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From flash crashes to the flash-fire contagion of credit distress, investors are busy weighing their perceptions of risk against the opportunities in well-selected stocks. Voluntary exposure to risk can have its place ... so long as those risks are well understood.

DryShips (Nasdaq: DRYS  ) -- that enigmatic, much-transformed shipper with a vehemently loyal following -- provides the ideal example of a stock pick where perhaps both risk and potential reward approach the limits of the imagination. I have long considered this one of the scariest stocks from any sector, but lost between the lines is my corresponding acknowledgement of the potential reward.

Curious George antes up
Believe it or not, the stakes keep climbing. If the initial foray into the ultra-deepwater drillships sector with the Ocean Rig acquisition were not a large enough gamble for a dry bulk shipper, CEO George Economou has doubled down with options to build another four drillships for delivery in 2013 and 2014. Representing a notional outlay of $2.4 billion, the move raises the specter of persistent debt distress for a company that has already put its shareholders through the ringer.

Even before delivering on the long-anticipated spinoff of that venture, the company boldly charged into the oil tanker business with a $770 million venture to acquire 12 oil tankers. Morgan Stanley analyst Ole Slorer downgraded the stock in response, stating that DryShips "has become difficult to value."

Moderating that expanding risk profile somewhat, DryShips has scored some very critical contracts for all but one of the first four newbuilding drillships. The newly delivered Ocean Rig Corcovado secured a six-month contract worth $142 million, with the charterer also contracting the semisubmersible rig Leiv Eriksson for $95 million. Corcovado's sistership, Poseidon, will be employed by a subsidiary of Petrobras (NYSE: PBR  ) for a 600-day stint generating $353 million in revenue.

Understanding the stakes
Given the company's unfortunate track record for woeful share dilution, excessive debt exposure, and often opaque dealings that leave many onlookers wondering whose interests are being served, Fools are advised to assess the stakes carefully before considering a gamble with DryShips.

First and foremost, it must be understood that DryShips is no longer primarily a dry bulk stock. Before rolling these dice, be sure you like the odds for improvement in three separate segments of the maritime industry: dry bulk, ultra-deepwater drilling, and now oil tankers. With the Baltic Dry Index mired in persistent weakness, it's clear that segment has yet to work through an epic oversupply situation. On the flip side, one could argue fairly effectively that these recent drillship contracts provide a powerful counterpoint to the thin operating margins presently descending upon pure-play dry bulkers like Baltic Trading (NYSE: BALT  ) .

Like a gambler who borrows from the house to sit at the table, DryShips is acutely leveraged with debt. The company's $1.7 billion market capitalization cowers beneath the shadow of a debt burden that will likely stand well above $3 billion once the recent $325 million bridge loan for the Corcovado and forthcoming installments on the tanker fleet are added to the tally. If worst-case scenarios were to play out in the global credit markets, highly leveraged companies like DryShips enter stormy waters. On the other hand, a landmark financing deal between China's new $5 billion shipping investment fund and DryShips suggests the company may have some key allies interested in keeping the operator afloat. Fellow Greek shipper Diana Shipping (NYSE: DSX  ) has noted the strategic importance of China's investment initiative in securing the outlook for these embattled shippers.

Pondering the payday
Now that we've contemplated the ways one can lose with a bet on DryShips, it's time to consider the potential gains from a successful outcome for Economou's unabashed quest for countercyclical growth. After all, it was not long after I warned investors of the debt-driven dangers of Teck Resources (NYSE: TCK  ) that the stock catapulted straight through nine-bagger status to stand today at a 24-fold gain from its multiyear low. We wouldn't call it gambling if the potential gains were not substantial.

In a jackpot scenario where DryShips manages to build a backlog of contracts on these first four drillships, which could in turn funnel capital into the exercising of options on the additional vessels, a forward-looking Fool can begin to see just how massively undervalued this 78%-owned Ocean Rig venture may arguably be. If such conditions were to be accompanied over time by improving market conditions in both the dry bulk and oil tanker segments, one could conceivably see these embattled shares shooting for the moon. Since DryShips has already diluted its share count a gut-wrenching 11-fold during its first five years as a publicly traded company, one might tentatively surmise that the worst of that activity must certainly lie in the past.

In parting, I would remind Fools of the principal advantage inherent in a truly high-stakes bet: Even a modest wager that one is prepared to lose outright can conceivably deliver that delightful surprise with a legendary multibagger return. I will continue to rely upon far safer resource plays like Peabody Energy (NYSE: BTU  ) and BHP Billiton (NYSE: BHP  ) to form the conservative core of my commodity-related exposure, but risk-ready Fools seeking a high-octane vehicle for overlooked growth potential may wish to give DryShips' roulette wheel a spin.

