DryShips Stock Earns Downgrade - TheStreet

(Dryships article updated for Dryships stock-price movement and further commentary on its drillships segment.)



) --


(DRYS) - Get Report

deepwater oil-drilling business earned it a downgrade Thursday, when

Credit Suisse

(CS) - Get Report

cut its rating and slashed its price target on the stock.

In a note to clients, the firm's shipping analyst, Greg Lewis, wrote that the


( BS) oil-spill fiasco had simply created too much near-term

uncertainty around DryShips' so-called drillships segment

, which is somewhat half-formed as it stands.

DryShips' Leiv Eiriksson, a deepwater oil-drilling vessel

Lewis did say, however, that he believes the "long-term thesis" behind DryShip's offshore strategy will eventually pay off.

>>Video: Dryships Biggest Risks

DryShips is scheduled to take delivery of four new drillships this year and next, but still lacks about $1 billion in financing for two of them. Further, the company needs to ink long-term charter contracts for the four new rigs before it can move forward with an IPO of the offshore segment, something

DryShips has been talking about for the last two years


Because of the Gulf of Mexico disaster, Lewis wrote, "we expect a continued soft patch for the deep water rig sector in the near term. The bottom line: without a rig contract we expect the stock to be a laggard."

The stock has already lagged, giving up more than 35% of its value since April 15, five days before the Deepwater Horizon exploded in the Gulf. DryShips' shares closed Wednesday at $4.31 and were falling hard Thursday. In recent trades, the stock was moving at $4.03, down 28 cents, or 6.5%, on run-of-the-mill volume.

Lewis said DryShips ought to delay delivery of the four drillships, which would "buy them time" as the company tries to sort out the $1 billion financing gap. "Another option, which is less desirable, would be the sale of one its newbuilding drillships," Lewis wrote. In that case, DryShips would lose most of the deposit it laid down with the shipyard in South Korea that's constructing the vessels, about $250 million for each ship.

DryShips' other two oil exploration vessels are gainfully employed, one in the Black Sea and the other off the coast of West Africa.

Lewis cut his rating to neutral from outperform and his 12-month price target to $5 from $8. He estimates the value of the straight-up dry bulk segment of the company, which hauls raw materials cargoes such as iron ore, coal and grain, at $4 a share, and the drillships business at just $1 a share, though he said his rig valuation model is "highly sensitive to rate estimates."

That's a bit cheaper than the value DryShip's operating chief, Pankaj Khanna, put on the drillships business in late March, when he told


that if the company decided to break up and liquidate its offshore segment, it would fetch $7 a share.

Lewis had previously valued the drillships unit at $4 a share. Rates for these sorts of vessels -- capable of drilling at depths of as much as 10,000 feet -- have fallen to around $400,000 a day. Last year, the going rate was more than half a million.

-- Written 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 TheStreet.com, 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.