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DryShips Dilutes Amid Drillships Struggles

DryShips expects to raise $350 million in yet another share offering as the company seeks to find financing for its drillships orders.
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NEW YORK (TheStreet) -- DryShips (DRYS) - Get DryShips Inc. Report will again issue equity -- this time, up to $350 million worth -- as the company struggles to find the money to pay for a pair of offshore energy-exploration vessels it had ordered as part of an ambitious growth plan.

According to an SEC filing, DryShips expects to sell 79.2 million shares for $4.42 apiece. The offering will increase the number of DryShips' shares outstanding by 27%. The company, which has a long history of diluting shareholders with equity offerings, said net proceeds from the sale will amount to about $342 million.

Deutsche Bank

(DB) - Get Deutsche Bank AG Report

is the offering's underwriter.

In its filing, DryShips was vague about its plans for the use of the those proceeds ("existing scheduled capital expenditures, future acquisitions and general corporate purposes"), but putting two and two together wasn't difficult. The company still needs to pony up a little more than $1 billion if it wants to take delivery of two offshore drilling rigs, called drillships, now being constructed at the


shipyard in South Korea. (Two other vessels, also on order, are fully financed. Deutsche Bank, in fact, syndicated a $1.1 billion loan to DryShips for that purpose.)

In order to secure financing for the two unfunded vessels, the thinking has been that DryShips needed to strike at least two long-term charter contracts with oil exploration companies, thereby guaranteeing future cash flow.

But the charter market for drillships, especially in the wake of


(BP) - Get BP Plc Report

Deepwater Horizon disaster in the Gulf of Mexico, has proved weaker than expected, and

DryShips has so far been unable to find charters


Rates for the kind of rigs DryShips has ordered have fallen from as much as $600,000 a day a year ago to about $400,000 or so now. Asset values have taken a parallel hit. DryShips agreed to pay $800 million each for its four drillship newbuildings. Natash Boyden, the shipping analyst at Canter Fitzgerald, now estimates the market value of those newbuildings at about $500 million.

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The company has turned to other forms of financing, including a batch of senior subordinated notes,

issued earlier this year

. Analysts have speculated that DryShips might at some point be forced either to delay delivery of the drillships, thus buying it time to close the funding gap, or even to sell one of its newbuildings.

DryShips has found itself up against a tight deadline, since it's scheduled to take delivery of its first of four drillships newbuildings at the end of December. The closer the company comes to that date without any charter contracts, the more likely it becomes that it will have to delay or sell. "I think all of the options are on the table now," Boyden said.

DryShips, based in Athens, wasn't immediately available for comment.

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Shares of DryShips were predictably under pressure Tuesday. Midday, the stock was changing hands at $4.19, down 5.2%, on volume of 9 million, matching the daily average turnover in the name over the last three months.

On Monday, the Norwegian bank

First Securities

cut its rating on DryShips' stock to what it calls "reduce." The company's ongoing drillships struggles have dogged its shares since last year.

DryShips also disclosed in SEC filings Tuesday that it obtained waivers on the covenants of three of its credit facilities. The largest, for $230 million, was extended until Dec. 1. Two others, one for $130 million and another for $90 million, received covenant waivers that will expire March 31, 2012.

-- Written by Scott Eden in New York


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