DryShips and the Oil Rush

Yesterday's front page of the Wall Street Journal highlighted John Fredriksen, Norway's richest man, for his brilliance at entering deep water drilling. His company Seadrill Ltd three years ago ordered two "ultradeep water" rigs able to drill at a 7500 feet depth. Now Seadrill Ltd has four of these deep water drill ships. Only 39 currently exist in the world.

That gives Mr. Fredriksen enormous pricing power. His units are in such demand he can charge major oil companies nearly $600,000 a day to use them. Similar rigs were earning about $70,000 a day just five years ago. With leasing rates like these, a vessel that cost half a billion dollars to build can pay for itself in as little as four years.

The article makes me think about another visionary, George Economou, CEO of DryShips (DRYS). His company has, up until recently, been solely involved in chartering dry bulk ships. Dry bulk leases have been extremely profitable (for instance, spot charters go for $134,000 a day for Cape ships at a cost of $ 6 - 7000 a day.)

Economou has entered deep water drilling and these drill ships bring an extraordinary upside for the company. Dryships has bought 30% of Ocean Rig, a company that owns 2 deep water drill ships and has an option to buy 2 drill ships. It is likely that Dryships will ultimately buy all of Ocean Rig and continue its venture into deep water drilling. This should give Dryships yet another highly profitable marine asset to lease, one which should pay off handsomely.

Disclosure: Author has a long position in DRYS

Comments

[joli:]

Right on

2008 Apr 02 07:26 AM

[MistaWhite:]

DRYS alos has that 30% stake in Ocean RIG which is a deep water driller.

2008 Apr 02 08:08 AM

[dn4911:]

Why would DRYS / GE buy OCR at current levels? Instead buy the drill ships and just let OCR manage them.

2008 Apr 02 08:27 AM

[awinnh:]

So why is DRYS only trading at 4.5x ???

2008 Apr 02 10:06 AM

[DSX Lover:]

Stop trying to praise the acquisition of 30% in Ocean Rig. That was the most horrible investment that shareholder money could be employed for. OCR has two rigs, one which was down for almost 2 months last year, the company lost money and has tons of debt, it is not even clear of how the transaction took place. Did OCR issue new shares? and use the proceeds to pay off debt, obviously not, because the Financial Statements are horrible. Even with Rigs being leased at $600 to $700K a day, the company could not make a positive return for its investors, the Deep Ocean Rig market is strong, but OCR financial condition is horrible, and it doesn't appear to be improving anytime soon. Why overpay for a partial share of something bad, when there where RIGS in the market being dispossed and offered by Transocean Inc, after the merger with Global Santa Fe at much better rates because of anti-competitive reasons. Hercules bought two Drill ships, debt free at much better prices than the OCR partial investment. Georgios is not getting paid to diversify and waste the company's money, he should employ Dry's mula to pay off debt and do share buybacks, or Dividend payments. Until he makes the Balance Sheet, and stops making horrible investment decisions, DRYS will be the laughing stock in the DryBULK sector.

2008 Apr 02 11:28 AM

[jimmy46:]

read the recent Forbers magazine article for all the conflicts of interest at this company.

This is the 6th blog in the last 2 weeks where you've been flogging this stock. WHY ???????????????

Something you don't seem to understand, is that for shipping
stocks past earnings don't mean much.
The DAY RATE CHANGES DAILY.

Do you know what the day rate will be a month from now?
Pick another dog to flog.

2008 Apr 02 12:11 PM

[drys long:]

DSX Lover - let's not get carried away bashing the investment in Ocean Rig. You might not understand the details (neither do I) but is it the most horrible investment possible? The company's two rigs are 5th generation harsh-environment semi-subs that command the highest dayrates in the global fleet. The foray into offshore drilling may be confusing but DRYS stock is clearly high risk/reward and will remain a pure play equity on dry bulk shipping rates. The investment might even pay off some day.

As for paying dividends and/or reducing debt - that is a fine strategy for a nice conservative company like DSX. When I look at the relative performance from the middle of 2006 I see DSX has gone from $10 to $27 while DRYS has gone from $10 to $60. Laughing stock??

2008 Apr 02 01:00 PM

[valueinvest...:]

I think Winston's Churchill quote, "A fanatic is one who can't change his mind and won't change the subject," greatly applies to you since all you seem to write about is how DRYS is undervalued. I don't have a long or short position in the name, but I do find it comical that you continously write on it.

2008 Apr 02 01:15 PM

[User 98183:]

Valueguy, who are also a fanatic. Let's face it, you have very little positive to say about DRYS, you haven't changed your mind and you are obviously obsessed about anyone disagreeing with your point of view. Too bad.

2008 Apr 02 02:45 PM

[Stephen Ros...:]

I write about DRYS alot because it amazes me how a company in a traditionally BORING sector like shipping can create so much value for shareholders and yet be so pummeled. Where else can you find a company with such great growth, earnings, ROE, branching into new and profitable businesses (that even headline the WSJ) and yet still trade at PEs of 3-4. There are at least a dozen reasons to own (and write) about DRYS: low valuation, robust industry, rising earnings, more valuable fleet, drill ships, ROE, plus a CEO who does interesting things that to this shareholder bring further value, a large short position against a company with steady and rising earnings and no difficulty getting capital. What other company (except AAPL) could engender more love and hate?

