DryShips Inc. (DRYS) has decided to sell $500 million worth of shares of its wholly own subsidiary Ocean Rig UDW Inc. through a private placement. The main purpose of this share offering is to finance the construction costs of the ultra deepwater newbuilding drillships under construction at Samsung Shipyard in South Korea and to exercise the option to build more ultra deepwater drillships. The private placement will reduce Dryships’ holding in Ocean Rig to around 78%-80%.
DryShips recently completed its equity offering from which it raised gross proceeds of $350 million. For this the company sold 79.2 million of shares which raised its total outstanding common shares by 27%. Net proceeds from this transaction were around $342 million.
However, the company’s new private placement will not increase its total share count. Furthermore, DryShips also secured a $325 million Senior Secured Bridge Loan Facility from an international lender.
Together these three financing arrangement will be sufficient to pay approximately $1.1 billion the first two drillship newbuilds. Last September, DryShips won a $135 million contract from a U.S.-based oil company to explore for energy off the coast of West Africa for 300 days for its first newbuilid drillship. The initial contract was to drill four wells of Vanco Overseas Energy.
Last October, the company gets an extension of this contract. The extension 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.
On November 29, Ocean Rig 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 gradually converting itself as an ultra-deep water drilling company rather than continuing as a simple drybulk cargo operator. The acquisition of Ocean Rig turned out 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.
We maintain our long-term Outperform recommendation for DryShips. Nevertheless, drybulk shipping industry is highly competitive and fragmented. For that any individual operator controls very little pricing power in the market.
We believe this is the reason for DryShips to currently have a short-term Zacks #3 Rank (Hold). DryShips mainly compete with Diana Shipping Inc. (DSX), Genco Shipping & Trading Ltd. (GNK), and Excel Maritime Carriers Ltd. (EXM).
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