DryShips Inc. (DRYS) is gradually converting itself as an ultra-deep water drilling company rather than continuing as a simple drybulk cargo operator. Today, the company announced that two drillships of its subsidiary Ocean Rig UDW Inc. have entered into a definitive agreement with Cairn Energy plc for a period of six months. These drillships are “Leiv Eiriksson” and “Ocean Rig Corcovado.”
Total contract value for the “Leiv Eiriksson” including mobilization charge is around $95 million whereas total contract value including mobilization and winterization of the “Ocean Rig Corcovado” is approximately $142 million.
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 announced that the rates for ultra deepwater rigs have bottomed out in the third quarter of 2010. This leads to a more favorable scenario and the demand for drilling rig is expected to surpass supply in 2011.
Last September, the company received its first contract for the four newbuilds drillships. DryShips won a $135 million contract from a U.S.-based oil company to explore 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.
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 2011, almost 80% of drybulk fleets are fixed at $37,000 per day.
For 2012, almost 40% of drybulk fleets are already fixed. The company continues with its fleet renewal and expansion strategy in the drybulk sector, replacing older tonnage with newer and larger vessels.
We maintain our long-term Neutral recommendation on DryShips. Drybulk shipping industry is highly competitive and fragmented, and hence any individual operator controls very little pricing power in the market. Therefore, we currently maintain a short-term Zacks #3 Rank (Hold) on the stock. Major competitors of DryShips are Diana Shipping Inc. (DSX), Genco Shipping & Trading Ltd. (GNK), and Excel Maritime Carriers Ltd. (EXM).
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