DryShips Sinks on Oil Tanker Acquisition

(Drybulk shipping report updated with detail on Genco Shipping, Eagle Bulk Shipping and Excel Martime Carriers.)

ATHENS, Greece ( TheStreet) -- DryShips ( DRYS) traded sharply lower amid heavy volume Monday after the shipping company announced it would acquire a dozen oil tankers from a Korean shipbuilder.
ARM Holdings

DryShips said it would buy the high-specification newbuilding oil tankers over the next three years for a price of around $770 million, including over $3 million per vessel in extra items.

>>DryShips Sets Rig Unit's Offering at $17.50

Six newbuilding Aframax tankers will be acquired by 2012; six Suezmax tankers will be acquired by 2013. Staggering the tanker deliveries will help DryShips take advantage of improving market conditions over the next few years, the company said.

The announcement was made on Thursday, the last trading before a three-day market holiday.

Investors reacted strongly Monday morning when trading resumed. DryShips shares plunged 7% to close at $5.55 on Monday. Nearly 28 million shares were in play at the closing bell, compared with their average daily trading volume of 22.4 million shares. The Guggenheim Shipping ETF ( SEA), an exchange-traded fund that counts DryShips and rival Diana Shipping ( DSX) as 5.1% of its total holdings, bid 0.4% lower to $27.83.

DryShips said it made initial payments of $120 million against the oil tanker contracts using cash on hand. It intends to finance the remaining capital commitments, including delivery installments of about 70% of each vessel's price, with cash and bank debt. DryShips also said it intends to position the tanker investments for a spinoff or initial public offering, likely in 2011.

"With OceanRig UDW's successful Norwegian offering, we have positioned OceanRig UDW to be a pure play in the ultra deepwater drilling sector with contracts and a balance sheet that is self-sustaining," said CEO George Economou.

DryShips said earlier this month its wholly-owned Ocean Rig UDW planned to raise $500 million in a private offering.

Ocean Rig UDW was priced at $17.50 per share. Following the share sale, DryShips' ownership stake in the unit will be reduced to between 78% and 80%.

"We intend to take further steps to enhance OceanRig UDW's status as a pure deepwater drilling participant," Economou added.

The CEO went on to say that DryShips plans to "refocus on the shipping markets where we see opportunities developing for both the drybulk and tanker sector."

He said the tanker market is experiencing low freight rates, but that urbanization in China and India will drive medium- and long-term oil demand, improving market conditions for the shipping industry.

Analysts at Credit Suisse recently upgraded DryShips' stock to outperform from neutral. The equity research firm also lifted its price target on DryShips by $4 to $9.

>>DryShips Cruises on Upgrade

Separately, DryShips said recently it completed its ATM Equity Offering, raising around $350 million since initiating the offering on Sept. 7.

Earlier, DryShips' Ocean Rig UDW subsidiary signed a $77 million contract with Borders & Southern Petroleum for a two-well exploration and drilling pact in the offshore Falkland Islands area for a period of 90 days, beginning in the fourth quarter of 2011.

>>DryShips Trades Higher on Drill Deal

There were three further optional wells that could extend the contract by 135 days.

The dry-bulk shipper and deepwater drill-ship operator recently posted better-than-expected quarterly earnings.

DryShips reported earnings of 18 cents per share, or $49 million. Excluding one-time items the income number would have come in at $99 million, or 38 cents per share, easily besting the consensus Wall Street estimate of 25 cents per share.

Quarterly revenue inched higher by 1.4% to $225.2 million from a year ago, also beating expectations.

>>DryShips Tops Views; Stock Jumps

The company finally made good this fall on promises regarding its long-floundering drilling business, inking contracts on several vessels that had still required financing.

CEO Economou issued a rosy outlook on that score as well, saying, "The ultra deepwater market has turned a corner in the last couple of months and we believe that current enquiry from operators matches or may even exceed the supply available in 2011."

