DryShips Taps Ocean Rig to Stay Afloat

DryShips is selling shares in Ocean Rig, another desperate move by a desperate company.

Travis Hoium
Travis Hoium
Feb 13, 2013 at 9:25PM
Industrials

DryShips (NASDAQ:DRYS) is doing its best to stay afloat as its business takes on water. In January, the company sold two Suezmax ships under construction that it couldn't afford to finish. Yesterday, it increased an offering of shares it owns in Ocean Rig (NASDAQ:ORIG) to 7.5 million  shares from 5 million shares.

The company expects proceeds of $126.4 million, and it will still own 59.4% of the company. But here's how bad things are for DryShips. Ocean Rig is worth $2.13 billion today, and DryShips is worth $935 million. That means the assets DryShips owns outside Ocean Rig have negative value, according to the market.

The sinking ship at DryShips
Ocean Rig has held its own since going public, but DryShips is sinking quickly. Even majority ownership of Ocean Rig doesn't mask the trouble the company is in.

DRYS Total Return Price Chart

DRYS Total Return Price data by YCharts.

While Ocean Rig plays a role in the very profitable ultra-deepwater drilling market, DryShips is trying to survive shipping a dwindling amount of dry goods around the world. Supply and demand in the industry is wildly out of whack, and companies are feeling the pain. The Baltic Dry Index shows the pain the shipping industry is in. Rates have plummeted, and there are no signs of recovery any time soon.

^BDIY Chart

^BDIY data by YCharts.

The rest of the industry isn't much better. Eagle Bulk Shipping (NASDAQ:EGLE) has a market cap of $31.2 million and doesn't have any profits on its horizon. Excel Maritime Carriers and Genco Shipping are worth just $53.5 million and $136.8 million, respectively, and neither is expected to reach a profit in the next year. The dry bulk business is sinking fast.

Deepwater is where the money is
That's why DryShips is taking money from its profitable public subsidiary to offset losses at DryShips. But it's chasing good money after bad, and investors would be wise to avoid the money pit that is DryShips.

Even Ocean Rig isn't a great play in the drilling business. Seadrill (NYSE:SDRL) has a forward P/E of 12.1, compared with 16.2 for Ocean Rig, and it pays investors an 8.8% dividend yield. Both companies have a lot of exposure to ultra-deepwater drilling, but Seadrill has a far better record of generating good returns than George Economou, who controls Ocean Rig.