Wednesday, July 28, 2010

DryShips (Nasdaq:DRYS) Beats Estimates, But Faces Major Challenges

DryShips (Nasdaq:DRYS) reported earnings which beat analysts expectations, but underscored the challenges the company continues to face in light of slowing business, but growing fleet of vessels.

Earnings for the second quarter came to $80.4 million, or 30 cents a share, beating analysts' estimates of 22 cents a share.

Revenue in the quarter also surpassed estimates, reaching $224.2 million, with the target being $216 million.

Last year Dryships generated a profit of $57.4 million, or 24 cents a share, with revenue coming in at $207.5 million.

What is challenging is the major reasons behind the charges last quarter which partially brought them the earnings results.

First, interest rate swaps were the major charge they took, without which the company would have only had earnings of $8.7 million, or 2 cents a share.

But over the long haul, things like floating the senior subordinated notes in order to strengthen their balance sheet to attain financing, is the big hurdle to overcome.

That was also a charge they took in the quarter, albeit a much smaller one. It does make you look at them going forward concerning how they'll finance the two new drillships they're having built for them in South Korea.

There are also two other vessels beside those two they're to take delivery of in the next year or two, with no charter contracts in place to pay for them. By that I mean no charter contracts for the drillships under construction. The other two ships evidently do have some charters to help pay for them.

Either way, DryShips will need close to $1 billion in financing. And with the new ships on their books and few revenue-generating charters to pay for them, it's getting difficult for DryShips to find ways of raising capital.

There have been rumors that the company will issue high-yield bonds to get some of that capital. That could work, as look at the people who invested in Greek bonds. If someone's willing to do that, everything else looks like a sure thing.

The foolish decision to impose a moratorium on the Gulf of Mexico by the Obama administration will also offer major challenges for DryShips, although it's being spun by CEO CEO George Economou as a positive for the company.

The problem with his assessment is it would have to be the absolute perfect circumstances for it to work out that way, which is highly unlikely.

Here's what he said in a release:

"The moratorium imposed on all deepwater drilling in the U.S. Gulf of Mexico is expected to be a short-term negative for the industry as some rigs may move out of the region and compete for business elsewhere.

"However, in the medium-to-long term the resulting emphasis on modern equipment and safety measures is expected to be a positive development for the industry overall. While it's early to authoritatively say what the actual regulations will be one expected result will be a focus on newer equipment. With four state of the art sixth generation drill ships, we believe that any new safety regulations will be advantageous for us."

As I said, highly unlikely.

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