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DryShips (Nasdaq: DRYS ) is starting to look more like a drilling company than a shipping company these days. Four ultra-deepwater drillships are currently under construction, and the company recently announced that it has secured the option to build four more sister ships.
As drybulk businesses continue to struggle thanks to low shipping rates, so do stocks such as DryShips and Diana Shipping (NYSE: DSX ) , which have languished since the 2008 global economic crisis. But the ultra-deepwater drilling business has held up relatively well and is quickly becoming the star of DryShips' fleet.
However, this deal doesn't come without risks. DryShips paid $24.8 million for the option on each ship, so $100 million goes down the tubes if the market takes a turn for the worst and the ships aren't built. And it isn't as if demand for the ships being built is knocking anyone's socks off.
The company has only one of the four drillships currently being constructed under contract. The first ship, set for delivery in January, is still without a firm contract. (It appears the one contract signed will be for the second ship.)
Then there's the issue of competition in the ultra-deepwater market. Fifteen new drilling units are expected to come available in 2011, and DryShips needs to find work for three of them.
On the surface, I like the move into ultra-deepwater drilling, as it provides a better revenue stream for DryShips, but this seems like an awfully big move. DryShips doesn't have the experience or resources of a Transocean (NYSE: RIG ) in the drilling game, so the competition will be steep.
Time will tell whether the move into drilling will pay off. DryShips has one year to show progress in its Ocean Rig business before committing to the build, and there is a lot of work to do before all the ships have contracts.
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