Should You Sell Ocean Rig UDW and Buy DryShips?

There may be a serious mispricing between the two.

Jun 25, 2014 at 10:26AM

Source:  Ocean Rig UDW

If you have any true confidence in the shipping business of DryShips (NASDAQ:DRYS), then you are making a mistake by owning Ocean Rig UDW (NASDAQ:ORIG). Do a little math, and the market is currently pricing the shipping business DryShips owns at negative value.

It's not arbitrage
Some will say it's an arbitrage trade, but it's not. An arbitrage trade is where you can buy and sell the exact same asset nearly risk free. An example might be if one pawn shop was selling ounces of gold for $1200 and another pawn shop down the street was buying them for $1250, you could buy an ounce from one and sell to the other and pocket $50 almost instantly. That's arbitrage.

Arbitrage situations are quite rare. In the case of Ocean Rig UDW and DryShips, you do indeed actually indirectly own more Ocean Rig UDW by buying DryShips than by buying Ocean Rig UDW itself. However, since you can't separate it out your Ocean Rig UDW stake from your DryShips stake, it's not exactly arbitrage. Confused? Let me explain.

DryShips owns Ocean Rig UDW
What many people don't understand is that although Ocean Rig UDW trades publicly, only a minority of its shares are available. Of the 131.9 million shares of Ocean Rig UDW outstanding as of Dec. 31, 2013, DryShips owns 78.3 million of them or 59.4%.

Based on the current share price of Ocean Rig UDW, the value of DryShips' stake is $1.42 billion. Now, consider that there are essentially two parts to the stock that is DryShips -- there is its $1.42 billion Ocean Rig UDW stake, and there the DryShips shipping operations. But the value of both combined, which is the market cap of DryShips, is only $1.31 billion at the time of this writing.

This means that the market is essentially telling you that the value of the shipping operation is negative $110 million. By buying DryShips instead of Ocean Rig UDW, you are essentially getting the shipping operations for free and then some.

Now be warned -- the market may be right by assigning a negative value to the shipping business.  After all, the shipping business alone has $1.6 billion in debt while losing money every quarter. Unless that turns around, the true fundamental value of any business that loses money forever is zero to negative. 

Where it can get interesting for Foolish investors is if you disagree with the market on the negative value of the shipping business. Since the $1.42 billion DryShips stake in Ocean Rig UDW is 8.4% higher than the entire market cap of DryShips, each dollar invested in DryShips basically owns $1.08 in value of Ocean Rig UDW plus the "free" shipping business.


Source: Ocean Rig UDW

But "free" can be expensive
The danger and risk here is twofold. First, if the shipping business does fail it could be forced to liquidate Ocean Rig UDW to support its losing shipping operations. For that reason, its shipping business in theory could actually be worth less than zero, unlike a regular stock.

The second risk entails something that DryShips has been known to do for many years. That is, raise money by selling common shares and diluting investors' stakes. It's possible that the market views this risk as very high and could be why there is a discrepancy in pricing.

Foolish final thoughts
While I'm not a huge fan of DryShips, if I were a long-term shareholder in Ocean Rig UDW with any degree of solid confidence in George Economou, CEO of both companies, and DryShips' shipping operations, I would sell my Ocean Rig UDW stake and go long DryShips.

As the late Benjamin Graham used to say, in the short term stock prices behave like a voting machine, but in the long term they behave like weighing machines and will eventually correct themselves to proper fundamental value. It seems extremely unlikely that the disconnection between stock prices could get much wider if the shipping business does even mildly OK.

Do you know this energy tax "loophole"?
You already know record oil and natural production is changing the lives of millions of Americans. But what you probably haven't heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America's greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, "The IRS Is Daring You to Make This Investment Now!," and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Nickey Friedman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers