017 that resulted in outstanding shares being cut by a factor of 11,760,000-to-1 in total. Bet MoviePass sounds pretty good about now, huh?

All this seems like quite an abusive relationship for shareholders of both companies and really calls into question their leadership and management. Who ran these companies anyway?

DryShips Inc. Founder: George Economou
DryShips Inc. Chairman: George Economou
DryShips Inc. CEO: George Economou
Ocean Rig Chairman: George Economou

Oh.

This George Economou guy must really be into maritime shipping and offshore drilling, because not only does he run both of these companies, but he personally owns sizable stakes in both of them and controls many of the companies that Ocean Rig and DryShips do business with.

Here is a quick rundown of some totally normal, not suspicious, and definitely ethical events of the past couple years for these two companies:

DryShips sells Ocean Rig its equity back for $50 million to a mysterious new subsidiary called “Ocean Rig Investments.” The shares are not retired, leaving the door open for Economou to regain control of the stock.
DryShips sells three bulk carriers to “entities controlled by Economou” and used the proceeds to pay down debt from a revolving credit facility “lent by an Economou-controlled company.”
Ocean Rig files for bankruptcy. Per the debt restructuring terms, 8,524,793 common shares are issued to a “company affiliated with Economou” and payment of an annual fee of up to $25.5 million plus 1% of all earnings to TMS Offshore Services Ltd. (operated by Economou).
DryShips takes on $200 million of debt from an organization called Sifnos Shareholders which is (you guessed it) controlled by none other than George Economou.

DryShips Inc. stock is currently up 50% from the start of 2018. This just goes to show that no matter how terribly run a company is or how villainous its management is, there will always be naive investors willing to take the bait. Next time you consider buying stock as a long term investment, remember Mr. Economou and do your due diligence by thoroughly researching not only the financials of the company, but the track record and philosophy of those running the show.

Sources:

The Saga of Dryships Inc.

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