A Dose of Hope for DryShips

As predicted by perceptive colleague Chris Barker, the perfect storm has left a gaping hole in the side of DryShips (Nasdaq: DRYS  ) . While I've given a Colbertian wag of the finger to Frontline (NYSE: FRO  ) for excessive financial engineering, that tanker operator has dodged the worst of the financial fallout. DryShips, meanwhile, has both dashed its dividend and breached some financial covenants.

Investors insistent on sticking by the shipper were in serious need of some good news. They got it in the form of a deepwater drilling contract with Brazilian behemoth Petrobras (NYSE: PBR  ) .

In case you haven't been following DryShips' deepwater diversion, DryShips has both acquired drilling contractor Ocean Rig and ordered four newbuild rigs. One of the acquired rigs, the Leiv Eiriksson, comes off contract with Royal Dutch Shell later this year, making it one of the only deepwater rigs with near-term availability, and thus an important barometer for the state of the market.

At $630 million for a three-year stint, that's about a $575,000 dayrate. That's solid, but well off the record highs notched by Transocean (NYSE: RIG  ) and Diamond Offshore (NYSE: DO  ) in 2008. It looks like the elusive "7-handle" -- a rate in excess of $700,000 -- isn't in the cards. Not this cycle, anyway.

Petrobras says it's using the rig to explore in the Black Sea, which I assume means the Turkish blocks battled over back in 2006. Petrobras outbid ExxonMobil (NYSE: XOM  ) and Total SA (NYSE: TOT  ) for those concessions. I have to say that it's a bit odd to send this rig off to such a high-risk, frontier area when Brazil's treasures are so tantalizing.

If I were DryShips, I would be counting my blessings to have landed such a marquis customer, with a good-not-great contract, in this time of company tumult. The deepwater drilling segment may very well save the whole ship from sinking.

Petrobras and Total are Income Investor recommendations. Drill down on the dividend-focused newsletter free for 30 days.

Fool contributor Toby Shute doesn't have a position in any company mentioned. The Motley Fool has a disclosure policy.


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  • Report this Comment On March 19, 2009, at 4:35 PM, raidman wrote:

    Sounds like sour grapes from Toby Shute to me. Having doubled this past month off it's lows and sporting a P/E of less than 1, not to mention recently settling it's covenant breaches they look poised to be heading much higher to me.

    Maybe Toby was a buyer when DRYS was over $100 or so. I'm a buyer at these levels and will be adding to my position!

  • Report this Comment On March 19, 2009, at 5:28 PM, mjonesy1985 wrote:

    I wonder what stock will get the most thumbs up or down today....

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