DryShips Goes Off the Deep End

On Monday, dry bulk shipper DryShips (Nasdaq: DRYS) dipped a toe into the deepwater by pouring $405 million into Ocean Rig ASA.

The purchase was justified as providing a strategic stake in a market experiencing strong fundamentals. Having mused at the undiminished deepwater-dance marathon, you won't find me disagreeing on that basic point. I do take issue, however, with the company's casual characterization of the deepwater market over a five- to 10-year time frame.

National Oilwell Varco (NYSE: NOV) can tell you that the floater order book is stuffed to the gills. More than 50 deepwater vessels are set to hit the water by 2010, in fact. Drillers such as Transocean (NYSE: RIG) and Noble (NYSE: NE) are reluctant to forecast the state of the market much beyond that time frame, and I frankly question a dry bulk operator's ability to see the long-term picture more clearly than can the leaders within the contract-drilling industry.

That's not to say the equity stake won't prove lucrative. I'm all for outside-the-box capital allocation, as evidenced by my recent defense of Google's (Nasdaq: GOOG) foray into alternative energy. But Google has gobs of money sitting in a bank account. DryShips has a much different capital structure. Like Quintana Maritime (Nasdaq: QMAR) and Genco Shipping (NYSE: GNK), DryShips carries quite a bit of debt. This is not an obvious vehicle for seeding alternative investments.

In fact, I'd argue that this foray goes directly against what DryShips investors want: a pure play on the direction of dry bulk rates. The company has made its shareholders a lot of money this year, and it's been quite easy to understand how. The Ocean Rig investment can only diminish DryShips' appeal to dry bulk devotees.

Most curious is the failure of yesterday's press release to reveal the counterparty to DryShips' share transaction. That would be Cardiff Marine, a private entity that manages DryShips' fleet and is controlled by DryShips' CEO, George Economou. Economou says DryShips is paying the same price as Cardiff, but it is most likely going to toss Cardiff a finder's fee of up to 1%.

This is exactly the sort of corporate-governance chicanery that has led your fellow Fools to vote DryShips the world's scariest stock. While I've taken a pretty conciliatory stance on the stock lately, yesterday's events demonstrate why DryShips fails to fill my sails.

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