There is no doubt DryShips (Nasdaq: DRYS) is a beaten stock as of late. Fellow Fools have taken turns shooting across the bow. Buying deepwater drilling rigs at a terrible time and facing weak shipping rates, poor management, and general unrest about a global recovery have hammered the stock. But it's when I see a forward price-to-earnings ratio just under four and everyone hating the stock that I like to take another look. Maybe there's something the market is missing? Or maybe I'm just crazy.

Drilling at the wrong time
One of the big issues investors have with DryShips is four drilling rigs currently under construction. The company is making a transition to compete with offshore drillers like Transocean (NYSE: RIG) for deepwater projects. All four rigs hope to begin operation during 2011, and none have found work in a weak drilling market. Some of this has been out of DryShip's hands. The original plan was to build the rigs and form an IPO around them, but the financial crisis compounded by BP's (NYSE: BP) oil spill in the Gulf and subsequent drilling unrest has cooled the market.

But there are some positives that might occur in the long run. If a relief well is required for every well, demand for drilling rigs should increase. There's also the abundant oil available in deepwater. Over the past 20 years, deepwater has gone from almost zero production to more than 6 million barrels per day. Even taking into account the Deepwater Horizon tragedy, we can't afford to give up on deepwater drilling altogether.

My contrarian view tells me this will be a bottom for demand of deepwater drilling rigs. By this time next year, there should be some resolution to drilling in the Gulf, and business will go on as usual.

Fighting over supply
Dry bulk shipping, with its cargo of unpackaged dry materials (generally commodities), is a business based on global economic growth. Economic expansion leads to more demand for ships and higher rates for shippers such as DryShips, Eagle Bulk Shipping (Nasdaq: EGLE), Excel Maritime Carriers (NYSE: EXM), and Genco Shipping (NYSE: GNK).

Where DryShips has done well is signing lucrative long-term contracts in high-rate environments. It's true some of its ships are contracted at below $15,000/day, but these contracts are short term. Three contracts ending in 2018 average $56,100/day, and eight contracts ending in 2013 average $43,500/day.

The concern has to be recent weak dry bulk prices. An increased supply of ships and decreasing demand struck at the same time during the Great Recession, crushing pricing. This year didn't help, when it looked as if Europe was going to fall off a cliff. The Dry Bulk Index, an index of shipping rates, fell more than 50%, hurting margins for all shippers. But since mid-July, the index has jumped sharply as fears of a double-dip and European contagion have subsided.

Even with all of these issues, DryShips has had more than 98% fleet utilization and a 14% increase in time charter equivalent pricing during 2010. These numbers suggest conditions are improving.

Preparing for the worst
DryShips prepared some interesting assumptions about its new drill ships in its second-quarter presentation. Even if it has to sell the ships at a loss, it will get cash back after paying off the debt on these ships. We'll use H1837 as an example (numbers are in millions of dollars).

Contract Price (695) – Sale Price (650) = Loss On Ship (-45) + Payments Already Made (360) – Debt (115) = Refund due to DRYS (200)

If we use these numbers and adjust the balance sheet, it looks something like this:








Other Current Assets




Total Current Assets




Fixed Assets




Other Non-Current Assets




Total Assets




Long-Term Debt




Other Current Liabilities




Other Non-Current Liabilities




Stockholders Equity




Liabilities + Stockholder Equity




Source: Company press release; numbers in thousands.

Of course, management projections like this should be taken with a grain of salt, but it's interesting to see what they think the balance sheet might look like in the "worst case" scenario of selling all four brand-new drilling rigs.

There are other issues I haven't gotten into like financing the new rigs and upcoming debt maturities. The $2.7 billion in debt is my biggest concern in a bad shipping and financing environment. I'm not trying to suggest DryShips is a sure thing, far from it. If you don't have an appetite for risk, Dianna Shipping (NYSE: DSX) may be more your flavor. It just seems to me that a lot of bad news is priced into DryShips right now. If an economic recovery comes through and offshore drilling picks up, so should DryShips. Sometimes a look at a hated company can bring a great investing opportunity if you can handle a little seasickness along the way.

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Fool contributor Travis Hoium does not have a position in any company mentioned here. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.