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Executives

George Economou - Chairman, President & CEO

Ziad Nakhleh - CFO

Pankaj Khanna - COO

Analysts

Justin Yagerman - Deutsche Bank

Michael Webber - Wells Fargo

Natasha Boyden - Global Hunter

Brandon Oglenski - Barclays

Fotis Giannakoulis - Morgan Stanley

Martin Korsvold - Pareto

Randy Loffman - Imperial Capital

David Epstein - CRT Capital

DryShips Inc. (DRYS) Q2 2012 Earnings Call August 17, 2012 8:00 AM ET

Operator

Thank you for standing by ladies and gentlemen and welcome to the DryShips Inc. conference call on the second quarter 2012 financial results. We have with us Mr. George Economou, Chairman and Chief Executive Officer; Mr. Ziad Nakhleh, Chief Financial Officer and Mr. Pankaj Khanna, Chief Operating Officer of the company.

At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session (Operator Instructions). I must advice you that this conference is being recorded today Friday, August 17, 2012.

Matters discussed in this release may constitute forward-looking statements. Forward-looking statements reflect current views with respect to future events and financial performance and may include statements concerning plans, objectives, goals, strategies, future events or performance and underlying assumptions and/or other statements which are other than statements of historical fact.

Please take a moment to read the Safe Harbor statement on page two of the slide presentation. Risks and uncertainties are further described in the report filed by DryShips Inc. with the U.S. Securities and Exchange Commission.

And I now pass the floor to Mr. Nakhleh, please go ahead sir.

Ziad Nakhleh

Thank you. Good morning everyone. I am on slide four. For the second quarter 2012, DryShips posted a U.S. GAAP net loss of $18.2 million or $0.05 per share. Our shipping segments are slipping further into [duress] as our time-charter equivalent rates continue to slide as a result of both drybulk vessels coming off charter and spot markets deteriorate. The bright spots for the quarter are positive EBITDA and cash provided by operations mainly fueled by offshore segment.

Having said that, the adjusted EBITDA of $144 million does not reflect the full earnings potential of our offshore fleet as the mobilization activity and downtime affected accounting earnings. For the remainder of this presentation, we will be primarily focusing on our shipping segments operations. For additional information on drilling segment please refer to Ocean Rig second quarter presentation available on www.ocean-rig.com.

Slide five; the chart on this slide highlights historical Panamax ship values versus spot earnings. Going forward, we do not expect to see volatility in the short-term as we continue to expect a prolonged (inaudible) period of very low earnings for both drybulk and tanker segments. Panamax spot rates are approximately $7,000 per day today while 2013 and 2014 SFA is approximately $8,500 and $10,500 per day.

To give you some context, DryShips shipping segment had a blended average of $26,000 daily cash breakeven for the second quarter of 2012. These blended averages skew towards our Panamax breakeven as they are largest shipping asset class. Our cash breakeven doesn’t take into consideration equity required for our newbuilding program; suffice it to say, we expect tough road ahead.

On slide six; our capital structure end of June is robust as evidenced by a modest 42% net debt to cap; only other thing to say is we have close to $750 million of cash in our balance sheet of which only de minimus balance is held in Greece.

Slide seven; here we present our drybulk newbuilding program which is more or more less unfinanced; while we have been bullish in previous quarters about our ability to finance remaining vessels of bank debt, recent developments including the action of common stock in shipping have given a second thought; still we are in discussions with certain institutions to finance the remain vessels including Chinese ECA’s and leasing companies.

Slide eight; on this slide we present our tanker CapEx. On the back of a full vessel financing package we executed in the first quarter with ABN AMRO and the Import-Export Bank of Korea, we're pleased to announce another ECA backed financing package for three of our tankers. We signed a term sheet with ABN AMRO, Korea Development Bank and Korea Trade Insurance Corporation or KSURE for $107.7 million senior secured term loan facility to finance the tankers Alicante, Mareta and Bordeira.

This financing has very competitive pricing in light of today’s solid banking market and has a six year maturity and 12 year repayment profile. As you can see, our tanker newbuilding program is nearly fully financed and we signed both our commercial lending partners and especially our new found friends Korean ECA’s who have been invaluable in this process.

