Tickers in this Article: DRYS, EGLE, DSX, EXM
Dry-bulk shipping giant DryShips (Nasdaq:DRYS) reported 2009 fourth-quarter and full-year results that continue to reveal the perfect storm maritime shippers face. For the quarter, the company earned one cent a share, or 23 cents a share when you adjust for extraordinary items. This compares to a loss of over $18 a share in the 2008 fourth quarter. While simple comparison might indicate a substantial improvement in operations, there's more than meets the eye here.

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Extraordinary Times
While the dry-bulk shipping industry may not be on the cliff's edge as it was last year, it's still close to the edge. And this is despite that fact that commodity prices rallied in 2009 along with an uptick in demand from China. The problem is a supply issue created by the shipping companies themselves. A few years back when shipping rates were at historic highs and credit was freely flowing, the shipping industry went on a massive expansion spree. A record number of newbuild ship orders were placed and financed by assuming greater levels of debt.

To appreciate the free fall this industry faced, look no further than the Baltic Dry Index, the industry barometer for current spot shipping rates. In the summer of 2008, the BDI was at over 11,000. At the level, capesize rates, or the daily rate for the largest ships, was over $110,000 a day. Later in 2008, the BDI had fallen to less than 1,000 or over 90%. Shipping rates plummeted and while the BDI has risen sharply since then, it still sits below 3,000. (For related reading, check out The Baltic Dry Index: Evaluating An Economic Recovery.)

The Perfect Storm
The major dry-bulk shipping stocks, including DryShips, Excel Maritime (NYSE:EXM) and Diana Shipping (NYSE:DSX), all watched their shares fall as rapidly as the BDI. DryShips was especially hit because it had a significant exposure to the spot market, while others had a greater blend of fixed long-term rates along with spot rates. And because DryShips fleet is predominantly the larger capesize, it was truly the perfect storm. From over $120 a share and EPS of $13 in 2007, DRYS lost over $8 a share in 2008 and saw the stock crater to less than $5. (For related reading, check out Finding Profit In Troubled Stocks.)

Making matters worse, all the new ship orders placed when the BDI was peaking were coming due during the worst time. The mountains of debt assumed by the industry was in breaching covenants. In the end, losses poured in and boat loads of new equity issuance was necessary in order to satisfy creditors. All of this of course, reduces EPS even in 2009 when things pick up.

Calmer Waters One Day
Maritime shipping continues to be the only economical way to ship commodities internationally. However, as the industry continues to fight off excess supply, which leads to cash charges and asset write downs, it could be 2011 before we see any normalcy. There's no denying that shares look attractive today assuming a healthy recovery in 2011 and beyond. The most attractive consideration today appears to be Eagle Bulk Shipping (Nasdaq:EGLE). It operates a fleet of smaller Supramax vessels that are much more versatile in terms of what they can transport. While capesize ships are used for iron ore and coal, Supramax can transport grains, cement, fertilizer, coal, and other commodities. Eagle predominantly charters its ships on long-term charters, thus fixing the majority of rates over years.

While clearly out of the eye of hurricane, dry bulk shippers are still trying to navigate out of the storm.

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