Why DryShips Inc.'s Stock Could Resume Its Volatility Next Week

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DryShips' (NASDAQ: DRYS) stock has been excruciatingly volatile this year, plunging a stunning 85.9%, though it has more than doubled over the past five trading days. While some of that volatility has been fueled by daily gyrations as short-term traders enter and exit the stock, most of it is due to a boatload of press releases issued by the company since the start of the year. In fact, it sent out seven releases last month alone. However, its most important release could be coming up this Tuesday, Feb. 7, when it unveils fourth-quarter and full-year results. Depending on what's in that release, it could unleash another wave of volatility. Here are three things that could cause that stock to make a big move next week.

Cashing in on a rising BDI

One thing that has bludgeoned DryShip's stock over the past few years is that its core dry-bulk shipping business is bleeding money. During the third quarter, for example, the company pulled in an average of $3,442 per vessel each day in revenue. However, its operating costs were $4,926 per vessel each day, meaning the company lost $1,601 per ship per day last quarter. In fact, as a whole, the dry-bulk carrier segment operated in the red all year, reversing the year-ago profit:

Data source: DryShips. Chart by author.

DryShips wasn't the only dry-bulk shipper to lose money last year. Rival Eagle Bulk Shipping (NASDAQ: EGLE) reported an operating loss of $64.5 million through the first nine months of the year, despite working hard to push its operating costs down. The culprit was the continued crash in shipping rates, which weighed on vessel revenue.

On a more positive note, Eagle Bulk Shipping CEO Gary Vogle did note last quarter that he saw "tentative signs of a recovery in rates." One of those signs was the rise in the Baltic Dry Index (BDI), a proxy for shipping rates. That index has increased from 875 at the start of the fourth quarter to a high of 1,257 on Nov. 18 before sinking back down to 953 to end the year. Given that rise, shipping rates likely increased during the quarter. The question is whether this was enough to return DryShip's dry-bulk carrier segment to profitability during the quarter. If not, look out below.

Returning to the black

Not only has DryShips' core dry-bulk segment spent the past year in the red, but its offshore supply fleet has had troubles as well due to the oil market downturn. During the third quarter, for example, half of its six vessels were laid up and therefore not making any money.

As a result of these troubles in both operating segments, the company reported negative adjusted EBITDA of $28.4 million through the first nine months of the year. Contrast this with 2015, when its adjusted EBITDA was $483.9 million over the same time frame, though it did operate nearly twice as many vessels in 2015 than it had in 2016. For what it's worth, Eagle Bulk Shipping also reported negative cash flow last year, consuming $39 million in cash flow from operations through the first nine months of the year.

That said,DryShips cannot continue to bleed money, especially during a quarter when shipping rates surged following the election and the oil market started showing signs of life. As such, if adjusted EBITDA stays red, then DryShips' stock could plunge.

Proving that money will not run dry

Because DryShips was losing money last year, its liquidity had all but dried up. That forced it to unload vessels and other assets to pay off debt. In addition, it signed an agreement with its founder and CEO for a new $200 million credit facility. As a result, the company ended the year with $76.8 million in cash, $137.5 million in debt, and $79 million of available credit on that revolver. Furthermore, it secured an equity infusion to bring in another $200 million in cash to fund vessel acquisitions. That pushed its total liquidity up to more than $350 million.

However, instead of breathing a sigh of relief that it had finally righted the ship, DryShips immediately went on a buying binge. It quickly signed an agreement with a company controlled by its founder for the option to buy four very large gas carriers (VLGCs) currently under construction at a total cost of $335 million. DryShips has already exercised the option for one vessel, which will sop up $83.5 million of its liquidity. The concern here is that it could potentially exercise all four options, leading it to use up nearly all of its available financial resources. While these vessels should provide a steady stream of cash flow when they enter service, that will not matter if the company's other ships are spending too much money. As such, DryShips needs to show that it plans to take a measured approach to acquisitions so that it has more than enough liquidity to stay afloat should the dry-bulk and offshore markets remainweak. If it fails to do so, investors could quickly lose confidence in the company's diversification plan.

Investor takeaway

DryShip's stock has been on a roller-coaster ride this year, which could take another twist next week. If the company's dry-bulk segment makes money (enabling it to generate operating cash flow) and it shows a clear liquidity plan, then the stock could take off. However, if it continues to hemorrhage money and rely on hope, not hard data, to fund growth, then the stock could take another deep plunge next week.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.