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Analyst Blog

Yesterday, the stock price of DryShips Inc. (DRYS - Analyst Report) jumped 32 cents (8.7%) to $4. The rise can be attributable to an increase in the dry-bulk shipping rate for the first time in 2014.

The benchmark Baltic Dry Index (BDI) moved up 4 points to 1,374. BDI represents activities along the major shipping routes globally. Capesize shipping rates also climbed $280 to $13,168 per day.

Despite an improving U.S. macroeconomic scenario, the financial condition of the drybulk shipping industry is still not out of the woods. This is solely attributable to non-economic decisions taken by shipping companies in 2008.

Owing to lack of near-term foresight, most of the vessel operators ordered large number of newbuild ships in several docks. The glut of ships resulted in severe cut-throat price competition.

A major problem for DryShips is that a large part of its shipping contracts are currently under volatile spot rate market. Management estimated that 33% and 19% of the company’s fleet will be exposed to the spot market in 2014 and 2015, respectively. Such a huge exposure to the spot market will definitely generate severe top-line fluctuations, going forward.

In this situation, an upward movement of drybulk shipping rates and ship values are major positives for the company. DryShips expects this trend to continue in the near future, at least for shippers with an extensive asset base. DryShips has three types of operations, namely, drybulk shipping, oil tanker and offshore deepwater drilling facility.

DryShips is gradually transforming itself into an ultra-deepwater drilling company. The company’s majority owned offshore oil drilling company Ocean Rig UDW Inc. (ORIG - Snapshot Report) is its major long-term catalyst. Ocean Rig had approximately $5.8 billion of order backlog at the end of the third quarter of 2013.

Other Stocks to Consider

DryShips currently has a Zacks Rank #2 (Buy). Other stocks in the marine transportation industry which are performing well include Paragon Shipping Inc. (PRGN - Snapshot Report) and Diana Containerships Inc. (DCIX - Snapshot Report). Both stocks currently carry a Zacks Rank #1 (Strong Buy).

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