Slide nine. This slide details a secured debt profile of the drybulk and tanker segments as of June 30, 2012. On a related topic, I want to reconfirm that currently we’re in technical breach of some of our drybulk loans. Most specifically, we have accumulated shortfalls on our VMC required ratios amounting to approximately $145 million at the end of June of 2012. We are in discussions with the effective banks to remediate above breaches by way of providing additional collateral whether in the form of cash or shares. So we’ll keep you updated in this respect.

This marks the end of the financial section; I'll now turn the call over to Pankaj for the company update.

Pankaj Khanna

Good morning, turning to slide 11. We are pleased to report the signing of letters of intent with three major oil companies for three of our drillships including two of our Newbuilding. The additional backlog from these three contracts is approximately $2.2 billion over three years. Assuming these contracts materialize, our total backlog was nearly double from $2.6 billion to $4.8 billion and will provide Ocean Rig with substantial cash flow visibility and growth.

Another major development is the commencement of the syndication process for $1.35 billion loan facility to finance the remaining payments of the three newbuilding delivering in 2013. Once in place, this takes away any financing uncertainty for Ocean Rig.

With banks reducing their balance sheets due to Basel III requirements or due to an exit from shipping, sourcing debt is becoming increasingly difficult, but due to our long standing relationships, we continue to secure loans for the shipping assets.

Slide 12, our prudent chartering strategy has been advantageous for the company as we continue to enjoy the rewards of historical decisions. We currently carry 44% coverage for the second half of 2012 at an attractive dayrate of $27,350 per day. For 2013, the coverage stands at 32% at almost $30,000 per day. We have significant leverage to the drybulk and tanker spot market and positive developments in these sectors could provide a substantial boost to our bottomline.

Slide 14; a lot has been said about the slowdown in Chinese GDP growth; however, it’s important to look into the details. While the growth rate has definitely slowed down from 12%, 13% seen in 2007 and 2008 to approximately 8% in 2012, on an absolute basis the GDP base has expanded to the point that 8% growth in 2012 is a larger absolute number than the 12% to 13% seen in 2007.

The growth in Chinese iron ore imports is a good example of this. In 2007, Chinese seaborne iron ore imports increased by 18% or 58 billion tons in absolute terms. In 2012, the growth rate as forecast have much lower 8%, but 56 million tons in absolute terms. Besides the inordinate focus of the growth rate another factor to point out is that the shipping industry is concerned with the seaborne imports of the commodity and for China in particular there is volatility in growth rates due to the role of domestic production of iron ore.

We know domestic iron ore in China is significantly inferior to what is produced in Australia or Brazil and production is quite sensitive with the spot iron ore price. With the projected increase in iron ore production from the major minors and from West Africa in the next couple of years, forecast suggests that iron ore prices are likely to decline and therefore Chinese iron ore import should increase in line with declining iron prices.

Slide 15; before moving on to the supply side of the equation, I would like to briefly touch on the future prospects for drybulk demand. The graph on the left shows the projected increase in iron ore production from Rio Tinto alone. It is expected to increase some 230 million tons in 2012 to approximately 350 million tons in 2015. Bear in mind, this is from Rio alone.

Another key driver for the drybulk market is the coal trade and besides China, India is likely to be large factor in the growth going forward. India recently had a massive blackout in the northern half of the country, where 600 million people were without electricity. India has several large coal based power plants under construction and will add further to this capacity.

The graph on the right shows projections where Indian coal imports are expected to grow from 100 million tons today to between 325 million to 450 million by 2020. Basically, the long-term demand fundamentals from the drybulk sector remains strong.

Slide 16, this slide show the deliveries so far in 2012 plus the order book for the various sectors going forward. Looking on a fleet wide basis, the drybulk fleet is predicted to grow in 2012 by approximately 12% with deliveries being offset by [gold] scrapping.

Hopefully, drybulk sector lies in the fact that deliveries slowdown dramatically in 2013, with shipyard capacity locked in for 13, low freight rate and lack of credit are very important factors in keeping the lid on further ordering and in their decisions driving scrapping.

Slide 17. It can easily be said that scrapping in 2012 will exceed the previous year and set a record. We're seeing wide spread scrapping across all the sectors as owners decide to take advantage of historically high scrap prices to mitigate their losses or invest in newer tonnage.

