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DryShips Downgraded to Underperform

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We downgrade our recommendation on DryShips Inc. to Underperform, primarily due to current volatile conditions of the shipping industry. The drybulk shipping and tanker industry are 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.

DryShips reported mixed financial results for the first quarter of 2012. Though top line managed to beat the Zacks Consensus Estimate, net income fell significantly below it due to downtime and relocation of oil rigs at the company’s drilling segment. We believe macro-economic uncertainty of the European regions, slowdown of the Chinese industrial sector, and fluctuations in oil prices are major near-term concerns. Moreover, the company is highly leveraged. Diversification into the offshore oil drilling business through its 65.2% owned subsidiary Ocean Rig UDW Inc. will no longer be able to offset losses in the drybulk shipping segment. We do not find any immediate growth catalyst for DryShips.    

We believe continuation of the extreme low spot rate may bring down fixed time charter rate. This will severely impact the overall finances of DryShips. It was evident from the previous quarter’s Time charter equivalent TCE, which was $22,257, down 19.7% year over year. Management declared that just 49% of its operating days in the Drybulk segment in 2012 are at present under fixed rate charters at an average rate of about $31,249 per day. This implies, DryShips still has huge spot-exposure.

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