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Dryships (DRYS): Dry Bulk Asset Sales Possible After Q2 Loss

 August 22, 2012 10:27 AM

(By Mani) DryShips Inc. (NASDAQ:DRYS) may sell some assets as the dry bulk and tanker markets remain weak and the company maintains a financing gap on its new building program.

Athens, Greece-based DryShips is an owner of drybulk carriers and tankers that operate worldwide. Through its majority owned subsidiary, Ocean Rig UDW Inc. (NASDAQ:ORIG), DryShips owns and operates 9 offshore ultra deepwater drilling units.

DryShips owns a fleet of 46 drybulk carriers (including new-buildings), comprising 11 Capesize, 28 Panamax, 2 Supramax and 5 newbuilding Very Large Ore Carriers (VLOC) with a combined deadweight tonnage of approximately 5.1 million tons, and 12 tankers (including new-buildings), comprising 6 Suezmax and 6 Aframax, with a combined deadweight tonnage of over 1.6 million tons.

[Related -DryShips Inc. (DRYS): Which Dry Bulk Stocks To Buy Ahead Of Market Improvement?]

The bulk shipping market is in a tough spot facing multiple challenges. In the drybulk and tanker segments, spot charter rates continue to hover at historic lows, and asset values have dropped precipitously in the last two years, not to mention from the highs of 2007/2008.

In addition, bunker prices have dropped somewhat from the record highs seen earlier this year but remain at high levels. The time charter market lacks liquidity and the rates anyway are very low, well below breakeven rates.

[Related -DryShips Inc. (DRYS) Q3 Earnings Preview: What To Expect?]

To compound all of this, there is a severe lack of liquidity from the traditional lenders as they contract balance sheets to meet Basel III requirements or due to complete exits from the sector.

"We still have contract coverage of 44% on the drybulk fleet for the remainder of 2012, however, unless the freight market recovers the shipping segment will remain a drag on our results," DryShips CEO George Economou said in a statement.

For the second quarter ended June 30, DryShips reported a net loss of $18.2 million, or 5 cents per share as compared to a net loss of $114.1 million, or 33 cents per share last year. Adjusted EBITDA was $144.6 million for the second quarter of 2012 as compared to $136.2 million for the same period in 2011. Revenue rose 50 percent to $336.13 million.

However, DryShips may look to sell some assets and restructure newbuildings as dry bulk spot rates at or below operating expense levels of the company. Drilling rigs operating expenses surged 132 percent to $145 million from $62.2 million last year.

"Currently, DRYS has $463.5 million of capex remaining on its dry bulk fleet, but we would expect the company's two unfinanced VLOC's to be the top restructuring or sale candidates," Deutsche Bank analyst Justin Yagerman wrote in a note to clients.

These vessels account for $95 million of capex in 2012 and 2013. Additionally, the two Capes set for delivery later this year which require an additional $81.2 million in financing.

Meanwhile, the company's Ocean Rig unit has signed a letter of intent for three drillship charters which should be finalized in the next several months. DryShips has also announced the syndication of a $1.35 billion loan facility, which should remove much of the financing risk at the company.

"Upon completion of these two positive developments, we would expect ORIG to announce a decision on one or more of its three newbuilding options this winter," Yagerman said.

Assuming these contracts materialize, DryShips total backlog could nearly double from $2.6 billion to $4.8 billion over three years and will provide Ocean Rig with substantial cash flow visibility and growth.

The company expects to further increase its already substantial backlog by entering into long term contracts for its two remaining units available in 2013 given strong industry fundamentals and the fact that there are very few ultra deepwater units available in 2013. However, investors may prefer to remain on the sidelines unless they see an improvement in spot rates, rising asset values and Ocean Rig monetization at attractive valuations



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