It is important to note that there exist further potential for scrapping as 14% of the total fleet is 20 years old or older. If freight rates stay in the doldrums if further 13% of the fleet is lies between the age of 15 years to 20 years and could be scrapped.

Slide 18. This slide shows crude oil flows over the last three years. The volume of oil moved has definitely increased in 2012 over the previous two years but critically most of this has moved to the Asia Pacific which isn’t as ton-mile intensive as movement to the west.

Shale oil and corn [belt] ethanol have become a major factor in the US and have a negative impact on ton-miles demand. Fortunately some of this has been mitigated by the lack or reduced exports from Libya or Syria.

Slide 19. [Anemic] demand growth and consistent growth in the feet supply are responsible for the current weak [freight] environment. This weakness exist despite a modest 2.3% increase in fleet supply during 2012 year-to-date, but the picture looks a little bit better for 2013 but the largest sizes will still see significant growth.

Slide 20, finally looking at tanker scrapping while scrapping continues it isn’t a major factor in the tanker sector as the fleet is relatively new and most of the single haul tonnage is no longer a factor. Scrapping is now driven by commercial consideration with ship owners deciding to scrap rather than spend more money on special service, sustain higher [OpEx] and bunker consumption and face significant [voyage] basis commission from customers. Unless we start to see a significant scrapping of the first generation double haul, the crude tanker sector remains challenged. I would now hand over to George to conclude the presentation.

George Economou

Thank you, Pankaj. As mentioned earlier, the drybulk shipping markets are in a dark spot facing multiple challenges. In the drybulk and tanker segments spot charter rates continue to hover at historic lows and as the values have dropped meticulously in the last two years. The time charter markets like liquidity and rates are very low in fact well below our breakeven levels. Our drybulk fleet still has got (inaudible) of 44% for the remainder of 2012 and 32% in 2013, however unless the trade market recovers the shipping segment will remain a drag on our results.

We also have significant capital expansions to finance our new building program which is something we are proactively managing in this challenging environment. There is a severe lack of liquidity from the traditional lenders as contract balance sheets to meet [budgetary] requirements or due to complete exit from the shipping sector.

Having said that, we believe we remain defensively position to weather the storm, will relevantly help the cash position and our holding (inaudible). We are very excited about the profits of ocean rig as we recently thanked as we dealt with three major oil companies for three of our DryShips including two of our new buildings. The [ramification] of dry ships into the other (inaudible) water sector is proved to be boon for the company with the holding in Ocean rig proving us with additional finance or flexibility to navigate through the dock ship market environment.

This is last slide of the presentation and we now open the floor to questions

Question-and-Answer Session

Operator

Thank you we will now begin the question and answer session (Operator Instructions). Your first questions comes from the line of Justin Yagerman from Deutsche Bank Please go ahead.

Justin Yagerman - Deutsche Bank

Couple of different questions the tone definitely sounds like it shifted here, you wanted to get a sense what changed in the overall environment in terms of the lending side, it sounds like things have got of lot tighter when did you notice that happening coincident with Commerce Bank having pulled out others that have pulled out of the lending market and any color on that end of the spectrum would be interesting here?

Ziad Nakhleh

Well let's start with Commerce Bank. I don’t think it is secret not only where they present in the last quarter but they were actually at the after marketing new projects. So when they come to after one and say we are out, but you know, there is a lot riding on their presence in the previous quarter and that’s a game changer because they were a huge bank, the top five traditional lenders in the industry. So that alone can change people sentiment. And other than that obviously we are real time, we talk to bankers on a day-to-day basis and we see things on a real time streaming basis.

Justin Yagerman - Deutsche Bank

Okay, in terms of how that affects your way that you looked at the S&P market. I mean does this signal our curtailment, or future asset purchases for the time being given the more uncertain lending environment? How do you think about that relative to the program that you’ve been on for the last several quarters?

George Economou

Well, what we’re obviously doing here is we actively managing our book and, there are various things you can do. One is that sale existing ships, which by the fact that the market is low or use our CapEx buying not taking a delivery of the new buildings or selling new buildings that are coming on. So this is what I think we will decide upon the next month or a couple of months. So you will have more news on the next quarter’s call.

So this is what we’re looking at because it's also the negative cash flow that you’re being produced because you can operate at an operating expense. Your revenue matches the operating expense but then you have bank repayments. So that’s what we’re considering on top of managing the new building CapEx that we have committed to.

