How DryShips Could Sail Higher in 2014

DryShips (DRYS) had a strong 2013, with shares doubling on hopes that a long-awaited rebound in the shipping industry might finally lead to a lasting recovery. Yet even as macroeconomic conditions appear to be improving worldwide, smart investors still have to decide whether DryShips is a better play on an industry rebound than dry-bulk specialist Diana Shipping (DSX 1.04%) or tanker company Frontline (FRO 3.17%).

DryShips has survived through tough times, as both the dry bulk and tanker shipping segments have been vulnerable to a glut of shipping capacity for years. What has helped distinguish DryShips from its peers, though, has been its exposure to the deepwater drilling business, with subsidiary Ocean Rig (ORIG) producing solid results that have provided DryShips with ongoing capital when necessary. If the rest of DryShips' business starts doing better as well, could the stock see even bigger gains this year? Let's take a closer look at DryShips' prospects for 2014.

Stats on DryShips

Source: Yahoo Finance.

What lies ahead for DryShips in 2014?
As you can see above, most analysts believe that DryShips has already overshot its most ambitious prospects, with their target price almost 30% below current share-price levels. That's also the case for Frontline, whose current share price is more than double analysts' targets, but Diana has a more realistic target that gives it some modest upside from current levels.

Behind those calls, though, there's deep division about the prospects for the shipping industry. On one hand, Morgan Stanley analysts argued recently that dry-bulk shipping in particular would push forward, helping DryShips, Diana, and other industry players profit from higher volumes of grain, iron ore, and other commodities. Yet bearish analysts believe that supply overhangs of newly built vessels will continue to weigh on the industry. Moreover, concerns about how sustainable the government-led Chinese recovery might be could spell trouble not just for dry-bulk shipping but also for the tankers that Frontline and DryShips both have.

It's still the deepwater business that seems to drive the most excitement about DryShips among investors. Late last month, the stock surged more than 6% simply from announcing that Ocean Rig had added a new drillship to its fleet of drilling vessels. Demand across the industry for deepwater-capable vessels remains extremely strong, and with high-profile areas like the Gulf of Mexico and the waters off the coasts of western Africa and Brazil teeming with promising oil and gas production areas, there's little evidence of that demand drying up anytime soon.

In addition, watch for share-price movements related to capital activity. On the first day of 2014, DryShips shares stumbled when the company said that it would resume its ongoing offering of up to $200 million in stock. Even with recent gains, offering shares at current prices dilutes the interests of many longtime shareholders, and it also limits the upside from any potential recovery in the industry looking forward. By contrast, Diana Shipping has a very strong track record of not diluting shareholders, with only minimal gains in share counts over the past three years.

How DryShips fares in 2014 will depend on all three of its major segments, with most of the marginal effect coming from the shipping sectors. Given the volatility in the sector, though, you can expect a wild ride from DryShips in 2014 regardless of where the stock ends up moving along the way.

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