SOURCE: Capital Link Shipping

October 09, 2008 08:40 ET

George Economou, Chairman and CEO of DryShips, Sets the Record Straight

Interview With Barry Parker

NEW YORK, NY--(Marketwire - October 9, 2008) - George Economou, Chairman and CEO of DryShips, (NASDAQ: DRYS) was interviewed today by Barry D. Parker of BDP1 Consulting. The interview focused on DryShips' recent strategic expansion with the addition of 9 Capesize drybulk carriers and two Ultra Deep Water drillships.

Please find below the interview in its entirety.

Barry Parker: You just announced two major asset contributions to DryShips. Let's start with the Cape vessels. Several people criticized the valuation for this acquisition inferring that it was on the rich side.

George Economou: I would like to clarify a point that might have been overlooked in yesterday's presentation. DryShips paid the sellers for their equity in these nine Capes with 19.4 million of new shares of DryShips. This is an all stock deal for DryShips, there is no cash consideration to be paid since the sellers including myself got a fixed number of shares, 19.4 million, not cash. The number of shares the seller gets does not adjust with the actual share price at the time of closing. The transaction value that was mentioned in the presentation illustrates purely a theoretical data point and was based on the previous day's closing price.

When the transaction was done, it was at a level about 10% below third party valuations we had received. So if you take into consideration yesterday's share price, this discount is a lot higher, making the transaction even more attractive for DryShips. If you want to put a price on the deal as of yesterday's close at $20.88 the transaction value is worth $884 million for all ships, which is a heavy discount to today's asset prices. Another point to add with respect to the 9 Capes, is that DryShips has minimal further cash outlays and these vessels have already financing in place, therefore there is no need to secure additional financing.

The fact that the sellers including myself, got shares of DryShips and not cash, is tangible proof of our belief in the long term fundamentals of the drybulk industry and in the prospects of DryShips.

Barry Parker: Can you tell us why did you decide to do it now, why did you pick up these particular assets?

George Economou: We have been working on this transaction for quite some time, so it is not something that happened overnight. We would have done this transaction now even if the shipping and financial markets were in a different state. This transaction is unique in many ways. Firstly it is an all stock en bloc transaction, which is almost impossible to find in shipping. Secondly it does not require raising debt, which as you know is very hard to come by, since the 9 Capesizes are financed. Thirdly it gives the company the opportunity to position itself more in the Capesize market, by increasing the company's total vessel dwt carrying capacity by 38%, in a vessel category that has always been our preference, but is difficult to buy into since there are a limited number of Capesize vessels available in the S&P market at any specific time. Lastly five of the nine vessels come with secured cash flows at premium rates which offer increased visibility of the company's cash flows.

Barry Parker: DryShips is today a lot less dependent on the spot market? Are you changing your operating profile?

George Economou: I want to point out that our strategic vision has been vindicated. We took full advantage of the spot market and covered with TC employment at the right time. I believe at some stage the market will give DryShips credit for our impeccable timing in fixing for long term employment.

We expanded based on this view and shifted our chartering strategy to long term coverage, when we saw the market mature and as a result of which 61% of the vessels in the water today are employed on fixed rate contracts with an average remaining term of 5 years at very strong rates. I would like to address analyst's and shareholders concerns about the creditworthiness of our counter parties. As a strategy, we have a diversified customer base and do not rely on a limited number of counterparties for our long term contracts. In any event, our counterparties are first rate and we feel comfortable with their ability to perform.

Barry Parker: Why did you enter the ultra deep water drilling business and where are you now with the development of your business unit?

George Economou: We observed the acute shortage of UDW assets and the insatiable demand of the world for energy, which pushes exploration and drilling further out in the oceans. This imbalance between supply and demand translates into record rates for the employment of these UDW drillships, and we expect these rates to continue improving. In the UDW drilling business, the assets are all chartered under long term contracts which create significant stability and visibility and high levels of profitability.

