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Yesterday after market close, DryShips Inc. (DRYS - Analyst Report) declared mixed financial results for the first quarter of 2012. Though DryShips’ legacy drybulk shipping cargo division and newly formed oil tanker division continued with their disappointing performances, management is optimistic that the company’s majority owned deepwater oil drilling unit OceanRig UDW Inc. (ORIG - Snapshot Report) will see growing momentum of drilling boom.

The drybulk shipping and oil tanker segments are suffering from over supply of ships and tankers, which reduced spot rates significantly. However, the deepwater oil drilling segment is currently witnessing shortages of rigs throughout the world, as the energy companies have raised their level of production. Ocean Rig, in which DryShips has 65.2% stake, had order backlog of $2.9 billion at the end of the reported quarter.

Quarterly GAAP net loss was $47.5 million or a loss of 12 cents per share compared with a net income of $25.8 million or 7 cents per share in the prior-year quarter. However, adjusted (excluding one-time charges) earnings per share in the first quarter of 2012 were a loss of 11 cents, significantly higher than the Zacks Consensus Estimate of a break even. The loss was primarily attributable to downtime and relocation of rigs at the company’s drilling segment. Quarterly total revenue was $247.5 million, up 19.3% year over year, surpassing the Zacks Consensus Estimate of $244 million.

Quarterly total operating expenses were $234.2 million, up 54% year over year. This was mainly due to higher drilling rigs operating expenses, higher depreciation and amortization charges, and higher general and administrative expenses. Operating income in the previous quarter was $13.3 million compared with $55.3 million in the prior-year quarter. In the first quarter of 2012, adjusted EBITDA was $105.5 million compared with $107.1 million in the prior-year quarter.

At the end of the first quarter of 2012, DryShips had $153.2 million of cash & cash equivalents and $4,195 million of outstanding debt on its balance sheet compared with $251.1 million of cash & cash equivalents and $4,241.8 million of outstanding debt at the end of 2011. At the end of the reported quarter, debt-to-capitalization ratio was 0.49 compared with 0.49 at the end of 2011.

Drybulk Carrier Segment

Quarterly Drybulk carrier revenue was $77 million, down 20.6% year over year. Time charter equivalent revenue was $72.4 million, down 20% year over year. Time charter equivalent TCE was $22,257, down 19.7% year over year. Total voyage days per fleet were 3,252, down 0.5% year over year. Management declared that 49% of its operating days in the Drybulk segment in 2012 are at present under fixed rate charters at an average rate of about $31,249 per day.

Oil Tanker Segment

Quarterly Tanker revenue was $7.5 million, up 580.3% year over year. Time charter equivalent revenue was $7.2 million, up 587.3% year over year. Time charter equivalent TCE was $15,916, up 22.9% year over year. Total voyage days per fleet were 453, up 459.3% year over year.

Offshore Drilling Segment

Quarterly revenue from Drilling contracts was approximately $163 million, up 49.1% year over year.

Recommendation

We maintain our long-term Underperform recommendation onDryShips. Currently, DryShipshas a Zacks #4 Rank, implying a short-term Sell rating on the stock.

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