We upgrade our recommendation on
) to Neutral ahead of its fourth-quarter 2012 financial results.
The change of recommendation is based on an expected growth of
drybulk shipping industry in the near future and the company's
low level of current valuation.
Why the Upgrade
We believe the company's majority owned deepwater oil drilling
unit Ocean Rig UDW, will boost DryShips' top line going forward.
Furthermore, an expected growth of commodity demand in the
emerging markets, especially in China and India may help the
drybulk shipping market to recover. We believe the company is
currently fairly valued as the stock price plummeted 43.5% in the
last year. DryShips currently has a Zacks Rank #3 (Hold).
The offshore drilling division continues to flourish buoyed by
rising expenditures from oil companies and success in ultra deep
water oil field discoveries. The deepwater oil drilling segment
is currently witnessing shortages of rigs throughout the world,
as the energy companies have raised the level of
production. At the end of the third quarter of 2012, Ocean
Rig had approximately $4.5 billion of order backlog over the next
three years. We believe the demand for deep water drilling
services will improve in the near future due to the discovery of
several big new deep water oil reservoirs. Ocean Rig has high
quality drillship fleets, which will enable oil explorers to
operate even under harsh environment.
DryShips decided to sell two of its unfinished Suezmax
tankers, currently under construction at Samsung Heavy
Industries, South Korea to a third party buyer. Last December,
DryShips entered into two novation agreements with the buyer
under which the third party owner will assume all rights,
benefits, liabilities and obligations of the two Suezmax tankers.
However, to get rid of the tankers, DryShips itself will pay
$21.4 million in cash. The primary reason for this divestment is
to reduce the annual capital expenditure of DryShips by a
significant $101 million.
Other Stocks to Consider
Besides DryShips, other stocks in the shipping industry that
are currently performing well include
Tsakos Energy Navigation Ltd.
). All these stocks currently have a Zacks Rank #2
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