DryShips Remains Neutral

DryShips Inc. ( DRYS - Analyst Report ) reported disappointing financial results for the second quarter of 2012, which fell below the Zacks Consensus Estimates. The company’s legacy drybulk shipping cargo division and newly formed tanker division continues their pathetic performances.

The drybulk shipping and oil tanker segments are suffering from over supply of ships and tankers, which reduced spot rates significantly. Ongoing macro-economic uncertainty of the European region, slowdown of the Chinese industrial sector, volatility in oil prices, and high leverage ratio are major near-term concerns.

Nevertheless, DryShips’ majority owned deepwater oil drilling unit OceanRig UDW Inc. ( ORIG - Snapshot Report ) , is expected to boost the company’s top line going forward. Meanwhile, the stock price has dropped more than 35% in the last year. We, thus, reiterate our long-term Neutral recommendation on DryShips.

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 44% of drybulk fleets are fixed at $27,400 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.

We expect the ongoing strong demand for drybulk trade to continue in the near future buoyed by healthy demand for iron ore and coal from China. Growing production of steel and electricity in China will sustain its import demand for iron ore and coal.

Currently, China accounts for 60% of global iron ore utilization and facilitates around 35% of the global dry-bulk shipping trade. Aprt from China, India has also become a major importer of drybulk goods, such as coal. The demand for drybulk shipping will continue to keep its momentum in 2012 mainly due to China and India.