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Executives

Paul Lampoutis - Vice President of Capital Link, Investor Relations

George Economou - Chairman and Chief Executive Officer

Analysts

Jay Goodgal - Castalia Advisers

Douglas Mavrinac - Jefferies & Co.

Gregory Lewis - Credit Suisse

Natasha Boyden - Cantor Fitzgerald

Omar Nokta - Dahlman Rose

Wayne Atwell - Pontis Capital Management

Jacob Miller - Aim Capital

Frazer Parker - Praxient Capital

DryShips Inc. (DRYS) Q2 2008 Earnings Call August 22, 2008 8:30 AM ET

Operator

Welcome to the DryShips Inc. conference call on the second quarter and six months 2008 financial results. We have with us Mr. George Economou, Chairman and Chief Executive Officer of the company. (Operator Instructions) We now pass the floor to Paul Lampoutis, Vice President of Capital Link, Investor Relations, advisors DryShips.

Paul Lampoutis

This conference call contains certain forward-looking statements within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties which may affect the company’s business prospects and results of operation. Such risks are more fully discussed in the company’s filings with the Securities and Exchange Commission. I will now pause for a second and allow you to read the safe harbor statement.

Mr. George Economou, Chairman and CEO of DryShips will be representing the company today. Following this presentation we will open the call to questions (Operator Instructions) I must advise you that this call is being recorded today Friday, August 22 2008. On that note, I will hand on the presentation to Mr. Economou.

George Economou

We are on Slide 3. We are pleased to report another quarter with solid financial returns. Included in the first quarter results, the capital gain and the sale of three vessels of $135.8 million and a non-cash gain of $12.2 million associated with the valuation of interest rate swaps; excluding these items, net income would amount to $151.8 million or $3.60 per share.

Slide 4, as you know analysts typically exclude gain from vessel sales; however, we have completely shown in 2006 that we can complement our operating earnings with well timed sales in sales activity. In 2006 and 2007, selling prices activity contributed 15% and 28% respectively of total earnings, while in 2008 and 2009 we have no sales to date.

We expect S&P gains to contribute another 79.5% and 15.6% of the earnings projected by analysts. Going forward we will continue to aggressively pursue arbitrage opportunities in the second hand market in an effort to actively manage the age and quality of our fleet while contributing to the total earnings of DryShips.

Slide 5, as of June 30, 2008 DryShip’s net debit utilization ratio adjusted for present market value of the fleet stood at approximately 30% and at the same time DryShip’s cash balance was $402 million. This not only provides the company with increased stability to continue to grow the strategy but simply allows DryShip to take advantage of business opportunities as they arise from a position of strength.

Slide 6, we have recently fixed four vessels, one Capesize and three Panamax’s on long term charges. With the recent charges we have managed to secure record consolidated rates that indicate the strength of the current market. This will provide a layer of secured avenue and will cover our fixed cost in the foreseeable future while still maintaining significant operating leverage. As you can see from this slide, the finished average on the total voyage days for the next four years i.e., until 2011 is about 50% leaving also significant upside potential.

Slide 7, Ocean Rig provides necessary (Inaudible) in order for us to tackle our strategy. Ocean Rig is a pure ultra deep water rig company with the operational expertise and a proven track record in the ultra deep water drilling segment. In addition Ocean Rig has a high level of contracted cash flow and no significant capital expenses going forward. We believe that Ocean Rig’s big management bench, it’s asset and counted portfolio as well as its operational expertise are a strategic value to DryShip and warrant the price that was offered to it’s shareholders.

Slide 8, this slide provides the employment stages of Ocean Rig throughout the deep water rig. Ocean rig has already secured a concept for the Eirik Raude. It will commence volume completely with started contracts in September 2008 at the rate of $607,000 per day for three years which are now for two years. At the time of the announcement in March 2008 which is a world record and the highest rate ever paid for an Ocean Rig water outlet; however one month later it will announce the fore fixtures of rates even higher than this.

