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DryShips Rolls on Morgan Stanley Upgrade

DryShips shares jump Monday after an upgrade from Morgan Stanley.
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DryShips item updated with further details from Morgan Stanley's research note Monday



) --


(DRYS) - Get DryShips Inc. Report

stock jumped by almost 9% Monday after

Morgan Stanley

(MS) - Get Morgan Stanley Report

upgraded the shares and said the company now has a chance to unwind a portion of the risky wager it made years ago to enter the offshore oil drilling sector.

Mostly because of that strategic move, a cloud of uncertainty has befogged DryShips. With its bid to enter the deepwater energy-exploration business apparently faltering, the company's stock has suffered through a rough 2010, losing 29% of its value since the start of the year.

But Morgan Stanley analyst Ole Slorer in a research note Monday introduced a price target on DryShips' stock of $5.50 a share and lifted his rating to equal weight.

Because rates have improved for the services of offshore oil-drilling vessels, Slorer wrote in his note, it's more likely that DryShips will sell two of the four newbuildings it has on order at a South Korean shipyard. He believes the ships could fetch up to $600 million apiece. If the company were to do such a deal, it "could allow the stock to appreciate 30-40% in the near term," Slorer wrote. Thus the analyst's new price target of $5.50.

In early September,

DryShips was forced to issue more equity

in order to shore up its balance sheet as it attempts to make good on the more than $1 billion it still owes the shipyard. DryShips, which made a controversial move into deepwater drilling when it acquired a Scandinavian rig company in 2007, has two so-called drillships in operation at present, one off West Africa and the other in the Black Sea.

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Four others are being built, currently scheduled for delivery this year and next. Two of those four newbuildings are still unfunded; it's widely believed that DryShips must sign deals to charter out at least two of those rigs to an oil company before it will receive a loan to cover the $1 billion gap.

As with all DryShips observers, Slorer warned investors that the stock remains risky, mostly because of the company's propensity to dilute shareholders with habitual equity issuance, including the latest announced plan to sell $350 million in an at-the-market offering. Slorer sees further dilution potentially coming from earlier offerings of $700 million in convertible notes and $300 million in convertible equity.

DryShips shares were trading recently at $4.48, up 8.6% or 36 cents. Volume was heavy, with more than 13 million shares changing hands as of noon EDT Monday, compared with average daily turnover of about 9.2 million.

On Friday, unusual trading in DryShips options pointed to bullish sentiment gathering around the name.

Dry-bulk freight rates, meanwhile, have remained fairly weak, though DryShips is insulated from fluctuations in spot-market rate movements, with 100% of its fleet locked into long-term contracts.

Rates for Capesize ships, the largest bulk carriers in the world, were going for $29,860 a day on average on the world spot market Monday, according to the Baltic Exchange, a London ship broker that tracks and publishes day-rate quotes. That's down 8.5% from a week ago. Weakening demand has been attributed to the Chinese government's ongoing effort to shut down inefficient steel mills there. Electricity production in the People's Republic is evidently overtaxed.

Many maritime pontificators have, however, been predicting a fourth-quarter rebound in demand for the services of dry-bulk carriers. "The Chinese government cannot afford to have steel prices surge due to an artificial restraint on supply," wrote dry-bulk analyst Jeffrey Landsberg, of Commodore Research, in his weakly update on the industry.

Many market players have also felt that a predicted decline in the price of iron ore in the fourth quarter should result in stiffer demand from China for the crucial steel ingredient, which is largely shipped by sea from mining countries to steelmaking countries, of which China is by far the largest. The Australia-China and Brazil-China iron ore trade routes have come to dominate the fortunes of the maritime dry bulk shipping industry.

Other dry-bulk names were in the green Monday, albeit more modestly.

Shares of

Genco Shipping & Trading

(GNK) - Get Genco Shipping & Trading Ltd Report

were up 1.4% to $15.96,

Diana Shipping

(DSX) - Get Diana Shipping Inc. Report

was rising 1.2% to $12.85,

Excel Maritime


was advancing 2.6% to $5.57, and

Eagle Bulk Shipping

(EGLE) - Get Eagle Bulk Shipping Inc Report

was up 3% to $5.15.

-- Written by Scott Eden in New York


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