DryShips Restructuring Could Mean Opportunity

DryShips [[DRYS]] share surged higher after the company reached a preliminary agreement to restructure $220 million worth of loan facilities with Piraeus Bank. The stock fell sharply last week after the company violated some debt terms thanks to buyers that backed out of deals to purchase three ships. The new agreement waives financial and net asset coverage through January of 2011 and reduces the amount of principal paid by 47% in 2009 and 21% in 2010.

DryShips share have been hurting amid a sharp decline in the price of commodities. The lower pricing has led to a slide in demand for shipping services overseas. Lower spot and contract rates for DryShips and others in the sector have led to lower valuations. In fact, DryShips is now facing a price-earnings multiple of 0.27x and a PEG ratio of just 0.01. The reason: Many investors believe that the company may face bankruptcy.

The prospect of bankruptcy for DryShips has been reduced, however, after these debt covenants were waived. Still, some investors believe that the company could face trouble down the road. So, how can investors take a stake in this company without putting their portfolio at risk? One solution may be long-term options called LEAPS. LEAPS give investors the timeframe needed for long-term investment with the leverage offered by options.

Currently, investors can purchase the rights to 100 shares of DRYS at $5.00 anytime between now and January 21, 2011 for just $390 down. This compares to a $609 cost for purchasing the underlying shares while the breakeven point is just $8.90 per share. If commodity prices for drybulk recover, then companies like DryShips could see their stock rise to previous levels. LEAPS enable long-term investors to bet on this future while limiting their capital at risk.

See “Using LEAPS as a Stock Substitute” for more information on this strategy or check out our Tools & Products for more ways to use LEAPS to profit in any market.

DryShips Sees Calmer Waters Ahead

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.