Wednesday, May 11, 2011

DryShips Inc. (NASDAQ: DRYS): Q1 Earnings Preview 2011


DryShips Inc. (NASDAQ: DRYS) is likely to release its first-quarter earnings after the closing bell on Thursday, May 12, 2011. Analysts, on average, expect the company to report earnings of 16 cents per share on revenue of $234.12 million. In the year ago period, the company reported earnings of 21 cents per share on revenue of $194.16 million.

DryShips, Inc. engages in the ownership and operation of drybulk carriers that operate worldwide. The company's fleet carries various drybulk commodities, including coal, iron ore, grains, bauxite, phosphate, fertilizers, and steel products.

DryShips is somewhat unique in the shipping industry in that it operates both drybulk carriers and also offshore oil deep water drilling units. DryShips owns and operates 8 offshore ultra deepwater drilling units, comprising of 2 ultra deepwater semisubmersible drilling rigs and 6 ultra deepwater drillships, 4 of which remain to be delivered to the company during 2011 and 2013. As of May 9 2011, DryShips owned a fleet of 38 drybulk carriers (including newbuildings), comprising 7 Capesize, 29 Panamax and 2 Supramax, with a combined deadweight tonnage of over 3.4 million tons, and 12 tankers (including newbuildings), comprising 6 Suezmax and 6 Aframax, with a combined deadweight tonnage of over 1.6 million tons.

In the preceding fourth-quarter, the Athens, Greece based company's net income was $99.74 million, or 29 cents per share, compared to $9.60 million, or 2 cents per share, in the prior-year period. On an adjusted basis, the company earned 24 cents per share in the fourth quarter. Revenue rose to $215.82 million from a restated $196.43 million in the same quarter last year. Analysts, on average, expected the company to report earnings of 26 cents per share on revenue of $221.12 million.

At its last earnings call in March,the company said it sees increasingly attractive opportunities to purchase drybulk carriers and renew and/or grow its fleet.

In November 2010, DryShips declared that over 80% of its shipdays in 2011 are fixed at around $37,000 per day, which will help the company to avoid spot-market volatility. For 2012, almost 40% of drybulk fleets are already fixed. The company continues with its fleet renewal and expansion strategy in the drybulk sector, replacing older tonnage with newer and larger vessels. 

The dry bulk shipping industries' fortunes are closely tied to global growth as these ships are responsible for carrying the materials required in economic expansion. However, despite improving global macroeconomic scenario, the financial condition of this industry is worse than what it was a year or two ago. An oversupply of ships and mediocre demand has severely damaged the drybulk industry and has forced companies to search elsewhere for revenues. The traditional indicator of the shipping industry's health, the Baltic Dry Index, has plummeted close to fifty percent in the last six months as demand for dry-bulk shipping has fallen. The company sees strong shipping demand over the long haul due to a "record pace of Chinese commodity imports," but this demand will likely continue to be uneven. 

DryShips is steadily transforming itself as a drillship company from a drybulk cargo operator. Therefore, both the top line and bottom line are benefiting from lucrative ultra deep-water oil drilling industry. The company recently said that its drilling unit Ocean Rig UDW won a $80 million contract for one of its rigs. The 90-day contract for the Leiv Eiriksson was by British explorer and producer Borders and Southern Petroleum plc for drilling offshore the Falkland Islands. This contract replaces the previous contract with Borders & Southern for another one of Ocean Rig's rigs, the Eirik Raude. Last month, the company also exercised options to build two ultra-deepwater drillships with a South Korean shipyard, reckoning that demand for drilling services is strong across the globe. 

Dryships Inc. has also invested a great deal of money trying to establish a presence in the oil-tanker market. Last year, the company agreed with a Korean shipyard to purchase 12 tankers for about $770 million, including over $3 million per vessel in extra items. DryShips plans to use its tanker investments for a spinoff or initial public offering. Though the tanker market is realizing low freight rates, oil demand from Asian economies like China and India are expected to boost market conditions, the company said. The company is revamping its business, as it sees opportunities for both the drybulk and tanker segments. DryShips towards this end is mulling a standalone tankers-entity in 2011.

In addition to the operating volatility, DryShips frequently needs to secure financing as it can spend more to acquire vessels and make improvements to them than it generates in operating cash flow. It recently secured an $800 million loan to fund the construction of two ocean rigs and restructured a $1.1 billion term loan with Deutsche Bank (NYSE:DB) regarding a drilling contract with Brazilian energy giant Petrobras (NYSE:PBR) and a couple of smaller loans.

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