Industry rival Diana Shipping traded lower as well Monday, falling 1.3% to close at $12.63. Goldman Sachs ( GS) recently gave the shipper a healthy buy rating.

>>Diana Shipping Cruises on Buy Rating

Goldman analysts initiated coverage of the dry-bulk shipper recently with a buy rating and $17 price target, which represents a 34.6% upside to Diana's closing price the day prior of $12.63.

Goldman's bullish rating cited that 60% of Diana's fleet is chartered out through at least the second half of 2012. The firm estimated that Diana has $1 billion in cash and debt capacity to take advantage of expected vessel acquisition opportunities. Goldman also likes Diana's disciplined managed team.

Diana recently posted third-quarter net income of $33.8 million earlier this month, up 17.8% from a profit of $28.7 million in the third quarter of 2009.

Dry-bulk shipping peer FreeSeas ( FREE) saw its shares drop 4.3% to $3.83 on Monday.

The operator of drybulk carriers posted a net loss of $9.5 million, or $1.51 per share, for the third quarter, compared with a profit of $465,000, or 8 cents per share, in the year-earlier period.

FreeSeas' revenue pushed up 5.3% to $13.8 million.

Paragon Shipping ( PRGN) shares were 1% lower Monday at $3.42.

Analysts from Cantor Fitzgerald maintained a buy rating on Paragon but recently lowered their price target on the stock by $1 to $5.

"We now look for Paragon to report 2010 earnings per share of 39 cents (from 33 cents) and earnings before interest, taxes, depreciation and amortization of $65 million (from $67 million)," the equities research firm noted. "For 2011, we look for PRGN to generate EPS of 40 cents and EBITDA of $70 million. We note that our 2011 estimates assume the company's open vessels achieve an average daily rate of $18,000 for the Handymaxes."

Like FreaSeas, Euroseas ( ESEA) swung to a quarterly loss. The shipper posted lower revenue and hedging benefits, and said rates continued to soften.

Euroseas posted a smaller-than-expected loss but revenue came in shy of expectations.

The drybulk carrier saw its shares bid 1.9% lower to $3.66 on Monday.

Genco Shipping & Trading Limited ( GNK) lost 1.8% to $14.20 on Monday.

The New York-based drybulk shipper filed a registration with the Securities and Exchange Commission to sell up to $500 million of debt securities, common stock, preferred stock, rights, warrants, units, depositary shares, purchase contracts, or any combination thereof on a timely basis.

Analysts from Dahlman Rose reiterated a buy rating on the stock in November, reducing their price target by $7 to $23.

Genko transports iron ore, coal, grain, steel products and other drybulk cargoes along worldwide shipping routes.

Eagle Bulk Shipping ( EGLE) was among the select few in the drybulk shipping sector to enjoy share price gains in Monday's trading session. The stock added 0.6% to close at $4.92.

Eagle Bulk Shipping recently posted a 75% jump in third quarter revenue, thanks to higher demand for grain and other bulk shipping cargo. The company said rising demand for coal, particularly in China, should extend the upward trend.

"Strong demand for minor bulks and grain contributed to relative outperformance. This trend should continue as we close the year, as the demand picture for coal, grains and minor bulk cargoes should remain strong in the medium and long term," the firm said.

Finally, Excel Maritime Carriers ( EXM) shares lost 1.2% to close at $5.58 on Monday.

The shipper said last week it entered into a new time charter agreement for seven of its Kamsarmax vessels to first class charterers.

"We are pleased to have announced these seven vessel fixtures which significantly increase the visibility of our cash flow generation through a time charter coverage of 45% for 2011," said CFO Pavlos Kanellopoulos. "These charters also allow us to monetize 100% of the upside in market rates through the index-linked element, while at the same time always provide profitable rates securing our cash flow breakeven levels."

-- Written by Miriam Marcus Reimer in New York.

>To contact the writer of this article, click here: Miriam Reimer.

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