DryShips Lands Drill Deal

A Crook or an Oracle?



DryShips lands drill deal

DryShips has removed some of the uncertainty surrounding the funding of its drillship newbuildings after securing a contract for one of the units.

Boss George Economou says the charter with a US contractor will help the shipowner to finance the unit.

The breakthrough contract could also act as a catalyst for an IPO of DryShips’ drilling arm Ocean Rig.

In a statement to investors DryShips says it received a letter of award for a four well contract off West Africa.

Economou, who has always been confident of finding work for DryShips' four drillships, said: "We are pleased to secure employment for one of our first two drillships that will be delivered from Samsung during the first quarter 2011.

“This will serve as a catalyst to securing bank financing on preferred terms.

"We continue to see strong interest for our state of the art sixth generation drillships operated by our experienced ultra-deepwater operator Ocean Rig."

Tying up a vessel for 300 days, the charter will generate $135m in revenue, DryShips adds.

According to Urs Dur of Lazard Capital Markets, the figure translates to a day rate of around $450,000.

The analyst adds the contract will help DryShips plug the funding gap on its first two newbuildings.

“The award of the contract noted today, though not particularly long in duration, should help alleviate the debt portion of this funding gap,” he said.

“We would not be surprised to see progress on the debt finance front for DryShips in the coming four to six weeks.”

DryShips has two rigs in the water which it took over following its 2008 purchase of Ocean Rig.

Economou paid $650m each for his first two drillship newbuildings in September 2007 and DryShips spent $800m on two more in April 2008. The assets were later united under the ownership of DryShips.

Dur says eight contracts for ultra deep water drillships are set to be awarded by the end of this year, with DryShips likely to find work for some of its three open newbuildings in the fourth quarter.

Talk of an IPO for Ocean Rig has circulated almost since it was removed from the Oslo Stock Exchange following Economou’s takeover.

It had been suggested a float was on the cards for this summer, but first at least one, and possibly two, charter contracts were required for the newbuildings before a listing was feasible, analysts said.

TradeWinds has reported DryShips wants to raise at minimum of $400m from the IPO. The shipowner collected $250m from its own float as a dry-cargo vessel owner in 2005.

By Andy Pierce in London

My Comment:

I believe the IPO for Ocean Rig is just a matter of time. Once the second Ocean Rig drillship secure a contract, they will defintely go for the IPO. The COO Pankaj Khanna have mentioned before that once 2 of the Drillship secure charter contract, they will then go for IPO. Please look at the below interviewed by DryShips COO Pankaj Khanna,  you will understand what I mean.

DryShips COO Pankaj Khanna: Q&A

NEW YORK (TheStreet) -- DryShips(DRYS_) is seen as a bellwether stock for shipping, a sector that investors look to in order to take the temperature of the global economy. If shipping is strong, it's an indication the economy should be in good shape.

DryShips is looking to expand beyond transporting drybulk commodities like coal, iron ore and steel and enter the drillship business, which involves operating vessels used in exploratory deepwater drilling for oil and gas.

I recently spoke with Pankaj Khanna, DryShips' Chief Operating Officer, about the company's efforts in this area, and possible plans to spin off the drillship business in an initial public offering. We also talked about the recession and the growth he is seeing in India and China.

Dryships COO: Stock Should Double

TheStreet: So you're talking about an IPO within the next couple of quarters?

Khanna: That's right. We've been basically working through our strategy over the last few months. We believe that we [will] probably have a couple of vessels -- the drill ships fixed in the next six months and that should be the catalyst for an IPO. We believe we'll be looking at an IPO probably in September at the earliest, so it's a couple of quarters [away]. We need to do the work. We need to get the charters in place and then look at the IPO.

TheStreet: It's been a difficult IPO market for shippers; we've had Crude Carriers (CRU)and Baltic(BALT_) come out. They've both gone down since. Alma Marine has been postponed. Are you concerned that maybe there isn't enough appetite for this type of IPO?

