Page 49: of Maritime Logistics Professional Magazine (Q1 2011)

Maritime Risk

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www.maritimeprofessional.com Maritime Professional 49 explains, “We did not reschedule any debt. In fact, we prepaid our debt obli- gations – over $1 billion last year. The only thing we have got is the so-called waivers on governance on the loans which were related to the loan-to-value clauses. For the significant portion of our loans – 75 percent – we are back in compliance.”

The new DryShips fleet is marginally smaller, but also appreciably younger.

Eschewing the longtime DryShip phi- losophy of “creating value by acquiring secondhand drybulk vessels across the size spectrum,” the firm has also reduced the average age of their ton- nage to about 8 years from a high of 18 years in 2005. Khanna adds, “Getting second hand vessels generates cash flow. However, there was no sense in buying a five-year old vessel at high rates when Capesize newbuilds were much cheaper.” Arguably, the firm has been nimble when needed, adapting strategy to the existing business envi- ronment. With regard to its business mix and long term charter performance record, DRYS management was either lucky or very smart. With as much as sixty percent of its fleet chartered dur- ing the worst of the crisis – 4Q 2008 to 1Q 2009 – customers, for the most part, had cargoes for those vessels. Beyond this, says Khanna, “We were looking at credit records and we were picky. We could not charter out the entire fleet – there just weren’t enough charterers with a good enough credit record.

RISK & REWARD

Discounting DryShip’s apparently cogent business strategies, the issue of stock price has some investors spooked.

DRYS at one time reached as high as $130 per share and plunged to as lit- tle as $3. In early December, Khanna countered those fears by explaining the cyclical nature of the DRYS business sectors. “The Drybulk business is sig- nificant, but the drillship business is more so, based on the capital employed in that business. We’re involved in two cyclical businesses; one related to the crude oil cycle, the other related to the general growth in the economy. You have to look at where we are in the cycle. If investors think we have prop- erly judged the fundamentals, then they will see that we are the right vehicle.”

The DRYS strategy is simple: Ultra deepwater drilling, closely tied to crude oil pricing, is based on a breakeven price of $55 per barrel. With the current price now pushing $91, that sector has the potential to be very profitable.

Khanna says, “We are highly leveraged to ultra-deepwater drilling markets and crude oil prices. There aren’t too many pure players (like ours) and these six vessels are being chartered out at high prices. On the Drybulk side, Khanna explains, “We have good charter cover- age for this year and next. It’s a like buying a bond with an option for 2012.

At that point, some of our ships come off charter, but we expect the market to be considerably stronger than it is right now.” There’s even more upside to the

DRYS story, according to their COO.

The business mix consists of 39 bulk carriers (combined DWT > 3.5 million tons), two ultra deep water semisub- mersible drilling rigs and 4 ultra deep- water drillships.

The drillships, at the time of our inter- view, had yet to generate any revenue but the two that are operating are fixed out at $648K and $480K per day. “So, that equates to about a 50/50 split from each side of the business equation.

Once the other vessels are delivered, the ratio will change considerably,” adds Khanna. In January, DryShips took delivery of its first (of 4) drillship.

DRYS also advised that “construction was progressing well and according to schedule.” The final vessel is due in

September, and long-term employment for all but one of the four has reported- ly been secured.

DryShips was created to serve the dry bulk market, evolved to the ultra deepwater drillship market, and recently has added tankers to its burgeoning portfolio. Will the diversification pay off?

Time will tell.

Maritime Logistics Professional

Maritime Logistics Professional magazine is published six times annually.