Ocean Rig makes available the Leiv Eiriksson which becomes open in Q3 2009. We expect the output project value of day rate to continue given that the Leiv Eiriksson is only one of the very few available rigs up to the end of 2009.

Slide 9, I would now move on to discuss the most recent market developments. Taking a look at the Baltic Dry Index or BDI we can see from the dark blue lines representing 2008 that the market has reached historic highs earlier this year. The seasonal slowdown we are witnessing these days is expected to reverse as China comes back from the Olympics and demand picks up again. We expect the tight supply and demand balance and the continued strong input of iron ore and coal into Southeast Asia and particularly China to continue for the balance of the year.

Slide 10, we started with at fleet of six batches, with an average age 19 years and in a span of 3.5 years, we have created a company that now owns 49 vessels with an average age of 7.4 years, making DryShip the largest publicly traded liable company in the US. Since inception we have achieved an ROE of 116% and an ROC of 42%. We remain committed and continue to deliver to stoke holder value. Thank you for listening.

We would now open the floor to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Doug Mavrinac from Jefferies & Co.

Douglas Mavrinac - Jefferies & Co.

I just have a few questions for you and actually the first couple we are going to relate to the Ocean Rig transaction because it looks like you dry bulk shipping business actually did better than we were thinking, so everything looks great there. The question that I have, relate to a couple of line items on the income statement, one that’s titled minority interest charge and the other equity and loss of investees; can you walk through what each of those relate to?

George Economou

Okay, the minority charges that we see here relates rather to the fact that we had acquired 98.5% instead of the 100%.

Douglas Mavrinac - Jefferies & Co.

Okay and so I would imagine that now that you own 100% of Ocean Rig, that should probably not be something that we should expect to see going forward, correct?

George Economou

That’s correct, that’s correct.

Douglas Mavrinac - Jefferies & Co.

And is that the same case for the equity and loss of investees?

George Economou

That’s correct.

Douglas Mavrinac - Jefferies & Co.

Okay, and then can you talk about Ocean Rig’s business itself. I mean since you guys are a majority stake holder as of May, it looks like utilization was fantastic, rates were good, how was that business during the first half of the quarter. I am just not has familiar with the first half since you guys didn’t own the majority of it then.

George Economou

You mean the first half of…

Douglas Mavrinac - Jefferies & Co.

The second quarter.

George Economou

The utilization was probably between 90% to 95% and the rate I think was not really above 500; if I remember correctly $532,000 loads per day.

Douglas Mavrinac - Jefferies & Co.

Okay, it’s a very good quarter that without these charges we could probably expect to see it going forward.

George Economou

That’s correct.

Douglas Mavrinac - Jefferies & Co.

Okay perfect and then second question relates to the stock compensation; can you provide any colors for this amortization schedule. It appears to be like a one year amortization schedule, is that correct?

George Economou

No, no it’s eight quarters starting from March -- from second quarter rather of this year.

Douglas Mavrinac - Jefferies & Co.

Okay, and going forward I mean it’s not cash and nature for us, right?

George Economou

Right.

Douglas Mavrinac - Jefferies & Co.

Okay, and then second should the amortization over the next seven quarters be somewhat similar to what we saw during the second quarter?

George Economou

Yes, it’s about 9.4 million per quarter.

Douglas Mavrinac - Jefferies & Co.

Okay great and then the final question related to the ultra-deepwater spin off that you guys have spoken off in the past, I just have two questions on that; first, can you provide an updated timeline if there is one compared to the April timeline that you guys spoke of a few months ago and then the second part of that is can you talk about what you perceive to be the current market value of the two ultra deepwater dealerships that Cardiff now owns or that Cardiff is constructing?

George Economou

Yes, we can drive the two as soon as we can and we’ll do better than we had promised. This is 12 months from April. We are obviously going to have to deal with the auditors and the accountants and the lawyers and that will probably delay the process but as far as management is concerned it is our desire to do it as fast as we can.