Khanna: The IPO we are considering is for the drilling business. The drilling business is quite different from the three names you're just quoted. The exploration and production spending from the oil companies is going up. We've seen a lot of announcements from various companies where they are focusing on the ultra deepwater. You have BP plc(BP_) looking at the acquisition of Devon Energy(DVN_), which is again deepwater assets. So the company we will create is a pure play ultra deepwater player. There isn't another player quite like it. So we believe this will get premium valuation. [T]he market will dictate when we go out and what the pricing is. But there is appetite for a vehicle like this.

TheStreet: The company has a $900 million payment (DryShips owes shipyard Samsung Heavy Industries this amount for two of the four drillships now being built.) What is the situation on that?

Khanna: We have already been working through that. We believe from the IPO we can raise somewhere between $400 to $500 million. In addition to that we're working with commercial banks on a term sheet where we would finance another $500 million from the banks based on just regular commercial debt. The banking market for the offshore sector has opened up. It's no longer like it was in 2009, where it was a severe crunch and no money was available from commercial banks. So we feel fairly comfortable that we'll have the financing in place for the $900 million unfunded portion of the capex

Khanna: Investors have been asking George to get a management team in place, so he brought in myself and Ziad Nakhleh as CFO and we've just also recently appointed a Senior Vice President of accounting. Now that there is a team, George has taken a step back, and he's allowing us to run the company. He's still actively involved on a day-to-day basis. He's a very hands-on guy.

TheStreet: Your stock is a darling of traders. They like to get in, they like to get out. They still treat it like a short-term shipping stock, but your business has gone longer term, right? Does that concern you?

Khanna: The shareholding in the company has changed quite a bit. Today about 30% of our shareholders are institutions. Whereas if you look six-to-eight months back, it was down at about 5%. The institutions recognize the value in the stock, so a lot of the value-based players are back in DryShips. In terms of the traders, they provide us with the liquidity. That's why you see that Dryships is the most liquid stock among shipping companies. So we don't necessarily mind the traders.

But we're trying to build a balance where we have the institutions in who are value driven, who will hold the stock and therefore drive up the value. Eventually, I think the value-driven investor will take more of a share in DryShips than they have now, because they see the story. The drill ship business has a lot of value tied up. Right now we get zero value for that. That's why the institutions are jumping back in. They see the value in the stock. This is the only shipping stock that has the potential to double. As soon as we get the charters -- we are able to execute on the IPO. We could double in the stock price. There are not too many shipping companies out there who can say the same.

TheStreet: What are you seeing right now in trends for shipping?

Khanna: I'm fairly bullish on the dry bulk market in particular, because the whole China and India story is intact and [is] in fact stronger than it ever was. I was in India three weeks ago and the infrastructure development there is unbelievable and it's only just starting. We believe that dry bulk will be strong. China still has a stimulus plan in place even though it's backing off a bit from it. But their iron imports were up 42% last year, and coal was up more than 200% last year. We expect that iron ore imports will be up at least 15-20% again this year, but along with that you see the rest of the world coming back to more normal levels, whereas in 2009 there was a decline in countries like Japan, Korea, etc.

So overall on dry bulk shipping we're quite bullish. There is overhang from the supply side, supply as in the fleet deliveries are not as large as people have been forecasting. We saw that last year. We had deliveries of about 60% of what was scheduled, but this year we believe that will be down to 50% of what was scheduled. So we'll see fleet growth of about 10-12%. On the demand side we see growth of about 7-10%, and in addition to that you have to look at port conditions. Over 6% of the world's dry bulk fleet is currently tied up in ports either in Australia, Brazil or China or elsewhere. That's a factor that's here to stay. Port projects that have been planned over the last several years were canceled or postponed because of the recession.

TheStreet: How is the trouble in Greece affecting you?

Khanna: It does not affect us at all. It affects us in general because we are headquartered in Greece. But as far as our banks are concerned, they are very healthy. We have very little debt from Greek banks, so it's not something that's a concern to us.

Edited for length and clarity.

--Written by Debra Borchardt in New York.