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Tickers in this Article: DRYS, PBR, DB, DAC, EXM
Before the credit crisis hit, dry bulk ship and drilling rig operator DryShips (Nasdaq:DRYS) reported 2007 earnings north of $13 per share. A year later, profits fell to a loss of more than $8 and are still in recovery mode. With a stock price of less than $5, there is definite upside potential, but Dryships' many moving parts to its volatile operations may make investors steer clear of the stock.

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Fourth Quarter Recap
The dry bulk carrier unit posted a sales decline of 4.7% to $106.7 million. The offshore drilling segment, which the company plans to eventually spin off into a separate company, experienced robust 32.7% growth and total sales of $102.2 million. Total reported revenue, including a small amount of other sales, improved 9.9% to $215.8 million. Operating income more than doubled to $78.6 million as last year's quarter contained a $32.7 million loss from a contract cancellation. A gain on interest rate swaps sent net income up to $99.7 million, or up drastically from net income of $9.6 million in last year's fourth quarter. This worked out to 29 cents per diluted share. Diluted share count jumped almost 36% to 345 million shares outstanding.

Full Year Review
Full year revenues increased 3.6% to $859.7 million as both operating units logged modest top-line increases. Operating income was again up significantly, rising to $367.4 million as last year's expenses included more than $244 million in cancellation loss charges. However, this year included a large $120.5 million loss on interest rate swaps, though net income was still positive at $188.3 million after a loss of nearly $21 million last year. Diluted earnings were 62 cents per diluted share. The company did not provide cash flow details in its press release.

Outlook
Analysts currently project sales for the coming year to grow almost 5% and reach nearly $860 million. They expect earnings of $1.11 per share. Management's only detail for the coming year relayed it is "seeing increasingly attractive opportunities to purchase dry bulk carriers and renew and/or grow our fleet," and that its "strategy remains opportunistic in this sector."

Bottom Line
In addition to the operating volatility, DryShips frequently needs to secure financing as it can spend more to acquire vessels and make improvements to them than it generates in operating cash flow. It recently secured an $800 million loan to fund the construction of two ocean rigs and restructured a $1.1 billion term loan with Deutsche Bank (NYSE:DB) regarding a drilling contract with Brazilian energy giant Petrobras (NYSE:PBR) and a couple of smaller loans. As a result, debt to equity is 46% and means debt is a significant portion of its capital structure.

DryShips diversified into drilling rigs during the 2008 downturn to offset volatile demand in its traditional shipping business. It sees strong shipping demand over the long haul due to a "record pace of Chinese commodity imports," but this demand will likely continue to be uneven. Given the many moving parts in its business and continual need to secure outside financing for its operations, the company, like Greek shipping rivals Danaos Corporation (NYSE:DAC) and Excel Maritime Carriers, Ltd. (NYSE:EXM), is likely suited for more risk-tolerant investors. (For related reading, take a look at The Baltic Dry Index: Evaluating An Economic Recovery.)

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