Douglas Mavrinac - Jefferies & Co.

Okay, so maybe year end, it’s even impossible before then?

George Economou

It depends on the accountants and the others. We’d like to do it as fast as we can.

Douglas Mavrinac - Jefferies & Co.

Okay, great and then just a final question related to the -- since the DryShips order in those couple of ultra deepwater drilled ships in some of the yards petrol bus obviously came in and filled up some of the yards with additional orders; is there any estimated market value or can you provide what you view to be the estimated market value, the two ultra deepwater drilled ships that Cardiff is constructing?

George Economou

Yes; if you would order one a day, the earliest delivery you can get would be Q1, possibly Q2 2012; the price would be about $130 million, $140 million up on what Cardiff had ordered. If we were to go out in the market, we were required to sell the drill ships, the private ones we could get in excess of $1 billion.

Operator

Your next question comes from Greg Lewis from Credit Suisse.

Gregory Lewis - Credit Suisse

Just to follow up on the Ocean Rig status, have you been in the process of circulating one of the new drilled ships for long term employment?

George Economou

We didn’t exactly circulate it, the market is very small so you respond to specific requests and just to remind you on the last round the Eirik Raude, that was only fixed in February for delivery in August; so that was six months before she was due to finish the prior employment. Now this prior employment will end somewhere between Q3 and Q4 ‘09 on the Leiv Eiriksson, so the market, you don’t want to guess the market you want to read the market because there is only maybe another one that’s available, so you can expect the rate to be high; so we are not in a rush to fix.

Gregory Lewis - Credit Suisse

Okay, great and then just also another follow up; what is sort of the time for bringing in potentially the two privately held drill ships that are owned by Cardiff; should we expect that before or after the spin off?

George Economou

I think we’ll plan it either slightly before or at the same time depending on what is the easies to make the process shorter.

Gregory Lewis - Credit Suisse

Okay and have you thought about what sort of fee that’s going to be paid to Cardiff for those vessels?

George Economou

No we haven’t.

Gregory Lewis - Credit Suisse

Okay great and then just sort of shifting gears; the four Panamax or the four vessels that were fixed on long term contracts that you alluded to in the presentation, which four vessels were those?

George Economou

They were the last of the fleet. One second let me go through the list.

Gregory Lewis - Credit Suisse

And actually while your looking that, I’m sorry you might have misunderstood my questions, I was referring into the transfer fee, whether typically for drybulk vessels it’s about 1% and for off water it’s typically around I think 25 to 30 basis points and that was the fee I was actually talking about.

George Economou

Okay, it was 1%, that’s correct.

Gregory Lewis - Credit Suisse

Okay, so it’s going to be 1% fee on top of the purchase price?

George Economou

Correct.

Gregory Lewis - Credit Suisse

Okay and then actually just one other thing; we are looking at the quarter for the drill rig segment, it looked like there were 90 calendar days and I’m assuming that’s because you only owned vessels for only half of the quarter?

George Economou

That’s it.

Gregory Lewis - Credit Suisse

Okay great and so then for the 45 days that you had position, with that income from those 45 days coming in, where did that show up on the balance sheet. I mean in the income statement?

George Economou

I think you can see it in the short comment we have in the press release. You’re deriving it from the drain rate.

Gregory Lewis - Credit Suisse

No, I mean -- my question is that a full quarter revenue?

George Economou

No this is 45 days.

Gregory Lewis - Credit Suisse

Okay, but for your ownership interest in Ocean Rig for the 45 days prior to you taking full ownership of the company, was there any income that we received from that for those first 45 days?

George Economou

Yes and that’s reflected in the industry fee, but it’s very minor, it’s negligible; somewhere around 6 something.

Operator

Your next question comes from Natasha Boyden from Cantor Fitzgerald.

