We reaffirm our long-term Neutral recommendation on DryShips Inc. (DRYS). The company continues to suffer losses although its top line improved significantly in the second quarter of 2013. We remain concerned as management provided a disappointing financial outlook.
Why Kept at Neutral?
DryShips is gradually transforming itself into an ultra-deepwater drilling company rather than continuing as a simple drybulk cargo operator. The acquisition of Ocean Rig UDW Inc. (ORIG) 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. On Oct 5, 2011, DryShips partially divested the Ocean Rig division and currently controls a 59% stake in the division.
At the end of the second quarter of 2013, Ocean Rig had approximately $6 billion of order backlog. We believe that the demand for deep water drilling services will improve in the near future due to the discovery of several big deepwater oil reservoirs. Moreover, Ocean Rig has high-quality drillship fleets, which will enable oil explorers to operate even under harsh environmental conditions.
Nevertheless, capesize vessels, which are mainly used for drybulk goods, are subjected to pricing wars among drybulk shippers. In the spot market, capesize vessel rates fell below the operating costs.
In the reported quarter, the realized average daily time charter equivalent rate of DryShips in the drybulk segment was a mere $12,756, a steep reduction of nearly 30.4% year over year. The Oil Tanker segment followed suite with the realized average daily time charter equivalent rate declining 34.7% to $10,004.
Other Stocks to Consider
DryShips currently has a Zacks Rank #3 (Hold). Other stocks in the shipping industry which are performing well include Danaos Corp. (DAC) and Paragon Shipping Inc. (PRGN). Both the stocks currently have a Zacks Rank #2 (Buy).
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