Wednesday, July 27, 2011

DryShips Inc. (NASDAQ: DRYS): Q2 Earnings Preview 2011

DryShips Inc. (NASDAQ: DRYS) is scheuled to release its second-quarter earnings after the closing bell on Wednesday, July 27, 2011. Analysts, on average, expect the company to report earnings of 18 cents per share on revenue of $272.56 million. In the year ago period, the company reported earnings of 30 cents per share on revenue of $224.24 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. Through its majority owned subsidiary, Ocean Rig UDW Inc., DryShips owns and operates 9 offshore ultra deepwater drilling units, comprising of 2 ultra deepwater semisubmersible drilling rigs and 7 ultra deepwater drillships, 5 of which remain to be delivered to the Company during 2011 and 2013. As of July 21, DryShips owned a fleet of 38 drybulk carriers (including newbuildings), comprising 9 Capesize, 27 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 first-quarter, the Athens, Greece based company's net income was $25.8 million, or 7 cents per share, compared to $13.3 million, or 4 cents per share, in the prior-year period. On an adjusted basis, the company earned 15 cents per share in the first quarter. Revenue rose to $207.4 million from $194.2 million in the same quarter last year. Analysts, on average, expected the company to report earnings of 16 cents per share on revenue of $234.12 million.

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.  With a falling dollar and the upward manipulation of the Chinese Yuan, there seems to be less reason to ship commodities long distances, as the prices of these commodities are getting closer and closer to one another. Along with these currency issues, there may be simply too little demand and too many empty boats for shipping companies. The traditional indicator of the shipping industry's health, the Baltic Dry Index, has plummeted close to 20 percent since the beginning of the year as demand for dry-bulk shipping has fallen. This downturn has sent average vessel prices down 65 percent from 2008 all-time highs. 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 will spin off the unit in an IPO within the next few months. The planned listing of Ocean Rig shares will help unlock the value of DryShips. The unit recently secured a $1.1 billion contract from Brazil's Petrobras and has obtained all the required financing for building new drillships. 

Dryships has also invested a great deal of money trying to establish a presence in the oil-tanker market.

Among other developments, the company recently agreed to acquire the outstanding shares of OceanFreight for consideration per share of $19.85, consisting of $11.25 in cash and 0.52326 of a share of common stock of Ocean Rig UDW Inc., a global provider of offshore ultra deepwater drilling services that is 78% owned by DryShips.  OceanFreight owns four capesize and two panamax vessels with an average age of six years and tonnage of 859,622 tons. 

Full Disclosure: None.
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