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We reiterate our long-term Neutral recommendation on DryShips Inc. (DRYS - Analyst Report). The company reported disappointing financial results for the second quarter of 2011, which fell well below the Zacks Consensus Estimates.All its three reporting segments e.g. Drybulk carriers, Oil Tanker, and Offshore Drilling, performed quite badly in the previous quarter. The drybulk shipping industry is facing severe challenges as the vessel rate collapsed even below the rate during the recession in 2009. DryShips fiercely competes with other drybulk carriers, such as Diana Shipping Inc. (DSX - Snapshot Report) and Excel Maritime Carriers Ltd. .

We believe the sole reason for this dismal condition is the sheer increase of ships under operation that resulted in intense price competition. We believe continuation of this pricing trend may significantly jeopardize DryShips’ future financials. We also remain skeptical regarding the long-term growth prospect of the oil tanker market. Nevertheless, the stock price plummeted over 59% in the last year, which may restrict further downslide in the near term. 

DryShips is gradually converting itself to an ultra-deep water drilling company rather than continuing as a simple drybulk cargo operator. The acquisition of Ocean Rig turned out to be a major positive. Ocean Rig’s asset and contract portfolio diversified DryShips’ assets and sources of cash flow. Furthermore, Ocean Rig’s operational expertise provided DryShips with the necessary platform to compete in the ultra-deep water drilling sector. DryShips will partially spin-off the Ocean Rig division on October 5, 2011. We believe the demand for deep water drilling services will boost in near future attributable to the discovery of several big new deep water oil reservoirs.

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