3 Things to Watch With DryShips

DryShips (Nasdaq: DRYS  ) is an owner of 46 drybulk vessels as well as nine offshore ultra-deepwater drilling rigs through its majority stake in Ocean Rig UDW (Nasdaq: ORIG  ) .

Today, let's look at three things investors should be watching regarding DryShips, as they'll provide us with better insight into the company.

1. The drybulk business
With DryShips, this is a case of the good, the bad, and the ugly -- the drybulk operations I'd lump under the "bad" column.

When Chinese demand was off the charts for raw materials, DryShips was able to avoid locking its vessels into long-term contracts and instead rode the Baltic Exchange Dry Bulk Index higher using short-term, sometimes daily, charter rates. As a pure play on the BDI, it became a quick favorite among day traders looking for a volatile trade. That dream turned into a nightmare when the BDI crashed a few years ago from well over 11,500 to less than 1,000 within a matter of months. You can imagine what sort of impact that had on DryShips, which had few of its ships under long-term contracts.

DryShips is still trying to play this game of waiting out low drybulk prices in the hope that charter rates will rise. In theory, the plan makes sense, as no shipper really wants to be locked into rates this low for the long term. However, the significant drop in BDI has resulted in a fixed-charter utilization rate of just 44% in its most recent quarter.

If there's one positive I can find here, it's that DryShips' operating expenses have been falling. In its most recent quarter, DryShips noted a drop of 17.4% in daily operating expenses while Genco Shipping & Trading (NYSE: GNK  ) reported a rise of 11% in its daily operating expenses as it struggles with the same low charter rates as DryShips. Still, this is a long cry from Navios Maritime (NYSE: NM  ) , one of the few shippers that's remained profitable, in large part because of its reliance on locking in long-term contracts.

2. The drilling business
If DryShips' drybulk business is bad, then without question, its investment in Ocean Rig UDW is the good part of its operations. In fact, I've speculated before that its investment in Ocean Rig is the only factor keeping DryShips solvent.

Although Ocean Rig's earnings have been less than stellar up until now, the fact that the ultra-deepwater driller has $2.6 billion in long-term backlogged contracts signifies the demand for oil and the safety in its contracts. In addition, DryShips has noted that Ocean Rig is working on adding what could amount to $2.2 billion in additional long-term contracts. Furthermore, as an international company, Ocean Rig still must abide by safety standards, but it isn't relegated to the strict safety standards we've witnessed in the Gulf of Mexico since the BP oil spill in 2010.

It should be noted, though, that DryShips has made two separate divestments of Ocean Rig since its purchase of the company before it went public in 2011, and the value of Ocean Rig has risen around 50% since its initial investment.

3. DryShips' debt
Now we've reached the "ugly" part of the factors worth watching regarding DryShips -- its debt. According to DryShips' 2011 annual report, the company is responsible for paying back $754 million in debt in 2013 and just shy of $1 billion in 2014, which may only be accomplished by either a debt refinancing or continued divesting of its Ocean Rig drilling business. The company's current cash balance of $370 million is dwarfed by its $4.37 billion in debt, and the company ended its most recent quarter with a debt-to-capitalization ratio of 0.48. This comes in stark contrast to peer Diana Shipping (NYSE: DSX  ) , which actually boasts a slight net cash position -- a true rarity among shipping companies.

Investors in DryShips will want to keep a close eye on its debt situation, as its upcoming debt payments and weak cash generation are a genuine concern.

Foolish roundup
Now that you know what to watch for, it should be easier to analyze DryShips' successes and pitfalls in the future and hopefully give you a competitive investing edge.

If you're still craving even more info on DryShips, I would recommend adding the stock to your free and personalized Watchlist so you can keep up on all of the latest news with the company.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on Motley Fool CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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Read/Post Comments (2) | Recommend This Article (3)

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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 September 10, 2012, at 10:56 AM, Kingla wrote:

    Your article is well written with 1 major exception. Most of the debt you refer to is not Dry Ships, but is Ocean Rig's. It is consolidated for GAAP purposes.

  • Report this Comment On September 13, 2012, at 11:26 AM, imacg5 wrote:

    Yes, $2.6 billion in debt is attributable to ORIG.

    Also, the reason for the reduction in operating expenses last quarter was mostly due to less drydocking charges, but does not indicate a trend to lower expenses.

    With all the ways George Economou skims money from DRYS to his management company, DRYS will never be included in the ranks of the low expense models.

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