Is Dryships really an offshore play?

Lazard Capital markets analyst Urs Dur raised his rating on the George Economou-led company to “buy” suggesting coming offshore UDW drilling contracts for new rigs will provide a lift over the next couple of quarters. The deals will mark DryShips’ shift from a dry-bulk company with offshore interests to a deepwater rig company with exposure to the dry-bulk term market.

Considering the weight of the UDW drilling operation on the DRYS balance sheet, I would certainly agree with Lazard. The assets and liabilities of the drilling operation overshadow the bulk carrier operation. DryShips has become a deepwater rig company with exposure to the dry bulk term charter market rather than a spot focused dry-cargo owner with drillship investments.

DryShips still has a US$ 1 billion gap in its debt financing for two drillships, which is staggering compared to its dry cargo liabilities and recent attempts to raise additional capital by share dilution. Contracts attained over the next few quarters will be crucial for the company to finance this gap. At least two of DryShips’ four drillships must have contracts in place by the end of this year. The vessels are set for delivery in 2011.

According to the analyst, the charters should be worth around US$ 500.000 daily, reducing the risk hanging over the company and speeding up a long-awaited offshore spin-off, which would again change the company dynamics if it happens.

The dry-bulk market still faces oversupply issues but most of DRYS's dry-bulk ships are chartered out for much of 2010. Banking on rising oil price in the next year, as is expected by consensus, investors might chose to play DRYS more as a UDW driller in an attractive UDW drilling market.