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Yesterday after market close, DryShips Inc. (DRYS - Analyst Report) declared financial results for the third quarter of 2011. Though DryShips’ legacy drybulk shipping cargo division and newly formed oil tanker division continue their pathetic performances, it is the company’s majority owned deepwater oil drilling unit Ocean Rig UDW, which helped DryShips beat the Zacks Consensus Estimates.

The drybulk shipping and oil tanker division suffered significantly from the industry’s oversupply of fleets, which drastically reduced spot rates in a  volatile global economy. DryShips recently acquired OceanFreight for $119 million to modernize its fleet. OceanFreight provides a relatively newer fleet of six drybulk vessels. However, DryShips is yet to capitalize due to the lack of favorable market conditions. 

On the other side, the offshore drilling division continues to flourish buoyed by high oil prices, rising expenditures from oil companies and success in ultra deep water oil field discoveries. Ocean Rig at present has $1.8 billion of order backlog. DryShips declared that it will try to disinvest its holdings on Ocean Rig in the near future but will delay the IPO of its oil tanker division.  

Quarterly GAAP net income was $25 million or 7 cents per share compared with net income of $57.7 million or 21 cents in the prior-year quarter. However, adjusted (excluding one-time charges) EPS in the third quarter of 2011 was 16 cents, beating the Zacks Consensus Estimate by a penny. Quarterly total revenue was $318.1 million, jumping 41% year over year, mostly in line with the Zacks Consensus Estimate.

Quarterly total operating expenses were $206.352 million, up 76% year over year. This was mainly attributable to higher drilling rigs operating expenses, higher depreciation and amortization charges, and higher general and administrative charges.

Operating income in the third quarter of 2011 was $111.7 million compared with $108.3 million in the prior-year quarter. In the third quarter of 2011, adjusted EBITDA (excluding gain/loss from interest rate swaps) was $172.2 million compared with $168.1 million in the prior-year quarter.

At the end of the third quarter of 2011, DryShips had $399 million of cash & cash equivalents and $4,274.8 million of outstanding debt on its balance sheet compared with $391.5 million of cash & cash equivalents and $1,988.5 million of outstanding debt at the end of fiscal 2010. At the end of the third quarter of 2011, debt-to-capitalization ratio was 0.50 compared with 0.34 at the end of fiscal 2010.

Drybulk Carrier Segment

Quarterly Drybulk carrier revenue was $88.6 million, down 23% year over year. Time charter equivalent revenue was $85.5 million, down 20.9% year over year. Time charter equivalent TCE was $27,011, down 15.3% year over year.

Total voyage days per fleet were 3,164, down 6.6% year over year. Management declared that 54% of its fiscal 2012 operating days in the Drybulk segment is at present under fixed rate charters at an average rate of about $35,000 per day.

Oil Tanker Segment

Quarterly Tanker revenue was $3.4 million. Time charter equivalent revenue was $3.3 million. Time charter equivalent TCE was $11,880. Total voyage days per fleet were 276.

Offshore Drilling Segment

Quarterly revenue from Drilling contracts was approximately $226 million, up 104.7% year over year.

Recommendation

DryShips fiercely competes with other drybulk carriers, such as Diana Shipping Inc. (DSX - Snapshot Report) and Excel Maritime Carriers Ltd. . We maintain our long-term Neutral recommendation on DryShips. Currently, DryShips has a Zacks #3 Rank, implying a short-term Hold rating on the stock.

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