Highlights From DRYS's Q3 Conference Call: 77% Covered for 2011 at Average Rate of $37,000 Per Day

October 27, 2009 2:22 PM EDT

DryShips, Inc. (NASDAQ: DRYS) reports Q3 EPS of $0.27 adjusted, 7 cents better than the analyst estimate of $0.20. Revenue for the quarter was $120.60 million, which compares to the estimate of $210.65 million. Shares have continued to sink throughout the session...now down 7.84%.

Highlights From DRYS's Q3 Conference Call:

• (COO) We incurred a non-cash flow associated with the evaluation of interest rates swaps. Adjusting our P&L for this would change our reported figure to a profit of 74.9 million or $0.27 per share.
  
• During Q3, we took delivery of our new building Panamax, the Oliva that commenced a two year time chart.
  
• We completed the acquisition of the remainder of our drilling units for over 92% of our outstanding debt we are either not in breach of covenants or have secured waivers. Discussions for waivers with two banks for 188 million of outstanding debt are ongoing and we hope to have this tied up in shortly.
  
• In October we fixed the Panamaxes surrender on a two year time charter at $17,300 per day leaving just three vessels on the spot market.
  
• We have now 92% covered for Q4 of 2009 and 2010 at just under $34,000 per day.
  
• 77% covered for 2011 at an average rate of $37,000 per day and 40% covered for 2012 at an average rate of $47,260 per day. These fixed rate charges will generate over 1.2 billion in revenues over the next three and a quarter years.
  
• Last week we announced the appointment of Ziad Nakhleh, as CFO. He will be commenting on the 1 of November. We are very pleased to have him on Board.
  
• Turning to the Ultra Deep Water segment, the Leiv Eriksson is expected to complete its charter with shale in October and commence the mobilization process to move to the Black Sea for the Petrobras charter. The Eirik Raude is drilling at the jubilee field Afgana for Tullow Oil and continues to perform at a very high utilization rates. The revenue backlog from the two semi-submersible rigs amounts to $1.2 billion.
  
• For 2009 the fixed EBITDA is expected to be approximately $600 million. For 2010, $671 million and for 2011 fixed EBITDA is $607 million.
  
• Assuming the four newbuilding drillships and the air crowd are fixed for three years at $500,000 per day, with $180,000 per day of operating costs and 95% utilization. The 2011 fixed EBITDA rises by an additional 221 million to $829 million.
  
• Following the delivery of the Oliver we no longer had any further CapEx outstanding on the drybulk side. Regarding the drillships, the 48 million for hull number 1838 was paid earlier this month and was financed by cash on hand. Further out, $1 billion is scheduled to be paid in 2010 and 886 million in 2011.
  
• In Q3, schedule debt repayments on par amounted to $136 million. In the first nine months of 2009, net debt repayment has amounted to $1 billion, not a claim many company's can make. Now our net debt to cap stands at 40%.
  
• With oil prices rebounding and the global economy recovering, exploration and production spending is expected to recover from hereon and drilling activity in the Ultra Deep water will be the beneficiary of this recovery. We're already starting to see signs of that in terms of tendering activity.
  
• Turning to the drybulk market. Chinese imports of commodities have been virtually the sole driver for the drybulk market during 2009. While scoffed at the decoupling theory, the continued GDP growth in China and India in the midst of a recession that developed whole world has proved otherwise. Chinese GDP grew by 8.9% year-on-year in the third quarter of 2009 and indicators such as industrial production and construction activity are rebounding strongly.
  
• For 2010, GDP growth is projected to accelerate further to close to 9.5%. A interesting thing is that it isn't just China anymore we're starting to see a recovery in the rest of the world as demonstrated by the graph on the right.
  
• In addition to looking at more macro issues, we also see here that micro issues such as steel inventories have an impact on the drybulk market. The record utilization rates at Chinese steel mills have led to record production and caused an increase in steel inventories.
  
• As reported in the last quarter, deliveries continue to the lag behind what as scheduled. In the first nine months of 2009, 26.6 million tones of drybulk carriers were delivered as compared to scheduled deliveries of 41.6 million tons, implying a 36% slippage.
  
• For the full year 2009, we expect deliveries to total approximately 40 million tons. We believe that between 50 to 60% of the drybulk order book would be delayed or cancelled with deliveries in 2010 and 2011 being most affected.
  
• Looking at the 2010 order book, it totals 109 million tons and adding the slippage from 2009 would amount we massive 140 million tons. Assuming 50% of this is cancelled or delayed, the 2010 deliveries are projected at 70 million tons a daunting figure.
  
• (Q&A) Pankaj could you provide us an update on the rig operations in Q3 in terms of utilization for the quarter of the rig. As well as it looked like rig operating expenses moved higher in the quarter? (A)The rig operating expenses going forward should actually be coming off. As you know the Leiv Eiriksson is completing its charter in the North Sea and will move to the Black Sea. So we expect over the next few quarters the operating cost for the Leiv Eiriksson to come down. As far as the operating rigs are concerned, both the Leiv Eiriksson and the Eirik Raude operated at very high utilization it was well above 95%. The Eirik Raude in fact was pretty much close to operating trades above 99%. So we have mentioned that in the press release, as well. We are very pleased with the operating results of both the rigs.
  
• When I compare the freed end in the second quarter versus the third quarter, it look like you had two Panamaxes new buildings delivery next year. And I guess those have been, were those cancelled? (A)I cannot comment on the details of the agreement as far as those two Panamaxes are concerned, because the terms of the settlement are confidential. Please refer to the 6-K filings that will be made or the next couple of days which will have the details in it.
  
• I wanted to ask you about progress in retaining contracts to the new building drillships any progress there, you mentioned some tenders coming up what kind of discussions you are having with in terms of getting contracts to this? (A) Well, I mean, just in the last few weeks we have about, other than Petrobras, which is the largest user of rigs, we have tendered for about seven additional rigs from oil majors. And these tenders are split between the Gulf of Mexico and West Africa in the main. So we have seen a marked pick up as far as just regular tendering activity is concerned. Besides that, Petrobras is also in the market for a several vessels. There was a three rig tender which was cancelled earlier, which they may or may not so we will be looking for it still up in the air. But in addition to that they have the program in Brazil or rather than where they want to build in Brazil, which is tender for seven drillships, plus two semi-submersibles again for which drilling contractors have been invited. So we see a marked pick up as far as the activity is concerned on the drillship side. As far as our rigs are concerned we are part of every one of those tenders. But in addition we are also in one and one discussions with a couple of companies. So while I don't have a contract to announce today, but we believe that we still are in a good position to have at least one or two of the vessels fixed away in the very near term.
  
• And as obtaining that you still need just under $2 billion for the CapEx for those -- for the vessels for new billing payment, is that is obtaining a contract from two still preconditions to getting that financing for that? (A)I mean we have financing in place for hull numbers 1865 and 66. And they are fully funded. I mean the equity for that is also sitting in an escrow account. And that's what the restricted cash consists of. As far as the two other rigs are concerned 1837 and 38, in the finance environment we are in currently, contracts are precondition to getting the financing. We're in discussions with a couple of commercials banks and of course, also with the export/import agencies. So, we're fairly confident that we'll have the financing in place as long as we have the contracts in place. Our finance is a very tight or almost unavailable as far as shipping is concerned, but on the offshore side, there is still availability.

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