SOURCE: DryShips Inc. via Capital Link

August 25, 2005 16:21 ET

Hibernia Southcoast Capital Initiates Coverage on DryShips (DRYS)

NEW YORK, NY -- (MARKET WIRE) -- August 25, 2005 -- Hibernia Southcoast Capital initiated coverage of DryShips, Inc. (NASDAQ: DRYS) with a Buy recommendation and a $22 price target. The analysts are Pierre E. Conner III and Joseph D. Gibney.

DryShips Inc., based in Greece, is an owner and operator of drybulk carriers that operate worldwide. It owns a fleet of 26 drybulk carriers and has entered into an agreement to purchase an additional vessel that is scheduled for delivery during August, 2005. Upon delivery of this vessel, DryShips will own and operate 4 Capesize, 21 Panamax and 2 Handymax vessels, with a combined deadweight tonnage of approximately 2.3 million. It is the second largest Panamax operator in the world. The company's vessels transport major bulk commodities such as iron ore, coal, grain and minor bulks such as fertilizer, bauxite and cement.

The report highlights the anticipated acceleration in demand for drybulk shipping in the second half of the year, driven by worldwide demand for iron ore, particularly in the fourth quarter. While rates have dropped off dramatically from 4Q04 peaks, they still remain above the seven- and 10-year averages, and Hibernia feels that they should trend up once again, particularly given an improving 2006 in the supply-and-demand balance. The report notes the seasonal ramp up of rates in the third and fourth quarters and estimates daily rates in the third quarter 2005 to be at $32,000 for Capesize vessels, $15,500 for Panamax and $15,000 for Handymax, while in the fourth quarter the estimates are at $38,500, $17,500 and $16,500 respectively.

Hibernia believes that the Panamax vessel is the workhorse of the drybulk fleet, and with 21 Panamax vessels, DryShips is now poised to further consolidate this mid-sized segment of the world fleet which remains highly fragmented.

According to the report DryShips is trading below its initial offering price of $18 and Hibernia's NPV-based target price of $22. DryShips currently trades at 4.3x Hibernia's 2005 EPS estimate of $3.88 and 3.0x their 2005 CFPS estimate of $5.46. The analysts estimate that DryShips will achieve EBITDA of $46.8 million in 3Q05 and $50.5 million in 4Q05 (compared to $61.5 million in the first half of 2005), commensurate with the anticipated turn in rates in the back half of the year. Hibernia anticipates DryShips closing 4Q05 with total debt of $418.1 million and a debt/total capital ratio of 60.0% (58.1% net debt/total capital). On June 30th, 2005, DryShips had total debt of $547.7 million, and a debt/total capital ratio of 63.6% (60.9% net debt/total capital)

Also mentioned in the report, DryShips paid its first quarterly dividend of $0.20 in July. On an annualized basis, this represents an approximate yield of 4.8%. Hibernia's EPS estimates are $0.74 for 3Q05 and $0.87 for 4Q05.

The report also focuses on DryShips' balanced spot versus time-charter strategy and estimates that the company will operate 60% of its total fleet in the spot market (16 vessels out of 27). The analysts believe that this approach provides the company with a good deal of earnings visibility going forward with 40% of the fleet on time charter (albeit of shorter durations, usually a year or less) but still provides exposure to an expected rise in the rates moving into 2006. Ten of DRYS vessels are expected to operate in the Baumarine spot pool, a pooling entity that outperformed the market by an estimated $1,000 per day in 2004 and $5,095 per day in the first half of 2005. All vessels in Baumarine pool their earnings reducing each shipowner's individual risk.

Furthermore, according to the report, despite the large expansion of its fleet, DryShips retains a sound balance sheet that provides for the possibility of opportunistic acquisitions or further expansion down the road.

DryShips is actively followed by analysts at four firms, Cantor Fitzgerald, Dahlman Rose, Hibernia Southcoast Capital and Jefferies. All four have Buy ratings on the stock with target prices at $21, $25, $22 and $30 respectively. DryShips' shares closed at $16.61 on Monday, August 22nd, 2005.

Written by Capital Link.

For more information, please contact Nicolas Bornozis, nbornozis@capitallink.com.

This article was written by Capital Link, a financial communications and investor relations company, which services several listed companies, including DryShips.

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