We upgrade our recommendation to Outperform for DryShips Inc. (DRYS), following its excellent third quarter of 2010 financial results, far ahead of the Zacks Consensus Estimates. The company’s strategy to put vessels under long-term charters during the quarter to avoid volatility in the spot-market paid off, resulting in soaring net earnings.
DryShips is steadily transforming itself into a drillship company from a drybulk cargo operator. As a result both the top-line and bottom-line are benefiting from the lucrative ultra deep-water oil drilling industry.
The acquisition of Ocean Rig turned out to be a major positive. Ocean Rig’s asset and contract portfolio diversified DryShips’ assets and sources of cash flow. Furthermore, Ocean Rig’s operational expertise provided DryShips with the necessary platform to compete in the ultra-deep water drilling sector. The company remains optimistic about the future prospects of ultra deepwater drilling. Management declared that the drilling rig contracts will remain in the long-run. The rates are trending upward and demand for drilling rig may surpass supply in 2011.
Last September, DryShips won a $135 million contract from a U.S.-based oil company to explore for energy off the coast of West Africa for 300 days for its first newbuilid drillship. The initial contract was to drill four wells of Vanco Overseas Energy. Last October, the company got an extension of this contract. The extension will add another well for drilling valued at $160 million. The project is expected to commence in the first or second quarter of 2011. DryShips further stated that this contract may be extended for another year.
DryShips has a substantial portion of its fleet under fixed time charter contracts, locking in sizeable cash flows that enhance the stability of its earnings base. For the rest of 2010, drybulk carriers are almost 100% fixed, for 2011, almost 80% of the drybulk fleet is fixed at $37,000 per day, and for 2012, almost 40% of the drybulk fleet is fixed. The company continues with its fleet renewal and expansion strategy in the drybulk sector, replacing older tonnage with newer and larger vessels.
Drybulk shipping industry is highly competitive and fragmented. For that any individual operator controls very little pricing power in the market. DryShips mainly compete with Diana Shipping Inc. (DSX), Genco Shipping & Trading Ltd. (GNK), and Excel Maritime Carriers Ltd. (EXM).