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TMFDeej (99.47)

Something to love about a company that top CAPS players HATE!

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May 30, 2008 – Comments (2) | RELATED TICKERS: DRYS

After finishing a big project this morning, I decided to take a break and procrastinate by reading my weekly issue of RigZone.com's newsletter (I know, I'm lame).  In doing so, a headline leaped off of the page at me.  I thought to myself, wow what a cool blog post!  One that says something positive about one of the most hated, and painful for many, stocks in the CAPS universe, DryShips (DRYS) (see article: DryShips toTake Over Ocean Rig).  This company has been the bane of many Top Fools' existences, including awesome stock pickers like TMFEldrehad who has ridden it to a 911 point loss so far and TMFOtter who is down over a whopping 946 points on it.

The gist of the article is that Dryships is diversifying its business by purchasing a relatively small Norwegian company that owns and operates deepwater drilling rigs.  Anyone who has read my blog knows that I am extremely bullish on this sector (see article: Transocean: The deeper they drill, the higher their stock will go).  I currently own several companies that are involved in deepwater drilling in real life, including Transocean (RIG), Diamond Offshore (DO), and Pride International (PDE).  The large number of deepwater discoveries in the Gulf of Mexico and off of the coast of Brazil alone are enough to keep every single deepwater rig that currently exists and every single one that will be built busy for years.  Ocean Rig currently owns and operates two deepwater rigs and it has another two on order.

If you hate Dryships, this small acquisition probably is not enough to change your mind about it.  Good news, you might not have to.  Along with its recently quarterly results, DRYS stated that it intends to spin-off its new drilling business segment to shareholders and list it on a major exchange in the United States within the next 12 months.  It remains to be seen how well Dryships will manage this new business segment...clearly many people dislike its current management.  However, I often say that a rising tide lifts all ships, possibly even Dryships in this case.  If the valuation is attractive, I might consider picking up some shares of the spin-off in real life after doing some additional research.  This is definitely a situation that I plan on am keeping an eye on.

An actual photo of an Ocean Rig drilling rig.

Deej

No position in DRYS

2 Comments – Post Your Own

#1) On May 30, 2008 at 5:36 PM, mandrake66 (95.07) wrote:

I neither love nor hate DRYS, but felt that rates were topping out and that the top of the cycle was being reached, and briefly investigated the possibility of red-thumbing it. After seeing what it had done to some of the best players in CAPS, I backed away ever so slowly. Man what a bloodbath.

I was looking at OSTK at about the same time. Same story. Except that at least DRYS is a company with a real business model. I don't know how OSTK does it. It will fall hard at some point, but a lot of people have gotten slaughtered waiting for it to do so.

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#2) On May 30, 2008 at 9:51 PM, TDRH (99.84) wrote:

Deej, It is purchasing the remaining 25% it does not control.   It has two semi submersibles of the type that are in high demand.   It takes many year to construct these jewels.   Imagine these completed rigs, one with a contract expiry in 2009, will attract a lot of interest. 

As for drilling, I have been through many boom, bust cycles.    Day rates go up, companies invest in upgrades and new construction, new rigs come on line, day rates fall, rigs go idle and the companies are stuck with servicing huge debts.   Keep your eye on how your stocks are funding their new construction.  If it is from operating profit, fine, but as their debt rises you will need to have an exit strategy to maximize profit.   Look at the history of Falcon Drilling- I think it is now part of Transocean.

A company that I like in the sectory, which you did not mention, is Noble Drilling.   It is a conservative company that funds its new construction from existing revenues.   When chips/dayrates are down they are in a position to aquire assets relatively cheaply.    I have not looked at them or any of the drillers for sometime, because my gut tells me that we will see a drop in the price of oil, and with that the entire oil service sector will see profit taking.

An area that you may want to consider are the true suppliers.   NOV, CAM, FMC etc (see OIH), as the price of oil drops and these reach more reasonable P/E ratios you can add some of them.   After years of consolidation, there are few players, and those players have historically huge backlogs.   The correction in oil will be short lived, the over all trend is up, but there will be significant profit taking.  

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