DryShips Divests Newbuilding Ships

DryShips Inc. ( DRYS - Analyst Report ) decided to sell two of its unfinished Suezmax tankers, currently under construction at Samsung Heavy Industries, South Korea to a third party buyer. Last December, DryShips entered into two novation agreements with the buyer under which the third party owner will assume all rights, benefits, liabilities and obligations of the two Suezmax tankers. However, to get rid of the tankers, DryShips itself will pay $21.4 million in cash.

The primary reason for this divestment is to reduce the annual capital expenditure of DryShips by a significant $101 million. At present, the Shipping industry is in grave turmoil. The drybulk shipping and oil tanker industry is facing severe challenges as the vessel rate collapsed even below the rate during the recession. We believe the sole reason for this dismal condition is the sheer increase of vessels under operation that resulted in intense price competition.

The only bright spot for DryShips is its majority owned deepwater oil drilling unit - Ocean Rig UDW Inc. ( ORIG - Snapshot Report ) , which is flourishing due to a worldwide rig shortage. However, strong performance of Ocean Rig was more than offset by tepid results of the company’s legacy drybulk shipping cargo division and the newly formed oil tanker division.We believe economic headwinds, slowdown of the Chinese industrial sector, and fluctuations in oil prices are the major near-term concerns.

In the third quarter of 2012, total operating expenses of DryShips were $307 million, up 46% year over year. Operating income in the reported quarter was $36.6 million compared with an operating income of $107.8 million in the prior-year quarter. Adjusted EBITDA was $141 million compared with $172.9 million in the year-ago quarter.

DryShips currently has a long-term Underperform recommendation and a short-term Zacks Rank #5 (Strong Sell) on its stock.