Justin Yagerman - Deutsche Bank

Can you just give us some color on the rig facility? What are you guys going to be paying on that under the new agreement?

George Economou

Under the Ocean rig facility we are just undertaking now, I mean we expect ideally to pay south of [360] basis points in that facility.

Justin Yagerman - Deutsche Bank

Okay. And then on the tanker side there's been a lot of noise in the quarter about whether or not you guys are still in the high [mark] pool, can you talk to how your tankers are currently being employed and how you think that’s going to play out in the future?

George Economou

Yes, what we have done I think it’s quite out there, we have set a 1.5 year field where we are slowly taking the tankers out of (inaudible) and that started I believe in if I am not mistaken sometime in April, it will be over until Q1, Q2 ‘13 to give them the ability to replace vessels where they now, so this is what we are actively doing so it’s spread over 1.5 year.

Justin Yagerman - Deutsche Bank

Are those going into other pools or are they going to be just operated on a spot basis?

George Economou

No they are going to be operated from a different chartering office spot or periods right now the market is weak. So we will operate all of the spot until the markets be captured it’s not a time to enter into long-term contracts in our view.

Justin Yagerman - Deutsche Bank

Okay. And the last question with the tone shifted very negative it sounds like on drybulk and tankers you guys had been more optimistic on asset purchases the ability to get financing obviously the offshore side of the equation continues to be a very bright spot for the company, how do you think about DryShips shares in terms of their attractive miss in the market and to you I guess my biggest question would be why not buyback as much as this company as possible while you are experiencing the weakness in two of your sectors and can get the better sector at a discount how do you think about that relative to your own shares?

Ziad Nakhleh

Well we just talked about the new build CapEx program and the cash drain from the company because of where the market is at, so the question of buying back stock for DryShips say that will be a tough call at this stage to grow out and but when you have all that other stock outstanding.

George Economou

I think where we have to address the negative cash flow or the drive about more so tanker for the time being and then consider buying back stock, it is more immediate to look at the negative cash flow we are going to be experiencing from the rate increase and CapEx we have undertaken.

Operator

Thank you. Our next questions come from Michael Webber of Wells Fargo. Please go ahead.

Michael Webber - Wells Fargo

Before I am going to read some stuff that you guys just talked about on the overhead call but considering how important it is for DryShips as probably we are going over it again, same cash with regards to the backlog additions in obviously [ROI] which are pretty huge deal, can you give us a sense in terms of the timeline of when they can kind of transition from the ROI stage to really have actual contract and then may be some of the geographical area where you think they are going be operating and try to get sense in terms of what you cost coming?

Ziad Nakhleh

In terms of the timeline, I think it will take anywhere from, I think the next couple of months we should be able to [form] them up and in terms of where that is quite sensitive to customer and could double the name because of (inaudible). All I can say is Atlantic basin that’s all I can say.

Michael Webber - Wells Fargo

Okay now that’s helpful. Sticking with ORIG, on the quarter, going through the numbers, you know, obviously OpEx came in well above expectations and it is kind of running to the footnotes. They seem like there is 20.7 million in expenses that were covered by insurance. There are lot of expenses in there that seem like they were non recurring. I am just curious as to why those weren’t broken out and whether that was an accounting issue or why they weren’t stripped out of your ongoing number?

George Economou

I mean we shipped them out on the side. We can do both, but we thought it was more prudent to ship them out on the presentation and it's been exactly what we’re doing.

Michael Webber - Wells Fargo

But not on the EPS number that comes out?

Ziad Nakhleh

No, there are two different things over here, right? I mean one thing is to try and sure what an adjusted EPS is. The other thing is to try and give people guidance on what is recurring cash OpEx going forward. Especially in this quarter we had the issue with the Corcovado where she was going acceptance I think for 45 days, 35 days on downtime.

In that downtime, we incurred expenses to take service personnel on both the rig. There were extra service personnel, extra or personnel, helicopter flights back and forth. So that’s why we’re trying to show that under the current business, cash OpEx and what it looks like going forward.

George Economou

And Michael, it's both things, it is not only the OpEx. It's also the lost revenue. So have can you ship that out as well. So at the end of the day, hopefully next quarter we’ll have everything in line. The revenue will be there, the cost will be more constrained and then we will see.

