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The shipping industry has been one of the hardest hit during the recent recession, with many stocks falling from triple digits down to single digits. The slowdown of global commerce has seen a glut of ships, with many of the older fleets being scrapped early and contracts for new ships being sold or canceled. DryShips, Inc (NASDAQ:DRYS) has been one of those companies. While it has struggled to remain solvent, I believe the bottom is here and it's only way to go is up. While there are many factors that will affect the success or failure of the company, the two main ones are the diversification of its fleet and the recent rates for shipping.

Diversification

DryShips, Inc. owns 46 ships, with a mixture of dry shipping and tankers, as opposed to many in the industry that specialize in one segment of the shipping market, such as Frontline (NYSE:FRO) which owns solely tankers. Their fleet is also very young, compared with the industry average, which means increased efficiency and reduced operating costs (fuel and maintenance).

DryShips, Inc. owns 12 Capesize ships that range in age from one to twelve years old with over half less than eight years old. They also own 28 Panamax ships that range in age from one to fourteen years old, with half less that eleven years old. Dry Ships, Inc. also owns two Supramax ships that are ten-years old. All of these classes of ships will typically haul coal, iron, or grain.

For tankers, the company owns ten ships, four Suezmax and six Aframax, all of which are new and less than two years old.

This diversification has helped the company tap into the different shipping markets.

Fleet Rates

When global trade slowed down, daily-shipping rates, as measured by the Baltic Dry Exchange, also went south. While the rates have still not recovered to pre-2007 rates, it seems they have hit bottom and are starting to come back up.

The fall in the price of Iron Ore has increased the demand from China, further causing the rate for Capesize to rise. Current rates sit at near $5000 per day, but are expected to rise by over 25% based on the demand from China. Panamax can also benefit from the demand from China and also the boom in South American grain exports. Their current rates sit at over $8000 per day, and are also expected to have a price bump. Supramax are averaging close to $9200 per day. While still under the break-even point for daily operating costs, the recent improvement in the global economy, consistent growth in the global stock indices, and reduction in the fleets from older ships will see the daily rates continue to climb.

Rates for Suezmax and Aframax are expected to increase as the global demand for oil increases with the improving economy. The Suezmax is expected to climb to $17,000 per day this year, short of the $23,700 break-even point, but better than the $10,000 per day bottom that was experienced during the recession.

Fundamentals

Fundamentally, this company has been able to weather the storm because of its majority ownership in Ocean Rig UDW Inc (NASDAQ:ORIG), a deep sea drilling company. The company has been able to use this stake, valued at over $1.3 billion as of 8 May 2013, as collateral for debt to help keep afloat. They have also been able to continually increase their revenue over the past three years; a 27% increase from 2010 to 2011 and a 12% increase from 2011 to 2012. This year is expected to be up over 19% and next year is estimated at up over 47%, based on predictions that the economy will continue to recover and global shipping will improve. Although their revenues have been increasing, their losses have also been increasing with 2010 being the last profitable year for the company. In response to these losses, the company has retired older ships in order to decrease maintenance and operating costs. They have also canceled and sold several contracts for ships that were ordered.

Looking forward, the success of DryShips, Inc. will depend on the daily spot rate. While all of their Capesize ships are currently under contract, giving them a predictable revenue stream, the majority of the rest of the fleet is subject to the daily spot rate. As the daily spot rate continues to improve, profitability will also improve.

Conclusion

While the rates are still short of break-even points, they are climbing, and can be expected to continue to improve as the world recovers from the recession. DryShips, Inc. is well poised to profit from this based on their young fleet with lower operating costs and diversification. The bottom is here.

Source: The Bottom Is Here With DryShips