Disappointing 3Q for DryShips

DryShips Inc. (DRYS - Analyst Report) declared disappointing financial results for the third quarter of 2012. 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 to historic low levels. Sometimes the spot rates were even below the cash breakeven rates. 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% stake, currently has an order backlog of approximately $4.5 billion over the next three years.

Quarterly GAAP net loss was $51.3 million or a loss of 13 cents per share compared to a net income of $25 million or 7 cents per share in the prior-year quarter. However, adjusted (excluding one-time charges) loss per share in the third quarter of 2012 was 9 cents, in contrast to the Zacks Consensus Estimate of a breakeven per share. Quarterly total revenue was $343.6 million, up 8% year over year and just managed to surpass the Zacks Consensus Estimate of $342 million.

Quarterly total operating expenses were $307 million, up 46% year over year. This was mainly due to higher drilling rigs operating expenses, higher voyage expenses, higher depreciation and amortization charges, and higher general and administrative expenses. Operating income in the previous quarter was $36.6 million compared with an operating income of $107.8 million in the prior-year quarter. In the third quarter of 2012, adjusted EBITDA was $141 million compared with $172.9 million in the prior-year quarter.

At the end of the third quarter of 2012, DryShips had $986.8 million of cash & cash equivalents and $4,453.5 million of outstanding debt on its balance sheet compared with $251.1 million of cash and 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 0.52 compared with 0.49 at the end of 2011.

Drybulk Carrier Segment

Drybulk carrier segment generated $46.9 million in revenue, down 47.1% year over year. Time charter equivalent revenue was $41.1 million, down 51.9% year over year. Time charter equivalent TCE was $12,727, down 52.4% year over year. Total voyage days per fleet were 3,233, up 1.1% year over year. Management declared that just 33% of calendar days in the Drybulk segment in 2013 and 22% in 2014 are at present under fixed rate charters.

Oil Tanker Segment

Tanker segment generated $11.1 million in revenue, up by a significant 226.4% year over year. Time charter equivalent revenue was $9 million, up 174.5% year over year. Time charter equivalent TCE was $13,978, down 17.7% year over year. Total voyage days per fleet were 644, up 131.7% year over year.

Offshore Drilling Segment

Quarterly revenue from Drilling contracts was approximately $285.7 million, up 26.4% year over year.

Recommendation

We maintain our long-term Underperform recommendation onDryShips. Currently, DryShipshas a Zacks # 3 Rank, implying a short-term Hold rating on the stock.