DryShips to Gain From Low Oil Price, High Iron-ore Demand

On Sep 19, 2014, we issued an updated research report on DryShips Inc. (DRYS).

Except for the last quarter, DryShips delivered negative earnings surprises in three quarters last year, with an average miss of 109.17%. However, the company posted improved financial results for the second quarter of 2014 with the bottom line missing the Zacks Consensus Estimate but the top line surpassing the same.

DryShips witnessed strong revenue growth of 57% in the second quarter of 2014 with all three segments witnessing growth. At the end of the second quarter, the Drilling segment had approximately $5 billion of order backlog. Earlier, Ocean Rig signed a 6-year definitive agreement with Total E&P Angola Block 32 to drill the offshore areas of Angola. The contract is expected to commence in the third quarter of 2015 and has an estimated backlog of $1.3 billion.

DryShips has 6,651 spot fleet capacity days in 2014, which is expected to increase to 15,821 days in 2015. Thus, the company is highly optimistic that increasing spot fleet capacity days and new contracts wins will bolster the company’s EBITDA growth while moving ahead. Moreover, rising demand for iron ore and steel production coupled with lower oil prices in the global market owing to increased oil supply may act as a strong catalyst for the shipping company.

However, the drybulk shipping industry is cyclical in nature with volatility in charter hire rates and profitability. Moreover, future demand and supply of drybulk commodities are quite difficult to predict. Several economic and geopolitical events can significantly affect demand, supply, price, and transportation of drybulk commodities within a short span of time. Moreover, the ongoing political turmoil between Ukraine and Iraq may further drive fuel costs moving forward, thus affecting profitability and competitiveness of shipping companies in comparison to companies engaged in truck or rail transportation.

Meanwhile, the main concern for DryShips is that a major portion of its shipping contracts are currently under volatile spot rate market. Such a wide exposure will definitely result in severe top-line fluctuations, going forward.

DryShips currently has a Zacks Rank #3 (Hold).

Stocks That Warrant a Look

Other better-ranked stocks in the shipping industry are Rand Logistics, Inc. (RLOG), Star Bulk Carriers Corp. (SBLK) and Nordic American Tankers Limited (NAT). All three stocks currently sport a Zacks Rank #1 (Strong Buy).