DryShips Inc. An Attractive Risk Reward For Value Investors?

Usually, I would stay well away from the shipping sector. Depressed spot rates caused by over capacity and high levels of debt, have wreaked havoc across the sector for much of the past five years. Many shippers have gone under as a result.

However, there are now some green shoots appearing across the industry. One company that really seems to be at a turning point is DryShips Inc. ( DRYS).

DryShips, a risky bet

Make no mistake, DryShips is a risky bet. The company is saddled with debt and highly exposed to volatile shipping rates. But for the patient, the risk/reward looks attractive.

DryShips has three main lines of business. First and foremost, the company’s main line of business is drybulk shipping. Secondly, the group owns and operates ten Aframax and Suezmax class oil tankers. Thirdly, Dryships owns 59.4% interest of Ocean Rig UDW Inc ( ORIG), a specialist deepwater drilling contractor.

DryShips making progress as drybulk market recovers

After five years of losses and misdirection, the combination of these three businesses has now reached inflection point. The drybulk market is recovering, albeit slowly, the tanker market has recovered rapidly and Ocean Rig has started to pay dividends.

Ocean Rig is the most interesting of DryShips Inc. ( DRYS)’s trio of businesses. The contract driller was spun off from its parent DryShips during the fourth quarter of 2011. Now, Ocean Rig has just begun to mature as an independent company and is paying a dividend to its parent, and majority owner. DryShips received a $15 million dividend from Ocean Rig during the first quarter and will receive a second $15 million payout for the second quarter.

Further, Ocean Rig is currently in the process of transforming itself into a MLP, which should unlock additional cash for DryShips. DryShips’ 59.4% holding is worth around $1.4 billion at current prices.

Aside from Ocean Rig, DryShips’ tanker fleet reported a strong first half, with day rates jumping 50% year on year, offsetting weakness within the drybulk market. In the drybulk market things are starting to improve. The newbuild order book is shrinking, iron ore production out of Australia continues to rise and the global economic recovery is gathering steam. With the industry’s largest player, Maersk Line, reporting results that beat expectations earlier this week, things seem to be looking up.

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