Natasha Boyden - Cantor Fitzgerald

I just had a follow up again on Ocean Rig. Also for the spin off structure you’re contemplating and will DryShips retain some kind of ownership of the new company?

George Economou

Yes, the idea is to spin it off like a dividend, so that you would give the existing shareholders a dividend, new shares and a new form of dividend. So DryShip is not retaining that and (Inaudible) so it’s going to be a one time dividend.

Natasha Boyden - Cantor Fitzgerald

Okay, so the entire company will be a stand alone company and DryShip will have no ownership whatsoever?

George Economou

That’s the intention.

Natasha Boyden - Cantor Fitzgerald

Okay and do you intent to maintain some kind of ownership; I guess you’ll be able to deal through the shares that you owned, is that correct?

George Economou

That it’s correct.

Natasha Boyden - Cantor Fitzgerald

Okay, great that’s helpful. What are your remaining capital expenditure requirements for 2008 and 2009 for DryShip, do you have any there?

George Economou

It’s about; I think if I remember off hand it’s got to be around $15 million per year.

Natasha Boyden - Cantor Fitzgerald

I’m sorry, was that 15 or 50?

George Economou

$15 million.

Natasha Boyden - Cantor Fitzgerald

And now in terms of your new credit facilities are you full funded?

George Economou

You mean in terms of which facility?

Natasha Boyden - Cantor Fitzgerald

Well all of the new facilities that you have for the spin up for the Ocean Rig. I think you went through all of the facility at Deutsche Bank, West Bank, North, all of those.

George Economou

The two drill ships owned by DryShips are fully funded yes.

Natasha Boyden - Cantor Fitzgerald

And then just going on to the G&A cost, that thing you had was about almost $20 million this quarter. Were there any one time costs in there related to Ocean Rig, I’m assuming they were, because they were a lot higher than we are anticipating. What can we expect for a run rate going forward?

George Economou

Yes, the ultimate is that we are facing this exactly is because of a stage of control. Going forward I mean the overhead for Ocean it has been running around $25 million per year.

Natasha Boyden - Cantor Fitzgerald

$25 million per year?

George Economou

Right.

Natasha Boyden - Cantor Fitzgerald

Okay great and then lastly you still have some I think several mid ninety or so vessels in the DryShips fleet. Can we expect to see you sell those and purchase more modern vessels as we’ve been doing and if you could just give an idea of how the S&P market looks right now, especially with the credit crunch going on, are you seeing any kind of distress sales out there? Actually just give us some kind of idea of what you are seeing?

George Economou

We only have two vessels we want the sell, because we’ve sold most of the mid ninety vessels that has been reported and you can also have a quick look at it presently, there is only two remaining; one is in between 1984 and the other one 1996. Those are the only ones there and we’re still seeing quite a lot of interest and we are just saying that we’re not seeing anything.

Operator

Your next question comes from Omar Nokta from Dahlman Rose.

Omar Nokta - Dahlman Rose

Just following up again back to Ocean Rig, we know in the past that there were some operational issues with some downtime; how do you see the second half looking; should we expect full utilization for those two rigs?

George Economou

Well in the offshore sector the utilization expected, the full utilization is about 95%, so if you can get that, you appear to be doing great. Obviously the company has had problems and we are trying to address them and see why that we had these problems but we expect going forward the utilizations will be better than it has been in the last twelve months.

Omar Nokta - Dahlman Rose

Okay and then on some of the other projects that you are bidding on with those two rigs obviously they are harsh environment capable; are you still targeting to be in those regions or are you looking for more?

George Economou

Yes.

Omar Nokta - Dahlman Rose

Okay so you are sticking with harsh environment?

George Economou

Not sticking but we have the advantage, we have the options of offering for harsh environments.

Omar Nokta - Dahlman Rose

I’m just figuring that may be because of the fact that working in a harsh environment might not be that attractive compared to going into just regular the nine waters?

