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DryShips Inc. (DRYS - Analyst Report) declared disappointing financial results for the second quarter of 2012, which fell below the Zacks Consensus Estimates. Strong performance of the company’s majority owned deepwater oil drilling unit OceanRig UDW Inc. (ORIG - Snapshot Report) was more than offset by tepid results of DryShips’ legacy drybulk shipping cargo division and newly formed oil tanker division.

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 controls 65.2% stake, currently has order backlog of approximately $4.8 billion.

Quarterly GAAP net loss was $18.2 million or a loss of 5 cents per share compared with a net loss of $114.1 million or 33 cents per share in the prior-year quarter. However, adjusted (excluding one-time charges) loss per share in the second quarter of 2012 was 1 cent, in contrast to the Zacks Consensus Estimate of earnings of 5 cents per share. Quarterly total revenue was $336.1 million, up 50% year over year but fell below the Zacks Consensus Estimate of $350 million.

Quarterly total operating expenses were $281.8 million, up 4.2% 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 $54.4 million compared with an operating loss of $46.5 million in the prior-year quarter. In the second quarter of 2012, adjusted EBITDA was $144.6 million compared with $136.2 million in the prior-year quarter.

At the end of the first half of 2012, DryShips had $366.3 million of cash & cash equivalents and $4,194.8 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 0.48 compared with 0.49 at the end of 2011.

Drybulk Carrier Segment

Drybulk carrier segment generated $62.5 million in revenue, down 32.9% year over year. Time charter equivalent revenue was $58.6 million, down 33.2% year over year. Time charter equivalent TCE was $18,319, down 34.5% year over year. Total voyage days per fleet were 3,200, up 2% year over year. Management declared that 44% of its operating days in the Drybulk segment in 2012 are at present under fixed rate charters.

Oil Tanker Segment

Tanker segment generated $10.2 million in revenue, up by significant 139.1% year over year. Time charter equivalent revenue was $8.5 million, up 103.7% year over year. Time charter equivalent TCE was $15,310, down 9.6% year over year. Total voyage days per fleet were 552, up 125.3% year over year.

Offshore Drilling Segment

Quarterly revenue from Drilling contracts was approximately $263.5 million, up 108.1% year over year.

Recommendation

We maintain our long-term Underperform recommendation onDryShips. Currently, DryShipshas a Zacks #5 Rank, implying a short-term Strong Sell rating on the stock.

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