Michael Webber - Wells Fargo

Right and well we can follow up offline about that as well. You know, kind of moving back against to the backlog and at the Analyst Day, earlier in the summer, you guys kind of tied, you know, chartering out a number of your drill ships and syndicating your loans, kind of getting those behind you before you can start talking about the drill shop options.

I know it's very early in the process to get (inaudible) deal a lot but how does that lead you guys thinking about the $0.03 on the options you guys have at Ocean Rig.

George Economou

Well we knew do as we say. So we think that we are going to have the three LOIs there into contracts. Soon one of them may be as early as next week. Once we do that, then we feel more comfortable with the financing which will take another month or maximum two. Then we will start exercising options.

I mean we will obviously guide you, but this is the intention. The intention hasn’t changed and we are moving towards what we saw the environment will be. So we are right on track in performing according to the expectations and the guidance we have given in the calls.

Michael Webber - Wells Fargo

Right, so you are still thinking kind of late Q3, early Q4 or kind of at the earliest and that’s kind of when you start thinking about it.

George Economou

Yeah I think on the next call, you should have some news on that yeah.

Michael Webber - Wells Fargo

Okay. One more from me and I will turn it over, as Justin touched on earlier the tone definitely seem to have changed from a financing perspective and you guys talked about it, Ziad in your prepared remarks you mentioned having second thoughts around some of these. You guys bought a bunch of dry bulk assets from Ocean Freight at a pretty healthy premium.

Are those assets you would think about turning around and selling and or not taking delivery of. Specifically there are VLOCs that don’t have charters that haven’t delivered yet. How should we think about that acquisition within the context that you guys do the framework you guys just do out there in terms of potentially walking away from some of these commitments.

Ziad Nakhleh

Mike, this is very early stage. We just wanted to highlight that same chart, this shouldn’t be really (inaudible) because the freight market has been at these kind of levels for a while as we have seen asset prices come off quite a bit in the last couple of year, that basically halved leave alone from 2008 levels.

And so we just wanted to make sure that everyone understands that this is where the market is at start and it depends on how the market progresses going forward. Of course if there is a turnaround in the market in the fourth quarter, things start to look very different.

But I think it is incumbent upon us to make sure that investors and the analyst realize the situation is not as rosy as it used to be. I mean other companies are either in bankruptcy protection or are being liquidated. We are very fortunate that we are not in any thing like that situation, but we just wanted to highlight that things are not easy as they used to be.

George Economou

And just to talk about the ocean fare I mean you know the three deal of (inaudible) finance with China Development Bank and plus the two deals that you are talking about are pretty much the CapEx is 2013. So it is not an imminent thing we are talking about.

Operator

Thank you your next question comes from Natasha Boyden from Global Hunter.

Natasha Boyden - Global Hunter

I think you addressed a lot of the questions that we had, but one of the questions we do have is the ships that are coming off charter over the next year or so particularly on your drive-off side. You know we have seen other owners fixing down here at these rates. We have seen other owners who have chosen to operate that that was in the slow market until the market improved. Which way are you kind of leaning when those ships do come off charter?

George Economou

We have seen in the last of the years, some cyclicality within any general trend whether it is up or down. I think you know this is the lowest point in the market to go out and charter a (inaudible) at $9000 a day where Panamax at eight or nine per year. We don’t think it’s a wise move. So, we’ll play sport until markets do change. We think that out in Q4 will be a better market.

So we have decided then whether we will take a one-year charge. We will not go out and fix two three charters at a time, but I think that’s what our outlook is as of today, playing a sport and then once you get in to October or then above them, you know, we don’t have a crystal ball to try and capitalize on putting some ships away for one year.

Natasha Boyden - Global Hunter

And then just turning over to the tanker segment. You know, you've talked in the past about a spin off of this unit at some point. I am guessing at this point given what the market is if that's not feasible, but do you sort of have a sort of time horizon in your site. I mean is it the market will recover in two years from now and that’s a good time to do it or you know, what is your kind of thinking there?

George Economou

We will have to take delivery of all the new buildings before we start thinking about implementing it. It eventually gets we will do it, but we do have to take delivery of all the units. I think the markets are going to be dull on the dry bulk and the tanker for this year and next.

