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Updated to clarify that shipping analyst Urs Dur works for Lazard Capital Markets, not the separate, though affiliated, Lazard investment bank.



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(DRYS) - Get DryShips Inc. Report

push into the deepwater oil-drilling business has evidently begun to excite investors once again.

Lazard Capital Markets upgraded the company's stock to buy from hold Tuesday largely based on the financial promise held by the vessels DryShips owns and has on order -- vessels specially equipped to explore for oil in extremely deep waters.

"DryShips will likely be considered more as a drillship owner in the coming year, not just a dry-bulk shipper," Lazard Capital's marine-transport analyst, Urs Dur, wrote in his research note. He lifted his 12-month price target on DryShips stock to $11.

Investors responded by bidding up shares of the Athens-based company by 9% in Tuesday. The stock was changing hands recently at $7.38, up 61 cents, on heavy volume of 22 million shares. Turnover in the Nasdaq-listed name averages 37.5 million shares a day.

Dur wasn't the first to hike his rating on the company's stock based on its diversification into the exploratory drilling business. Greg Lewis, of Credit Suisse, did the same back in July, when he wrote, "We believe

DryShips' rig assets are being ignored by investors."

DryShips began its move into drilling in 2007, when it took a stake in a Norwegian operator of two of these extremely sophisticated, and therefore complex, vessels. DryShips subsequently bought the whole company, called Ocean Rig, and then placed orders for four more such ships, due for delivery throughout 2011.

At first, the company was criticized for moving into a complicated industry about which it knew little, and for wrecking the pure-play dry-bulk stock that many investors were then seeking. But when the global financial system melted down, and the dry-bulk industry with it, asset values for drillships held up much better than their ore-hauling cousins, causing many to rethink DryShips' strategy.

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Now, investor optimism about the company's bid to exploit the energy sector appears to be building.

But a significant problem remains: DryShips still lacks about $1 billion in financing with which to pay for two out of the four drillships on order. A loan for those vessels will only come if DryShips is able to contract them out to an oil-exploration company. (And, of course, the company has a dilutive history of issuing equity whenever it needs cash, as it did earlier this year when it was having trouble handling a huge debt load -- a tool it may use in this instance, as well.)

About a month ago, DryShips indicated that, sometime soon, it would be inking a drillships contract (or contracts). It hasn't done so yet.

Dur, for one, is a believer. He expects DryShips to land contracts for some portion of those four ordered drillships -- he wasn't more specific -- "within the next two quarters." The contracts' terms will likely be "consistent with the healthy deepwater drillship market that exists today," Dur said. In other words, he expects the contracts to cover a period of more than a year at rates "in excess of" $500,000 a day.

Many observers, including Dur, believe that the oil-exploration business will remain robust, along with crude prices, for the foreseeable future.

Dur believes that when DryShips eventually announces the deals -- and it's received the $1 billion in financing -- the company's stock will bounce toward his price target.

If uncertainty still obscures the company's drill-rig play -- without contracts, there's no revenue with which to confidently build a model -- that's not quite the case with DryShips' core dry-bulk shipping business, at least through the end of next year.

That's because the company has locked almost its entire fleet into contracts that will keep those ships running, and churning out reliable rates, through the end of 2010, and some even longer. (Just four of the company's Panamax ships will remain in spot use.) Thus, Dur says, the company is protected, at least temporarily, from the widely documented ship oversupply that many believe will soon beset the dry-bulk trade.

The use of long-term charters represents a big shift for DryShips, long known for its gamblers' ethos -- a direct reflection of the company's chief, George Economou -- which resulted in the company being heavily exposed to the volatile spot market.

-- Reported by Scott Eden in New York

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Scott Eden has covered business -- both large and small -- for more than a decade. Prior to joining, he worked as a features reporter for Dealmaker and Trader Monthly magazines. Before that, he wrote for the Chicago Reader, that city's weekly paper. Early in his career, he was a staff reporter at the Dow Jones News Service. His reporting has appeared in The Wall Street Journal, Men's Journal, the St. Petersburg (Fla.) Times, and the Believer magazine, among other publications. He's also the author of Touchdown Jesus (Simon & Schuster, 2005), a nonfiction book about Notre Dame football fans and the business and politics of big-time college sports. He has degrees from Notre Dame and Washington University in St. Louis.