George Economou

You are right because your expense is higher and your risk is higher so you’re supposed to be getting more money for working in that environment and I think in time it doesn’t happen; it’s not on the next rig.

Omar Nokta - Dahlman Rose

Okay and then can you just clarify again what exactly that seven or eight million dollar equity and loss in the fees was? Did Ocean Rig operate at a loss during the second quarter?

George Economou

That was basically because of the fact that we had the 98.5% and it was the first half actually of the quarter.

Omar Nokta - Dahlman Rose

Okay so was the first half at a loss?

George Economou

No the first half was not at a loss, to tell you the fact there was a gain in the first quarter and then we had to deduct from the second quarter and that is shown as a loss, so not that item anyway.

Omar Nokta - Dahlman Rose

Okay and then just on your fleet coverage, you’re up to now 54%, 55 % for next year.

George Economou

Yes and about 50% going forward.

Omar Nokta - Dahlman Rose

And 50% going forward; is that a size you want to take it or is there a certain target you are looking to?

George Economou

No with the size increases as we said we are happy to increase it as much as we can. Obviously we are enjoying the spot market as well but with this slightly increase.

Omar Nokta - Dahlman Rose

Okay and then just with lightly over the path. I guess last week we saw a huge run up in freight rates, this week it comes back a little bit; how do you see time charter advance, say right now versus what it was last week and say since the beginning of August?

George Economou

Well usually the time charter opportunity is when the market is rising. Now for the last months I would say the market has been moving downwards and sideways and it’s not easy to find time charter employment and a lot of the time charter employment that we see reported is the time charter employment that has been fixed one or two months ago and just hit the news, so it’s not exactly the abandoned time charter employment out there; there isn’t much.

Operator

Your next question comes from the line of Wayne Atwell from Pontis Capital Management.

Wayne Atwell - Pontis Capital Management

Could you give us a review of your thoughts in the market going forward? Obviously at some point a lot of new vessels are going to be on the market but a number of the vessels that are ordered from yards haven’t even been completed yet; can you give us sort of your thoughts over the next several years in terms of supply demand for ships in the market and likely slippage in terms of construction and slippage in terms of yard construction?

George Economou

Yes it’s hard to give you a view on numbers but there will be a slippage for various reasons. A lot of yards, especially in China and to a small extent in Korea will not be able to build the ships for many reasons; one, is they are not be able to be funded, in the sense so they would not be able to offer recent guarantees, without the recent guarantees the owners will not be able to protect with the ordinary ships.

The second situation is where owners will not be able to find financing, so a lot of complex will be delayed, will be switched to other vessels, yards once built vessels where they have a better margin, the bulk orders they have the least margin. The general terms usually pushes everything back, so you can expect to have a slippage, delay, I would say 10% to 20% of what you see as vessels of today.

Wayne Atwell - Pontis Capital Management

And what is your best thought in terms of when the market might be in balance when ships will be much more available and the market might take a bit of a hit in terms of day rate.

George Economou

Well I think you will see that in 2010 and 2011 and that will give the time when older vessels will be scrapped that will create new opportunities for people that have their firm balances to come again into the market and expand their companies.

Operator

Your next question comes from Jacob Miller from Aim Capital.

Jacob Miller - Aim Capital

I have a couple of questions on Ocean Rig. As far as the daily operating expenses, where do you forecast that to be going forward?

George Economou

The operating expenses on the outer sector are in the increase because of the shortage of the people, the increased demand for the qualified people that are there. So we’re estimating that you can have anywhere from 5% to 10% increases for the next two years and we see it leveling out thereafter.

Jacob Miller - Aim Capital

And the G&A of the $27,000 a day that would go back down towards the 7 or 8?

George Economou

Well, that would be great because you don’t need a hell of the lot more people than six rigs versus two. So you will increase the G&A to some extent on a yearly basis for the entire company of six rigs, but on a daily basis that will go down a lot. If today, for example the G&A is $25 million if you ran six rigs it will be probably $35 million.

