The shipping sector has put in a solid performance during the past year or so. However, DryShips (NASDAQ:DRYS), one of the sector's biggest players, has missed out on much of the rally.

Surprisingly, even after reporting a good set of first quarter results, DryShips is still lagging its peers, although this poor performance can be traced back to one factor; debt.

Good first quarter
For the first quarter DryShips reported a net loss of $34.6 million, or $0.08 per share. Analysts were expecting the company to break even for the quarter.  These results included a $32.6 million, or $0.08 per share non-cash write off charge associated with the full refinancing of Ocean Rig's (NASDAQ:ORIG) $500.0 million 9.5% senior unsecured notes. Excluding this cost, the company would have reported a net loss of $15.2 million, or $0.04 per share.

Despite this loss, DryShips' results did contain some good news. For example, the company's drybulk segment reported a 17% rise in time charter revenues and a 3% rise in voyage days. In addition, DryShips' tanker segment really outperformed, reporting a near 100% rise in time charter revenues, drop in operating expenses and rise in voyage days.

Meanwhile, Ocean Rig UDW Inc, DryShips' majority-owned offshore drilling subsidiary reported a 47% rise in sales. This rise in sales spurred Ocean's Board of Directors to declare a quarterly cash dividend of $0.19 per common share. Overall group operating costs increased by 25%.

What's more, DryShips reported an operating profit for the period. However, the company was thrown into a loss by crippling interest costs, which amounted to $114 million, for the period, 1.3x operating income.

Debt is a concern
There is no denying that debt is DryShips' main concern going forward. The company's debt stood at a total of $6 billion at the end of the first quarter, up around $500 million quarter over quarter.

However, the company has vowed to do something about this. The refinancing of Ocean's $500.0 million 9.5% senior unsecured notes was a major step in this plan. While not directly beneficial to DryShips, low interest costs for Ocean will be reflected through higher dividend payouts to DryShips. The notes were refinanced at 7.25%, which should save the company just under $10 million per annum in interest costs .

DryShips is working to reduce its debt in several ways.

Firstly, the company is cancelling its delayed Chinese newbuildings, several Panamax vessels which were slated to be delivered this year. . Secondly, with ship prices rising, DryShips is looking to refinance its fleet, hopefully achieving a lower rate of interest as the loan-to-value rate falls.

As far as maturities are concerned, DryShips has a convertible bond maturing this year with loan maturities of $72 million, $138 million and $68 million for 2014, 2015 and 2016, respectively. The firm is taking proactive measures to potentially refinance certain facilities ahead of maturity. These measures include the refinancing of facilities and possible addition of extra debt to pay off existing issues.   .

Of course, if these measures fail, the company still has the ability to issue shares into the market for immediate cash. During the first quarter DryShips sold approximately 22.2 million common shares, at an average share price of $4.14 per share, resulting in net proceeds of $90 million. Management is trying to avoid this option, as they are fully aware of the implications to shareholders.

Ocean Rig
Still, DryShips is beginning to profit from its investment in Ocean. DryShips received a $15 million dividend from the subsidiary during the first quarter and further payouts should follow.

DryShips owns around 60% of Ocean Rig and management is trying to unlock value from the offshore driller by converting some, if not all of Ocean's assets into an Master Limited Partnership structure. Hopefully, this should help DryShips in its quest to reduce debt.

Luckily, Ocean's fleet of nine 6th and 7th generation ultra-deepwater drillships is one of the most advanced fleets in the offshore drilling business. It's easy to see why the company has a $5.4 billion contract backlog. An additional two drilling units are being delivered to the company next year.

With a sector leading fleet, Ocean's income is soaring, great news for DryShips. For the first quarter Ocean's income totalled $31.1 million on an adjusted basis. Revenue for the period jumped around 50% year over year, and similarly, operating income rose by 90%.

On average, for fiscal 2014 Wall Street analysts expect Ocean to report earnings of $1.56, rising to $2.30 during 2015 . Based on the first quarter dividend of $0.19 per share, Ocean should be able to pay $0.76 in dividends to DryShips this year, or maybe more, adding roughly $60 million to DryShips' bottom line -- a much needed income boost .

Of course, DryShips always has the option to sell its 60% share of Ocean to repay debt, although this is likely to be a last resort.

Foolish summary
Even after a solid first quarter, DryShips remains underwater, constrained by its overwhelming debt pile and crippling interest payments. However, the company's management is working hard to remedy the situation and DryShips' investment in OceanRig is just starting to yield results and boost overall income.

The next few months, or even quarters will be crucial to DryShips. If the company can put in place a plan to lower debt and interest costs, the company should return to profitability. On the other hand, if DryShips continues to struggle with its debt load, more shares could be issued to meet the company's cash flow requirements, diluting existing holders and leading to more uncertainty.