So I think we have to live with that and try and work our strategy around the assumption that it is going to be dull markets for the remaining one and half year.

Natasha Boyden - Global Hunter

Right, and then just turning to your ownership in ORIG, I think it is 55% right now, if I am correct?

George Economou

Yes.

Natasha Boyden - Global Hunter

You know, where do you see yourself, say yes or no, do you still think you will be 55% majority owner or if the price is right, do you feel yourself for now for more of that?

George Economou

Well, you said we will review it, but we think it's much too low. I mean you know, we talked about valuation of $25 to $30. We don’t seem to be getting there anytime soon. I think once we have fixed I think people will get comfortable in and the value should be picking up and then we will consider them, but it to reduce the holding of DryShips into Ocean Rig.

Natasha Boyden - Global Hunter

Would that be down below because to the central, what do you want to say about that?

George Economou

It doesn’t matter. I mean the 50% is psychological, it is not economic or anything. We don’t have the issues, no.

Natasha Boyden - Global Hunter

Then just lastly, just a quick question what was the legal settlement gain from?

George Economou

What legal settlement?

Natasha Boyden - Global Hunter

You had a 7.9 million gain from legal settlement.

George Economou

No we didn’t have 7.9 million. That’s actually -- that was from -- there was no legal settlements, what are you referring to, what slide?

Natasha Boyden - Global Hunter

If you look on the quarterly results, you have a line item that says 7.9 million from a legal settlement.

George Economou

That was from the previous quarter and that was from the Ocean Rig (inaudible) number case. That was a Q1 event.

Natasha Boyden - Global Hunter

That was a Q1 event?

George Economou

Yeah, this is an old case with Ocean Rig before we bought it over and there was an outstanding legal case that we settled.

Ziad Nakhleh

Yeah it’s a Q1 event.

Operator

Thank you. Our next question comes from Brandon Oglenski from Barclays. Please go ahead.

Brandon Oglenski - Barclays

I was hoping that you could talk a little bit more about the ability to restructure your new building schedules and what recourse the ship owners could potentially have if you decided to walk away from a few of those vessels?

George Economou

We have done this in the past, so this is not something which is new to us. We had a $2 billion CapEx outstanding in 2009 that we restructured. So basically we have already made certain statements. We look at what the market price is and but that is in case we want to walk away from the shipyards.

There are various way to restructure that arrangement that we have the contract that we have with the shipyards. We could sell it to a third party and if you just link all the shipyard there will be difference in the price. Enough equity has gone into those contracts already that we can basically walk away more or less at today's market price.

Brandon Oglenski - Barclays

So not a lot of recourse then beyond that?

George Economou

No you shouldn’t be worried about recourse against dry session, that we will find a way that we will involve leaving the rig that we have put in there. We are not worried about recourse. We will break it out. We are friendly with people we do business with.

Brandon Oglenski - Barclays

Okay and the majority of those vessels have already started construction and there is not a way to differ until later year?

George Economou

No the problem is that you cannot because even if you haven’t started construction yards all their equipment. You can delay a bit, but it is not easy to delay it for years.

Brandon Oglenski - Barclays

And on the China Development Bank facility that you mentioned, how should we be thinking about the LTV on that and what range of rates are we expecting on that facility as well?

George Economou

On the VLOCs China Development Bank, I mean we are talking about the usual rates on the 25% VMC as the value to loan. That is the required ratio on this facility.

Brandon Oglenski - Barclays

Okay is that secured or is that on LOI right now?

George Economou

No that is secured. That’s the norm (inaudible).

Brandon Oglenski - Barclays

And then Ziad, I think you mentioned about collateral requirements on some of the waivers that you're seeking?

Ziad Nakhleh

Okay, so we're shifting the topic now, okay fine. So we talked about this, we have technical breach of some of our drybulk loans and we have total shortfalls in our VMC requirements of approximately $150 million. So we talked about a couple of facilities and you know we’ll work it out with the banks at end of day to provide them the required collateral, whether in the form of cash or other securities i.e. shares.

Operator

Thank you. The next question comes from Fotis Giannakoulis from Morgan Stanley. Please go ahead.

Fotis Giannakoulis - Morgan Stanley

I would like to ask about your outlook mainly about the tanker business. You talked a lot about drybulk; you don’t seem to be very optimistic. Can you give us your outlook and what do you think it can be the driver to move this market higher?

