Page 50: of Maritime Logistics Professional Magazine (Q1 2011)

Maritime Risk

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50 Maritime Professional 1Q 2011

Khanna is bullish when asked about the health of the global drilling markets. “We have already announced several contracts for the drillships. The demand we see in the market over the past two months is tremendous. We are confident that we will find employment for our drillships at attractive rates.” Indeed,

DryShips launched 2011 with lease deals worth almost a combined $600m.

Less clear was the daily net revenue expected from the deals. DryShips is also banking on the new emphasis on drilling safety in a post-Deepwater environment. “The main thing that will come of the spill is to raise the empha- sis on safety. Our two vessels operating now already comply with current regu- lations and those contemplated by U.S. authorities. Because some rigs operat- ing there will not be able to meet the new requirements, our drillships will actually be in high demand. In the future, we think we will be operating in the Gulf of Mexico and our state-of-the- art drillships will be the preferred rigs.

The added bonus of having new drill- ships that can move in the event of hur- ricanes only makes us more attractive.”

DRYS points to their deep experience in the drilling sector. Khanna claims, “We have drilled more than 80 deepwa- ter sites for sixteen different customers.

I think that the only other operator that has drilled more is TransOcean.”

Khanna adds that DRYS will stay in both the bulk and drilling sectors, struc- turing the companies as standalone, list- ed entities. “We will own a significant portion of the ultradeepwater company that we create. We don’t intend to get out of the deepwater drilling business.

We like the business, it has a great pay- back – you pay back a drillship in five to eight years. The life of a drillship is 40 years.”

With the promised IPO (gross pro- ceeds $500m) in its wake, DRYS announced in late December its intent to purchase 12 newbuild tankers at a total purchase price of $770m. The deal included six Aframax and Suezmax each, with intended delivery of the final three hulls in 2013.

DRYS made initial payments of $120m against the newbuilding con- tracts from cash on hand and also announced plans to finance the remain- ing capital commitments, which include delivery installments of about 70% of each vessel's price, with cash on hand and bank debt. Ultimately, DRYS intends to position its tanker invest- ments for spinoff or initial public offer- ing. Defending the strategy which arguably represents a significant course change for DRYS, Khanna said, “For the past two years, we’ve been focused on drillships. Now that the IPO is over and most of our drillships have con- tracts, we shifted our attention to the tanker market. Diversification is not a bad thing.”

Khanna all but declined to discuss claims that the tankers were the same group of 12 that Cardiff Maritime – the operator with ties to DryShips CEO

George Economou – had previously contracted. “I can’t speak for Cardiff.

The pricing and structure of this deal is different. Those allegations don’t make any sense.” Still, the purchase did not go down well with some analysts, who pointed out that the tankers significant- ly changed DryShips' asset profile and furthermore made the company more difficult to valuate. One way to look at the latest DryShip move is that it reflects an intention to balance the cyclical nature of its other two business units by entry into a third. The tanker acquisition, the six OceanRig UDW vessels and the Drybulk fleet modern- ization represent three distinctly differ- ent sector plays. DryShips sees opportu- nities in both the drybulk and tanker sectors where others are less optimistic.

Using a staggered newbuild delivery schedule against a tanker market expe- riencing low freight rates – and may not have bottomed – DryShips is betting that the long term strong oil demand in places like China and India will lead to improved market conditions.

DryShips characterizes its market mix as “positioning the Company to be a significant player in the tanker market with a sizable fleet and a balance sheet that can withstand the cyclicality of the tanker market.” The tankers could also be a play to develop a “turnkey” busi- ness with existing drilling clients; with transport as an adjunct to drillship efforts. With Pankaj Khanna (formerly

VP of Teekay Strategic Development) on board, the new project is also some- what reminiscent of Teekay’s foray into productions with its acquisition of

Petrojarl FPSO assets in 2006.

DEFINING RISK & REWARD

As DryShips “leverages the platform built over the last few years to enhance shareholder value,” only time will tell if the diversified fleet mix is too deeply leveraged to withstand the next crisis, or when two of three business units expe- rience cyclical lows at the same time.

With its low annualized price-to-earn- ings (P/E) ration, the market has built in the risks of a significant debt load, while extending the possibility of allowing risk-tolerant investors a real opportunity to make some money.

Boasting six fully modern and compli- ant drilling vessels for placement in an onerous regulatory environment, the pure deepwater drilling play may well be DryShips’ best bet. Across the spec- trum of their drybulk, tanker and drill- ship fleets – and once all newbuilds are delivered – they will have one of the most modern equipment collections on the water. Nevertheless, and tempered by uncertainty in the global dry bulk and tanker markets – even if the brisk global demand for raw commodities continues – the long term prospects for the new-look DryShips are anything but certain. If the previous 24 months are any indication, it will certainly be excit- ing. If DryShips Defies Definition, then you now know why.

DryShips

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