So, as we did with the drybulk side, we set out to penetrate the UDW drilling market in an early stage and to build quickly a sizeable presence in it. In the last 12 months, we acquired Ocean Rig, a company with an established management and operating track record in the sector which owns two UDW drillships currently in the operation. Since then, we expanded the fleet with the addition of four more UDW drillships to be constructed at Samsung Heavy Industries, with deliveries between the fourth quarter of 2010 and the third quarter of 2011. With six UDW drillships, Primelead, our UDW drilling subsidiary, will have the 4th largest UDW drillship fleet in the world and will be a significant player in this market.

Barry Parker: What is the value proposition for Primelead?

George Economou: As I mentioned before, with six offshore units in operation by 2011, the UDW unit will be a significant player in this market and given the shortage of UDW assets, we see day rates to continue increasing.

Using several methodologies, it was estimated that the total equity value of Primelead would be between $2.55 billion and $2.80 billion, which if correct, and taking into account the 75% owned by DryShips and divided by the 63 million shares should result in a common stock price of $30 to $31 for the spun-off entity.

As we showed in our recent presentation, if for example you assume a daily rate in excess of $675,000 per drillship, you get an EBITDA level which after applying a multiple of 5, which is the current market, you get an Enterprise Value of $900 million per drillship, or $5.4 billion for all six units. Taking out the net debt of this entity you get an equity value of about 2.7 billion. 75% of this value ($30-$31 per share) goes to the 63 million shares owned by DryShips shareholders post closing and post spin off.

Barry Parker: How will the spin-off take place?

George Economou: This is really a simple process which is only subject to SEC approval and not the broader state of the markets. After we file all appropriate documents with the SEC, and once approved, we will spin-off the entity to our shareholders as a dividend. We hope to do so in the fourth quarter of 2008 or in the first quarter of 2009. This is not an IPO, as we will not raise any new equity. Simply, each shareholder in DryShips as of the record date will end up owning a share in DryShips and a share in the new spun-off entity, which they can then keep or sell on a U.S stock exchange, and the market will then determine the ultimate value of those shares.

The new public company's CEO will be David Mullen, and the CFO will be Jan Rune Steinsland, who currently are the CEO and CFO of Ocean Rig respectively.

Barry Parker: What is then your outlook for the dry bulk market and DryShips stock valuation?

George Economou: I believe the turmoil in the financial markets has dented confidence and psychology, it is not a matter of fundamentals. When the turmoil in the financial markets subsides and the current economic environment stabilizes we will see shipping rates rebound. I will not argue today's undervalued nature of our stock as the stock market is plagued by irrational behavior which has even hit industries with healthy prospects. I am confident that those shareholders who have the same longer term horizon with us stand to be rewarded for their loyalty and patience. Management continues to be a strong believer in Dryships stock and future company prospects owning approximately 35% of shares outstanding post transaction and will create future value for its shareholders.

About Barry Parker:

Barry Parker is a financial writer and analyst. His articles appear in a number of prominent maritime periodicals including Fairplay, Seatrade, Lloyds Shipping Economist and James Transport Finance.

About DryShips Inc.:

DryShips Inc., based in Greece, is an owner and operator of drybulk carriers that operate worldwide. As of the day of this release, DryShips owns a fleet of 54 drybulk carriers comprising 7 Capesize, 30 Panamax, 2 Supramax, and 15 newbuilding drybulk vessels with a combined deadweight tonnage of about 4.7 million tons. DryShips is also the owner of 6 UDW drilling units including 4 UDW drillships to be built at Samsung Heavy Industries (SHI), scheduled for delivery between the fourth quarter of 2010 and the third quarter 2011. DryShips Inc.'s common stock is listed on NASDAQ Global Market where it trades under the symbol "DRYS."

Contact Information

  • For further information on DryShips, please contact:
    Nicolas Bornozis
    Capital Link, Inc., New York
    Tel. 212 661 7566
    E-mail: dryships@capitallink.com