George Economou

Yeah. The good thing in the tanker market is that your revenues exceed OpEx. There is some margins to go towards interest and/or principle repayment which is not the case in the drybulk. So we mentioned the drybulk because we have the majority of assets in there. It’s a business we started in going back in 2005 and we believe that the revenue versus OpEx, there is no margin there.

The tankers, I think, you know, its not easy to predict; obviously, the growth in demand over the years has been anywhere between 0% to 2%, probably then average 1% may be 1.5% that should continue and not easy to predict when the market is going to turn, but it’s going to be similar to the drybulk I would think. Some people talk of three, four years I think it’s going to be shorter when the market picks up; you will see and you are seeing two, three year market developing between the older and the younger and you do have some positive margin between revenue and OpEx.

Fotis Giannakoulis - Morgan Stanley

So you mentioned earlier about potentially deferring or even getting either some of the newbuildings; I would assume that you are referring only for the drybulk newbuilding vessels or there can be a potential of selling some of the tanker vessels?

George Economou

Well, mostly we think of the drybulk there is only five that remain to be received from the tankers, so we will mostly think of the drybulk.

Fotis Giannakoulis - Morgan Stanley

So in terms of a long-term growth plan, what is the your view about growing the company; obviously, you have a very big stake on Ocean Rig which is quite profitable, but I understand that right now you are on a contracting mode mainly on the drybulk side?

George Economou

I think your assessment is correct and when the time comes to reinvest in the drybulk and/or the tanker then what the view point would be when you think that the future two, three year revenue on either sector is going to outweigh the returns that you are going to get from the offshore. So it has become by the time we think if that happens if the offshore is peaking and then you can take it fine and let me take some money off the table and reinvest in something that has a gain in future for growth in terms of asset and rates. But as you know we are likely [not] to be in the three sectors so you can move I mean right now we don’t want to reduce our stake in Ocean Rig unless we have to and we are not eager to invest more on the drybulk and tankers I mean there is plenty of time to wait for that.

Fotis Giannakoulis - Morgan Stanley

And my last question is, was there any particular event that has changed your outlook in order that your order some drybulk vessels earlier this year is there anything else except of the deterioration of the denouncing market that has made you sound so negative on the drybulk side?

George Economou

Well it’s a combination of everything, it relates to finance little for us, we do find that is just more expensive. Scrapping is not as high as we thought; cancellations today are not that much in slippage. So we now reduce (inaudible) we thought there would be more scrapping and may be you know better finance. So it is everything that’s adding up towards (inaudible).

Operator

Our next question comes from the line of Martin Korsvold from Pareto. Please go ahead.

Martin Korsvold - Pareto

I am wondering if you can give us some idea lets say that’s probably [full] by another 10%. How much more and cash collateral do you have to put up in addition to the 150 and that you already reached as per your current agreements?

George Economou

I mean I don’t have that number with me right now, but lets wait for next quarter but you come up, come down, we will give you an updated amount. I mean I just don’t have this calculation.

Martin Korsvold - Pareto

Okay, maybe to ask in another way, how much did [volumes] decline, your evaluations from the second quarter and is it right to assume that it will be an accelerating effective value just decline further?

Ziad Nakhleh

I mean the values I would estimate decline by 5% from the first quarter, it would be between 5% and 10% in the first quarter but don’t forget that you know, our loans are amortizing very aggressively as well. So even with the shortfall in prices, we should kind of hold that accumulated deficit in check just because our loans are amortizing in the same time and at some point in time, you know, prices would just bottom out and those who keep amortizing, we get back into compliance.

Martin Korsvold - Pareto

Okay, and one question also regarding your Ocean Rig stake, am I right to assume that you would prefer to leverage on that position rather than sell further share, and if so, how much debt do you feel you can get in the market rather that position today?

Pankaj Khanna

Well, I don't think we said that we would like to leverage that position. All we’re saying is that if required, we could potentially use the shares as collateral. That’s all we have said.

Martin Korsvold - Pareto

And could you give us some, or could you give us some idea how much debt you could get from that position to date if you were to put some leverage on it?

