DryShips Inks a Drilling Deal

DryShips Inks a Drilling Deal

By Travis Hoium | More Articles

September 29, 2010

Finally, DryShips (Nasdaq: DRYS) has announced a drilling contract for one of its four new ultra-deepwater drill ships. According to a press release, an unidentified American company will drill four wells off the coast of West Africa starting sometime in the first half of next year for a day rate of $450,000.

One worry eased by the contract is financing of the vessel. The four ships currently under construction are only half-financed, and with $1.49 billion due and only $394 million of cash on the balance sheet, DryShips doesn't have the coin to pay the bill without a big financing package.

Investors have been very concerned about the commitments DryShips has made getting into the drilling business. DryShips faces plenty of risks as a relative newcomer, competing with the likes of Transocean (NYSE: RIG), an operator with more than 50 years of experience and 140 offshore drilling units. DryShips' Ocean Rig subsidiary has some experience with two rigs drilling some 79 wells over the past 10 years, but ultra-deepwater rigs are coming online at a rapid pace in 2011, so it could lose contracts to more experienced operators.

Deepwater drilling rigs give DryShips a more diversified base Diana Shipping (NYSE: DSX) and Eagle Bulk Shipping (Nasdaq: EGLE) can't match. Both have stronger balance sheets, but the upside potential at DryShips is greater given the persistent weakness in dry bulk shipping rates and the premium charged for ultra-deepwater drilling. There are also rumors of an IPO of the Ocean Rig drilling arm if DryShips can finance the rest of the new vessels.

This is a step in the right direction for DryShips, which now needs a contract for the second ship being delivered in the first quarter next year and two more down the line. When these contracts are announced, the stock tends to jump as we saw this week. If you believe ultra-deepwater drilling isn't dead and DryShips' red flags don't scare you off, now could be a good time to get in.

Interested in reading more about DryShips? Click here to add it to My Watchlist to find all of our Foolish analysis on this stock