It's your turn to place your bets. Please take our Motley Poll then scroll down to the comments section to explain your vote.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Baltic Trading, Diana Shipping, and Peabody Energy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (7) | Recommend This Article (27)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 06, 2011, at 11:08 AM, pondee619 wrote:

    "In a jackpot scenario where DryShips manages to build a backlog of contracts on these first four drillships"

    Are these drillships unique, or at least rare, in the marketplace? Is Dryships the only/best place a consumer would obtain the use of ships like these? Or are these ships commodites themselves readily available elsewhere/anywhere?

  • Report this Comment On January 06, 2011, at 11:58 AM, XMFSinchiruna wrote:


    Excellent question. DryShips has been careful to stress at every opportunity that these new drillships are state-of-the-art units which will command heigthtened interest from industry operators.

    I encourage you to visit Ocean Rig's website and watch the animation depicting rig operations on deck. I've seen my share of footage of oil rig work, and I've never seen as automated a process as is depicted therein.

  • Report this Comment On January 07, 2011, at 2:48 AM, Usnzth wrote:

    "already put its shareholders through the ringer"

    should be "wringer"

  • Report this Comment On January 07, 2011, at 11:26 AM, silverminer wrote:


    Oops! :) You're darn tootin'.

  • Report this Comment On January 07, 2011, at 1:51 PM, lowmaple wrote:

    Well i saw the (ringer) but somehow i knew this article was not about phones.

  • Report this Comment On January 09, 2011, at 9:10 AM, skypilot2005 wrote:


    I am laying over today and did some pursing via the Internet. Here’s what I discovered:

    May I suggest readers peruse their 3rd Qtr results @

    Additional income is finding it’s way to the bottom line and stockholders equity per share, even with the additional shares. See page 7 Financial Statements.


    BY Reuters

    — 9:51 AM ET 12/03/2010

    “DRYS said it plans to sell about a fifth of its drilling rig business for $500 million to mainly Norwegian investors, setting the stage for a highly anticipated IPO of the business.

    DRYS which started out as a dry bulk shipper, into the drilling business in 2008 -- a move that pressured its finances as the company struggled to win contracts and garner funds to build rigs.

    Its insistence on funnelling money into the rig business drew widespread criticism, until the third quarter, when a strong show by the business propelled results.

    "I consider (today's) offering to Norwegian investors a prequel to a full IPO offering in the future," Oppenheimer analyst Scott Burk said.

    DRYS stake in the drilling unit, Ocean Rig UDW Inc, will fall to about 78-80 percent, the company said in a statement.

    "The private placement allows it to begin monetizing its investment in Ocean Rig and potentially set the stage for a Norwegian IPO..." analyst Michael Webber at Wells Fargo Securities said.

    About 20.8 billion barrels of oil equivalent are waiting to be discovered off Norway -- more than the total proven oil reserves of Brazil and Azerbaijan. The Nordic kingdom, world's No. 5 exporter of oil, is home to Seadrill.

    Globally, energy companies are expected to raise exploration spending 11 percent this year, according to a Barclays Capital forecast, helping oil services companies secure more contracts.

    Success in deepwater is expected to give DryShips some respite from funding concerns that were raised since it said on Dec. 23 it planned to enter the tanker sector.[ID:nSGE6BM0C2] “

    “DryShips Inc. Announces Ocean Rig UDW Inc. Common Stock Purchase Program

    Wednesday, 22 Dec 2010 04:05pm EST

    DryShips Inc. announced that its Board of Directors has approved a share purchase program for up to a total of $25.0 million of common stock of its majority-owned subsidiary Ocean Rig UDW Inc., which may be purchased from time to time through March 31, 2011. Share purchases by the Company will be made for cash in open market transactions in Norway on the OTC market maintained by the Norwegian Association of Stockbroking Companies at prevailing market prices or in privately negotiated transactions; provided that the maximum price shall be $17.50 per share. The timing and amount of purchases under the program will be determined by management based upon market conditions and other factors. The program does not require the Company to purchase any specific number or amount of Ocean Rig UDW Inc. common stock and may be suspended or reinstated at any time in the Company's discretion and without notice”

    I am going to throw some money I have laying on my nightstand at some shares. Maybe, they’ll appreciate enough I can buy an alarm clock.

    A future spin off to shareholders of the Ocean Rig unit would allow me to secure enough additional funds to add a TV.

    Thanks, for indentifying this one for further D. D.


  • Report this Comment On June 08, 2011, at 11:38 AM, dontwin wrote:

    It is a case of risk versus reward. At under $4.00 today, the risk isn't very great but the potential reward is fantastic. The word in deep sea drilling rigs is "new rigs"! The fact that they already have them leased, lowers the risk substantially! A December $3.00 cal lis only $1.25. As cheap as the stock is, the call is even cheaper.

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