DryShips Inc.’s (DRYS)fully owned subsidiary Ocean Rig UDW signed a $77 million contract with Borders & Southern Petroleum Plc for a 2-well exploration and drilling pact in the offshore Falkland Islands area for a period of 90 days, beginning in the fourth quarter of 2011. There are three further optional wells that could extend the contract by 135 days.
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.
During the third quarter of 2010, the company’s two semi-submersible drilling units continue to perform at a high utilization rate, generating soaring profits for DryShips. The company remains optimistic regarding the future prospects of ultra deepwater drilling.
Last September, DryShips won a $135 million contract from a U.S.-based oil company to explore energy off the coast of West Africa for its first newbuilid drillship. The exploration will continue for 300 days.
The initial contract was to drill four wells of Vanco Overseas Energy. Last October, the company got an extension of this contract. The extension part will add another well for drilling for a total contract size of $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.
However, the drybulk shipping industry is highly cyclical together with volatility in charterhire rates and profitability. Moreover, the business is strongly capital-intensive. Also, drybulk shipping industry is highly competitive and fragmented. DryShips mainly competes with Diana Shipping Inc. (DSX), Genco Shipping & Trading Ltd. (GNK) and Excel Maritime Carriers Ltd (EXM).
We maintain our long-term Outperform recommendation for DryShips. Currently, it is a short-term Zacks #3 Rank (Hold) stock.
DRYSHIPS INC (DRYS): Free Stock Analysis Report
DIANA SHIPPING (DSX): Free Stock Analysis Report
EXCEL MARITIME (EXM): Free Stock Analysis Report
GENCO SHPG&TRDG (GNK): Free Stock Analysis Report
Zacks Investment Research
