Dryships (NASDAQ:DRYS) : Upgraded to Outperform at CSFB; $8 target

Credit Suisse is upgrading Dryships (NASDAQ:DRYS) to Outperform (previously Underperform) and increasing their target price to $8 (previously $5). Firm believes DRYS rig assets are being ignored by investors. While they expect oil prices to remain volatile, the recent oil price surge should help DRYS secure contracts for its speculative drillships which should in-turn help DRYS secure financing on its two un-financed drillships. While the timing of any new rig contracts remains uncertain they expect DRYS to fix 1-2 rigs on long term contracts later this year.

- They caution DRYS is not for the faint of heart and concerns remain about future equity issuances. DRYS raised $1.1 billion over the last 6 months (more than quadrupling its share count) and while highly dilutive it put DRYS balance sheet on stable ground. It is possible DRYS may tap the equity markets later this year, but do not expect it barring an acquisition, as they expect its shipyard to partially defer this years’ rig installment payments.

- Two Potential Catalysts for DRYS – Good and Bad. The positive catalyst for DRYS would be a fixture(s) for its newbuilding drillships. The negative catalyst would be a dilutive transaction for existing shareholders – this could be an equity issuance or a cancellation of existing newbuildings that results in payments of cash or shares to the selling party.

- Dry Bulk Freight Rates Softening– But Expectations are Low. Shipping is a demand driven story and the recent surge in freight rates has been driven by China’s thirst for iron ore. While CSFB expects Chinese iron ore imports to tail off in the back half of the year a pick up in demand from Other Asia or Europe could help off-set a potential slowdown in China.

Baltic Dry Index Off YTD High, But…
With the Baltic Dry Index trading over 3,000 and closer to its year to date high (4,291) than low (773), the firm expects the BDI to move lower heading into summer as port congestion in China unwinds, newbuildings are delivered, and China pulls back on its iron ore imports. Over the last few years DRYS has exhibited a strong correlation to the BDI – however, more recently the relationship between DRYS and the BDI has broken down. Over the last 6 months DRYS has exhibited a negative correlation to the BDI. This is not overly surprising given the volatility in the equity markets combined with DRYS ATM equity issuances in which DRYS raised roughly $1 billion in equity in at the market transactions.


Increasing Target Price to $8 (previously $5)
The $8 target price represents 60% upside potential from yesterday’s close. The $8 target price is based on our 2010 EBITDA estimate of ~$585 million and a ~6.5x EV/EBITDA multiple. O6.5x 2010 EBITDA multiple is a blended average of dry bulk comps (6.0x- 7.0x) and offshore driller comps (5.0x-6.5x). Following the completion of the last ATM equity issuance we estimate net debt at $1.5 billion and a share count of 258 million. Additionally, CSFB's $8 target price represents a 30% premium to DRYS NAV. DRYS dry bulk comps are trading at premiums to NAV ranging from 10% to over 100%.

They are increasing their 2009 EPS to $1.15 (previously $1.08) and 2010 EPS estimate to $1.09 (previously $1.01). The 2009 EPS revision was driven by increases to day rate estimates for the Panamax spot fleet. They expect the Panamax spot fleet to average roughly $16,000/d for the full year 2009.

Notablecalls: I think this is a fairly major call on CSFB's part. It sure rhymes with what Alcoa (NYSE:AA) CEO had to say about China yesterday.

Believe a 6-10% move may be in cards today for the dryshipper.