Jacob Miller - Aim Capital

Do you expect the utilization to get hit at all as one of the rigs changes over from the old contract to the new contract in this coming quarter?

George Economou

No, we don’t have any, in fact because we changed on the utilization.

Jacob Miller - Aim Capital

And one more question; as far as the debt, how much of that debt that you currently carry into company do you expect to move out with the spin off of Ocean Rig and how much will remain with the DryShips company?

George Economou

The debt that will remain with the final company will be the debt that Ocean Rig has with the new facilities and that debt will be negotiated for the two rigs which is 1.1 billion and one and a quarter for rig that owned by DryShips.

Jacob Miller - Aim Capital

And how much of that being the total?

George Economou

The total will be a little bit over the $1 billion, so I would say it’s about $2.1 billion.

Jacob Miller - Aim Capital

And that would leave DryShips around $1.2 billion as well?

George Economou

Closer to two I would say, because its an $800 million facility negotiated to purchase the Ocean Rig which is in the process of being negotiated, would be based on the $5 million in the third quarter.

Jacob Miller - Aim Capital

But as of the end of this quarter basically net debt is around $2.5 billion or so?

George Economou

2.87.

Jacob Miller - Aim Capital

That’s excluding the $400 million cash?

George Economou

That’s excluding the $400 million in cash, correct. I mean the cash is 400, total debt is 2.87.

Jacob Miller - Aim Capital

So, the net debt it less than 2.5; isn’t that correct?

George Economou

Correct.

Jacob Miller - Aim Capital

Right so, you’re essentially saying that you have the new facility of one-one plus I guess its legacy debt around $1.4 billion in Ocean Rig expect for the new facility, right?

George Economou

The Ocean Rig debt rig now is $700 million. There is a new facility within the course of being concluded which is going to be about $1 billion, so that will take care of refinancing the existing 750, will give 250 in cash remaining. That’s for the Eirik Raude and the Leiv Eiriksson. The other two rigs that are owned DryShips have negotiated I think which is $1.1 billion to $5 billion to be drawn in accordance with the yard payment until delivered. So, it’s not in the books now, it’s debt to be incurred later.

Operator

Your next question comes Frazer Parker from Praxient Capital.

Frazer Parker - Praxient Capital

I was just wondering what is the tax rate you are expecting to pay on OCR vessels.

George Economou

I guess you are asking about the tax rate. Because there is quite a substantial tax credit, we don’t expect to pay any time.

Frazer Parker - Praxient Capital

How big is that tax credit or tax loss available?

George Economou

It’s about $1 million.

Operator

Your next question comes from the Jay Goodgal from Castalia Advisers.

Jay Goodgal – Castalia Advisers

Can you talk about the market in the fourth quarter with current levels of inventory stock levels at 64 million metric tons for iron ore in China or above depending upon estimates and that’s either normal levels or higher and anywhere between three and half and four and a quarter percent estimate of the fleet being delivered to the balance of the year, why do you think rates are going up?

George Economou

I think you are going to see increase in coal movement. You have a tradition dull moment in the summer. You have a lot of the Europeans that take the coal during the summer and they start increasing again in September, you will see the same in coal in Southeast Asia. Iron ore, 64 million tones is high but not exorbitant and we still think that there was a slow down because of the Olympics and we believe that you would see a gain and increased activity in terms of tone mile.

Jay Goodgal – Castalia Advisers

Are you also factoring in the 3.5% to 4.25% of the just the Capesize fleeting delivered?

George Economou

Yes we are, yes.

Operator

There are no other further questions at this time.

George Economou

We would like to thank everybody for attending. As we have said, we still believe in the fundamentals of dry bulk business and we’ll go back to spinning off one company and then have the 2Q plans for those interested in participating in either sector or both. Thank you very much for attending this call.

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