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We are upgrading our recommendation on DryShips Inc. (DRYS - Analyst Report) to Neutral based on the fact that the recent drop in fuel prices will help the company to increase profitability in the near future. The company’s legacy drybulk shipping cargo division and newly formed tanker division continues their pathetic performances. However, DryShips’ majority owned deepwater crude oil drilling unit OceanRig UDW Inc. (ORIG - Snapshot Report), is expected to boost its top line.

DryShips reported mixed financial results for the first quarter of 2012. Tough top line managed to beat the Zacks Consensus Estimate, but net income fell significantly below it due to downtime and relocation of oil rigs at the company’s oil drilling segment. Nevertheless, ongoing macro-economic uncertainty of the European regions, slowdown of the Chinese industrial sector, volatility in oil prices, and high leverage ratio are major near-term concerns.

DryShips has a substantial portion of its fleet fixed under its time charter contract, locking in sizeable cash flows that enhance the stability of its earnings base. Management declared that 49% of drybulk fleets are fixed at $31,249 per day for 2012. The company continues with its fleet renewal and expansion strategy in the drybulk sector, replacing older tonnage with newer and larger vessels.

Several industry researchers have predicted that the rates of drybulk ships, particularly for the Panamax vessels, will increase in late 2012. This was primarily due to growing demand for raw materials in Japan, the largest importer of coal and the second largest importer of iron ore, for generating power to rebuild its nuclear facilities after the devastating earthquake and tsunami. This will pull the rates for the drybulk cargos.

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