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DryShips (DRYS): The wild west of share trading

January 24, 2017

Does anyone know what’s going on with DryShips (DRYS) stock? Shares have lost over 80% of their value since the first of the year and over 99% of their value in the past 12 months. Last Thursday alone the shares traded down 36% to $1.01 per share with 73 million shares changing hands. As of Friday there were 107.8 million shares, of which less than 34 million in public hands. As of Monday, January 23, DryShips management implemented an 8 for 1 reverse split (the 3rd or 4th int he last 12 months), and once again the shares traded down another 33% on Monday.  Less than 4.2 million post-split shares are in public hands (the balance belonging to Kalani Investments, but more about that later) and Monday’s volume was over 12 million. Rather strange, no?  So what’s really happening?

This is a real question to which I don’t have the answer. I’m hoping some reader will jump in here and give me something better than my humble speculations below.

First, a bit of background. DryShips owns dry bulk carriers, 20 Panamax ships as far as I can see, and some other oil service vessels. But times are not good. Bulk carrier rates are low, as is demand in the offshore oil service sector, and the company is highly operationally leveraged as its vessels are not under long-term contract; thus the company has been bleeding cash profusely for the past couple of years. The company was able to sell some convertible preferred stock with warrants for further convertible preferred stock last November, raising up to $100 million to at least partially offset the cash drain. In December the company announced a private equity offering for an additional $200 million. Kalani Investments, an apparently very private buyer, however extracted blood for the infusion. They agreed to a $200 million equity purchase but at a  price to be determined by market trading with the price being set by the closing stock price each day. In the past 3 weeks Kalani has purchased 9.2 million shares at an average price of $14.20 per post-split share. They still have almost $70 million more to invest under their $200 million equity purchase agreement.

So who has the most to gain from a falling stock price? Certainly short sellers gain. But the person with most to gain is Kalani. As the share price tumbles they can purchase more and more of the stock at lower and lower prices. Basically as the share price falls they are able to increase their percentage ownership of the company to the detriment of existing common shareholders AND owners of the preferred convertible; the preferred have a conversion floor of $12.00 per share ($1.50 pre split). So I ask myself, is it possible that Kalani or a proxy is shorting the shares in an attempt (very successful to this point) of gaining the majority of the equity at the least price? In theory they could short sell shares over the trading day, then purchase the shares at the closing price under their equity purchase agreement, delivering those shares to the purchasers and making a profit (day-end prices have almost always been at the lows). To be clear, I have no information whatsoever to assert that Kalani (whoever may be lurking behind its corporate shield) is in any way involved in pressuring the share price. But the incentives speak for themselves.

So where will this end up? Well, as I said Kalani has only $70 million more to invest so at the current rate of purchases ($40 million a week over the past 3 weeks) this should be over in a week or two. At that point the pre-equity infusion shareholders will be diluted down to 10% or less of the company’s equity when all the common shares have been issued under the two equity infusion agreements. So for $300 million the two parties will have purchased 90% or more of DryShips and they have $300 million to invest in the new LNG tanker fleet (if they can stem the operational bleed). Is this a good deal? Sorry, I don’t really know. It’s out of my sphere of competence.

Is there any way for us mere mortals to profit from this? Well, I guess if I had understood the dynamics some 3 weeks ago and if I was able to borrow shares I could possibly have profited by shorting the shares. But there are 2 too many ‘ifs’ in that sentence. And besides, I try not to speculate. What about now? Perhaps once Kalani has purchased its entire $200 million of equity the downward pressure on the share price will abate. Then might be a good time to invest but we’ll have to look at what a common shareholder gets for his/her share and that we’ll know only after its announced at what price Kalani was able to purchase shares.

For now its just an exciting spectator sport.

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From → Investment Ideas

6 Comments
  1. hielko permalink

    Seems like a variant of death spiral financing: https://en.wikipedia.org/wiki/Death_spiral_financing

    • Yes, but more interesting because the process will come to an end, or at least the first part, when Kalani invests the full $200 million it has agreed to. After that, it is possible that Kalani will have no incentive to keep the share price down. In fact, if Kalani is not associated with the preferred investor, they (Kalani) will have an incentive to inflate the share price as much as possible above the convertible preferred conversion price floor; this will provide them with the greatest equity ownership.

  2. Casper F permalink

    Is there any way to see how many shares Kalani owns (not just how many they bought?). It would be interesting to see if they have unloaded all the shares they have gotten so far in order to drive down the share price or if they have kept a portion for themselves…

  3. I believe Kalani can own only 5% of the DRYS stock so the author is wrong. After the $300M equity infusion DRYS can be initially worth $3-7 per share (assuming the number of shares outstanding will be around 35M).

    • Would love to know why Kalani can only own 5% of DRYS. In any case it looks like there will be well over 35 million shares after Kalani infuses $200 million in funding. we should know the exact number in a week or sooner!

  4. Art Rogers permalink

    5% ownership in investments is not only common but the Norm. The agreement probably says they can own no more than 4.99%. Once they own 5% or more they have to file Form 13g disclosing their ownership interests and none of these investors that trade in toxic financing instruments want to disclose their ownership interests. This instrument is commonly referred to as an equity line of credit. So think about it. If Kalani does not want to own more than 5% at any point in time, then everytime that DRYS issues shares against this equity line of credit, then it means that DRYS has probably already shorted the stock and will then use the shares received to cover their short position. They have in all likelihood engaged an individual or less than reputable IR firm to promote the stock so as to move the price of the stock up so as to enable Kalani to naked short the stock with their broker before receiving the actual shares. Remember that even though Naked Shorting is illegal in the U.S., Kalani is based in South Africa. Regardless, these guys have brokers in countries like Canada or Germany where naked shorting is acceptable. This is a textbook toxic investment using “pump and dump” strategies.

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