Every so often, investors will find valuation anomalies in the market. DryShips (Nasdaq:DRYS) looks like a good example today, as the company's stake in Ocean Rig (Nadsaq:ORIG) is actually worth more than the company's present market capitalization. Although the shipping industry is indeed struggling, and no fast turnaround looks likely, any estimation above zero means the core DryShips operations are undervalued.

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A Tough Quarter, As Expected
Nobody expected a great quarter from DryShips, or at least not insofar as the drybulk and tanker operations were concerned. Net voyage revenue for shipping was down 23%, as the company saw a 4% decline in voyage days and a 20% decline in contract rates. By comparison, the majority-owned Ocean Rig drilling subsidiary saw revenue more than double for the quarter.

The bifurcation in profitability was similar. Overall adjusted EBITDA rose about 22%, but all of the momentum came from drilling. On a like for like basis, core shipping EBITDA was cut in half (though still positive), while the drilling EBITDA more than doubled. (For related reading, see A Clear Look At EBITDA.)

Drilling Activity Picking Up
Compared to companies like Transocean (NYSE:RIG) or Diamond (NYSE:DO), Ocean Rig is a small player in drilling, with two UDW rigs and four drillships. Though it's small, that intense focus on ultra deepwater assets is attractive, as rates here tend to be higher and more sustainable.

This is certainly where the growth in reported earnings is going to come from in the near term (DryShips owns about 74% of Ocean Rig). The company has agreements with Petrobras (NYSE:PBR) to build and lease new rigs, as well as over $2 billion in backlog. While there will likely be some higher mobilization costs in 2012, activity in deepwater drilling does seem to be on the upswing.

Shipping - What More Need Be Said?
There's only so many times the same things can be written about the shipping industry. Conditions right now are terrible, as there's just too much supply chasing too little demand. While DryShips does have about 56% of its fleet under charter contracts for 2012 (and at decent rates), and it does have a young fleet (which means lowering operating costs), there are still weak hands left to be shaken out of the industry.

Whether or not it's to management's credit, they're not shying away from plans to maintain a big presence in the shipping industry. The company has over $600 million committed to new dry bulk ships and more than $460 million committed to new tankers, all to be delivered over the next three years.

Is Less Than Nothing a Fair Price?
Based on a somewhat simplistic forward EBITDA analysis, DryShips shares look more or less fairly valued, as they trade at about six times the current estimates for 2012 EBTIDA. There is another angle to the story, though. If you simply compare the value of DryShips' stake in Ocean Rig to DryShips' present market capitalization, there's a gap of close to $300 million. In other words, the market says that DryShips' shipping operations are worth negative $300 million right now. (For related reading, see 2011 In Review- Shipping Hit The Iceberg.)

There are a lot of reasons not to like DryShips. Management, specifically CEO George Economou has conducted some questionable transactions in the past that appeared to benefit him at the expense of shareholders, and there have been multiple accusations of self-dealing. That alone is reason for caution. That said, transparency seems to be improving and however bad the shipping business may be today, "less than nothing" seems like a harsh assessment of DryShips' ongoing value.

In no way is this a safe pick or a clearly undervalued play. Likewise, investors may very well be better off owning Ocean Rig and ignoring DryShips altogether. That said, value is value and there may be enough of an anomaly in DryShips today to be worth a closer look.

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

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