DryShips Initiated as Neutral – Analyst Blog

We initiate our coverage for DryShips Inc. (DRYS) with a Neutral recommendation, which means the stock will perform mostly in line with the broader market. The company’s second quarter 2010 financial results outperform the Zacks Consensus Estimates. Both dry bulk and drilling segments improve their respective top-line and operating margin. The surging BDI (Baltic Dry Index) also predicts that the shipping sector may witness a rebound during the second half 2010.

Nevertheless, we remain concerned regarding DryShips’ deepwater drilling rigs which are under construction. Although global economic conditions are improving but it is still not out of danger. Volatility of U.S. dollar with the Euro may also affects the company’s financials since DryShips generates its revenue in U.S. dollars, but incurs a major portion of vessel operating expenses in terms of Euro.

On a positive note, DryShips has a substantial portion of its fleet fixed under time charter contract, locking in sizeable cash flows that enhance the stability of its earnings base. For the rest of 2010, dry bulk carriers are almost 100% fixed, for 2011, almost 82% of dry bulk fleets are fixed, and for 2012, almost 40% of dry bulk fleets are fixed. The company continues with its fleet renewal and expansion strategy in the dry bulk sector, replacing older tonnage with newer and larger vessels.

On the other side, DryShips is facing severe problems to find charter contracts for at least two out of the four new drillships that it has to take delivery within next year. The company desperately needs new agreements to hire out those vessels failing which DryShips may not be able to get the remaining $1 billion of financing to pay for the newbuildings.