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We reaffirm our long-term Neutral recommendation on DryShips Inc. (DRYS - Analyst Report). The company continues to suffer losses although its top line improved significantly in the first quarter of 2013.

Why the Reiteration?

DryShips declared that it does not foresee any improvement in the time charter rate for the rest of 2013. This is attributed to the sluggish growth in China, the largest importer of coal and steel in the world. Solid performance by the company’s majority owned Ocean Rig UDW Inc. (ORIG - Snapshot Report) deepwater oil drilling unit was more than offset by the tepid results of its drybulk shipping cargo division and oil tanker division.

In 2013, both the drybulk shipping and the oil tanker industries are facing severe challenges as the vessel rate collapsed even below the rate during recession.

Meanwhile, DryShips is gradually transforming itself into an ultra-deepwater drilling company rather than continuing as a simple drybulk cargo operator. The offshore drilling division continues to flourish buoyed by rising expenditures from oil companies and success in ultra-deepwater oil field discoveries. The deepwater oil drilling segment is currently witnessing shortages of rigs throughout the world, as the energy companies have raised the level of production.

We believe that the demand for deep water drilling services will improve in the near future due to the discovery of several big new deepwater oil reservoirs. Ocean Rig has several high-quality drillship fleets, which will enable oil explorers to operate even under harsh environment. Moreover, the stock price plummeted nearly 35% in the last year. We believe DryShips is currently fairly valued.

Other Stocks to Consider

DryShips currently has a Zacks Rank #3 (Hold). Other stocks in the Shipping industry which are performing well include Navios Maritime Holdings Inc. (NM - Snapshot Report) and Star Bulk Carriers Corp. (SBLK - Snapshot Report). Both these stocks currently have a Zacks Rank #1 (Strong Buy).

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