2008 Apr 02 03:45 PM

[downnotout:]

The stock does perform poorly, but the sector is down in general due to the fluctuation of the BDI. As a large long holder of this stock, I can only look toward the earnings announcement and an improvement in the day rates as the better season progesses. Hopefully, then, there will be an ending to the short sell beating and the stock can move to a more fitting level as the author points out.

2008 Apr 02 04:17 PM

[valueinvest...:]

To user98183: I have never been long or short DRYS. Therefore, I have never profited from it going up or down. I just find it comical how he seems to write all the time on this name.

2008 Apr 02 06:56 PM

[hmeister:]

The difference is Georgie has a history of F***ing his investors, his managers and others he should be embracing. People forget his debt deal that went belly up within a short time of its being funded. Recently, he axed senior mangement from his nephew's company after they helped get the vehicle public and he no longer needed them. He may look chic on his boat in St Barts, but don't be fooled. Friedrikson is no angel but George is simply not in his league.

2008 Apr 02 09:53 PM

[notsosmart:]

i have no connection to wall st. or this co. i have benefited greatly from FRO. i could sell for a great gain but i hold.why-check the dividend history.wet ships the way to go as no one can yet pave over the ocean & oil will have to be used(like it or not) for many years.

2008 Apr 02 10:36 PM

[mavv:]

As the season nears the shipping companies are looking for great gain. I have also benfited from the DRYs and other shipping companies. There's really no other way to transport such large bulk items. Look for this sector to improve dramiticly

2008 Apr 03 12:06 AM

[163888:]

drys long, you should be asking yourself why are they only have a stock price just over double DSX, when DRYS has 5 times the amount of ships dwt.

2008 Apr 03 09:41 AM

[drys long:]

163888, an investor doesn't make money based on the size of the fleet. I was just pointing out that if you were trying to decide which stock to buy in mid-2006 (I chose that time frame because both stocks were beaten down) you would have had roughly twice the price appreciation if you chose DRYS over DSX. What does it matter which company has more ships? I think Diana Shipping is a fine company (maybe it has more conservative management and therefore less risk) but there is no doubt which has been a better investment over the period. My post was really a response to DRYS being referred to as a laughing stock - that is the kind of message board nonsense that helps no one.

2008 Apr 03 10:22 AM

[Gaucho:]

Well the answer to many questions is called MANIPULATION. DRYS has a large shot position. Have you guys ever heard of selling into the bid??? Just go to yahoo DS board and look at the number of bashers flogging this stock. Hedge funds have huge money and they beat the shit out of many good companies. Other examples are CALM P/E of this year will be about 3, DNDN major shift in the way cancer is treated yet huge short position keeps the stock down.

As long as the SEC is a whore for the Hedge funds then we will have situation like these.

2008 Apr 03 01:14 PM

[163888:]

drys long, the amount of ship dwt. matters to the market share, which you have to admit matters to investors. Also why not go back to when they both started on the open market, and you have to take in account dividends. While in the two years, that still does not make up the difference, I am not a short term investor, and I will take a 8% return over a 1% every time. On top of that I dont like George Economous attitude towards shareholders, of take it or leave it, and "if you dont like it you dont have to own share in the company". That kind of attitude is a major problem for me and should be for most shareholders.

2008 Apr 04 03:16 PM

[icanpress:]

Watch DRYS hit $150 inside a year - ridiculously low PEG & PE; insatiable demand for its dry shipping capacity coupled with capacity constraints across major commodities markets - Australia, Brazil, Russia; never mind it's debt/equity ratio which will be paid down at a rate of knots due to massive cashflows from forward contracts, hefty spot rates, and love the move into deepwater drilling. Go Mr. Economou!!!!

2008 Apr 06 07:14 AM

[headgeek:]

Stop bitching about this and make money off it. The hedge funds a slapping this stock around. They run it down to about 55 then they run it back up over 70.

You can either sit around pointing fingers or you can "buy low (55) sell high (75) then wait for it to go back down and buy it back.

I have been playing this stock for a year now. I am up 8% YTD.

2008 Apr 07 12:47 PM

[stuurman:]

The comment that "spot charters go for $134,000 a day for Cape ships at a cost of $ 6 - 7000 a day" needs some explanation. First of all the term is Capesize; not Cape ship. On average a Capesize bulker can load about 175,000 metric ton iron ore; less in terms of coal, because the holds will fill up before the ship is on her max. draft.
The daily operating cost to the shipowner of $6-7,000 may only be true if the owner got the ship from Santa Claus. Usually there is a hefty mortgage. Newbuilding vessels have just about doubled in cost during the last five years.
Current time-charter (t/c) rates are off course fantastic for owners. However, when the dry bulk freight market turns South, charterers become very inventive to get out from under their t/c obligations. They find something wrong with the ship, or she does not maintain proper speed or uses too much fuel. They threaten to re-deliver the vessel, or ask the owner for a lower rate in accordance with prevailing market rates. The owner usualy does not have a choice but to give in.
The Nautical Institute in London has published a good book on COMMERCIAL MANAGEMENT IN SHIPPING that covers bulk shipping operations in detail.

2008 Apr 17 01:57 PM

[iansane:]

BDI hit 9130 today!! Drys will easily hit 100's this year.It's a great stock to trade-twice i've purchased at mid 50's and sold in low 80's!I can't imagine anyone complaining about that!

2008 Apr 24 11:10 PM