Ziad Nakhleh

No, we haven't explored that. All we’re saying is that we have VMC technical bridges and we could use in the Ocean Rig shares as collateral if required to rectify that bridge. That’s all.

George Economou

So we are just saying these are options.

Martin Korsvold - Pareto

Okay, last question I just see that your G&A on the shipping side was very low this quarter can we expect it to stay at such low level going forward?

George Economou

The G&A on the shipping side is actually two components, it’s the cash [G&A] and it’s also the non-cash (inaudible) I think bearing any unforeseen event I think you should expect the same run rate for a special to next couple of quarters.

Operator

(Operator Instructions) Your next question comes from Randy Loffman from Imperial Capital. Please go ahead.

Randy Loffman - Imperial Capital

Thanks for taking my questions. One point of clarification looking at the two drybulk new builds cape size number one and cape size number two, last quarter you indicated that you had a loan agreement with HSH Nordbank nothing at this quarter, can you just update us on that?

George Economou

Good question, last quarter we actually signed a loan agreement with HSH on the basis of firm commitment higher commitment from HSH and let’s say a softer commitment from another bank that we are pretty sure was going to come in which is 50-50 and subsequent to that the other bank let’s call it bank X retreated or just walked away from the deal, so that’s why we haven’t put it back on this slide and we are working as we speak right now to find a replacement bank for the other 50% of this facility.

Randy Loffman - Imperial Capital

So you still have 50% (inaudible) not the full.

George Economou

You know 50% is the highest commitment from HSH.

Randy Loffman - Imperial Capital

Secondly wanted to just in general with, you talked about the waivers for some of the technical preachers in some of these loans. So what about the amortization requirements, we've seen some of your competitors and some of the other owners get deferrals on amortization. You have reasonably minimal amortization requirements over the next couple of years, but it is still a good amount of liquidity. I'm wondering if there is any talks for deferral of the amortization and banks kind of giving you some relief on the amortization front?

George Economou

We can always do that. We have a good relation with all the banks I believe, we can defer amortization, but that will result in increased spreads. So we are always valuing the cost of the increased spread versus the negative cash loss and this is – other people don’t have this choice.

We do have it and so far we've chosen to still stay with the low spreads that we have. Because the spread increase will be substantial considering where we are – whether the average spreads that we are paying now which will probably below one in the quarter or something like that.

Randy Loffman - Imperial Capital

And then finally just wanted to get your updated thoughts on the convertible bonds that are coming due in 2014 and may be if you could talk about the various options you have to address those bonds?

George Economou

Well we have talked about this in the past. There is nothing changed. We have all the options that are on the table. We can extend the maturity; we can exchange it for a different security. We can try and do buybacks and so on. We have to use it.

Ziad Nakhleh

But we still have time. So we are not in a hurry to find a solution there.

Operator

Thank you. Your next question comes from David Epstein from CRT Capital. Please go ahead.

David Epstein - CRT Capital

I also have a question on the convertible. You guys talked a little bit earlier about whether you'd spin off or sell Ocean Rig shares. I think I missed part of what you said, but I also wanted to drill down a little bit more deeply because it is such an important topic.

You know, obviously a lot of convertible investors have been not so much worried that you'd sell Ocean Rig shares because that brings cash in to the corporate coffers, but that you'd spin off some Ocean Rig shares to DryShips shareholder because then the asset value isn’t there to support the convertibles.

I am sure convertible investors appreciate that you guys haven't spun much off thus far. Obviously, the low Ocean Rig shares price might dissuade you guys from selling shares, but can I get your thought a little bit about how the low Ocean Rig share price affects your thinking as far as spinning of the shares and sort of how important do you feel that it's more important just to keep those shares owned centrally to support the convertible debt and your other debt.

Ziad Nakhleh

I think somebody else on the call other than us mentioned something about spin off. We have not talked about a spin off or anything like that. You know, we've said that we could use the Ocean Rig shares as collateral. Of course, we have the option to sell Ocean Rig shares, but spin off is not something that we have discussed.

David Epstein - CRT Capital

And it's still not something that you have on the drawing board and any significant size.

Ziad Nakhleh

As I said it is not something that we are going to discuss.

Operator

Thank you. (Operator Instructions) Okay, there are no further questions at this time, please continue.

George Economou

Thanks for listening in guys. We will talk to you next quarter.

Operator

Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.

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