DryShips Downgraded to Neutral

We downgrade our recommendation on DryShips Inc. (DRYS) to Neutral due to the increasing competition in the drybulk shipping, which may result in steep fall of freight rates in 2011. The company’s recent decision to acquire 12 new oil tankers may not be able to generate required synergies due to the ongoing depressive situation of the global oil tanker market.

DryShips recently entered into an agreement with a first class Korean shipyard to purchase 12 oil tankers for a consideration of about $770 million. The oil tanker market is highly cyclical in nature and is currently going through low freight rate. Several analysts predicted that the depressive situation of the tanker market may continue through the end of 2012.

Drybulk shipping industry is highly competitive and fragmented. Therefore any individual operator controls very little pricing power in the market. Furthermore, several industry researchers predicted that the freight rate in 2011 may come down to the lowest level in 2002 due to the increase in the number of vessels. Major competitors of DryShips are Diana Shipping Inc. (DSX), Genco Shipping & Trading Ltd. (GNK) and Excel Maritime Carriers Ltd. (EXM).

Moreover, fifteen new drilling units are expected to be operational in 2011. This will intensify the competition of the deep water drilling segment on which DryShips in currently depending for its future growth.

Nevertheless, the company is steadily transforming itself as a drillship company from a drybulk cargo operator. As a result, both the top line and bottom line are benefiting from lucrative ultra deep-water oil drilling industry.

In January 2011, DryShips received $590 million contract for three of its Ocean Rig drillships. The company entered into a definitive agreement with Cairn Energy plc for a period of six months. These drillships are “Leiv Eiriksson” and “Ocean Rig Corcovado” with a total contract size of $95 million and $142 million, respectively. Moreover, DryShips received a $353 million 600-day drilling contract from Petrobras for “Ocean Rig Poseidon.”

DRYSHIPS INC (DRYS): Free Stock Analysis Report

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