- Cantor Fitzgerald is upgrading DRYS to Buy from Hold with a $8 target (prev. $7) based on their 7.0x EV/EBITDA multiple to their new 2010 EBITDA forecast of $558 million (from $544 million)
With nearly all of its dry bulk fleet fixed under period charter contracts, the firm suggests the primary upside catalyst for the stock over the near-term will be securing employment and financing for the 5th and 6th drilling rigs.
They raise their 4Q:09 EPS estimate to $0.27 (from $0.26). For 2010, they now look for DRYS to report EPS and EBITDA of $1.05 and $558 million (from $1.00 and $544 million), respectively. Finally, the firm introduces their 2011 EPS and EBITDA forecasts of $1.22 and $743 million, respectively.
Management has stated its intention of growing the dry bulk fleet through potential distressed transactions over the near-term, with a focus on the Panamax and, to a lesser extent, Capesize vessel classes. However, Cantor believes the primary focus will be on fixing drilling rigs 5 and 6 under charter contracts, as those charters will likely be necessary before bank financing can be secured.
- Deutsche Bank reiterates Buy Rating on DRYS with a $10 price target.
Firm believes recent downside in DRYS provides an attractive entry point for the stock. They believe the thin UDW market has weighed on shares, as investors are waiting to gauge DRYS’ ability to charter at least one of its drillships as a sign that it will be able to fully realize its planned UDW fleet expansion. They believe elevated crude prices, increasingly fluid industry wide tendering activity, and DRYS’ strong cash position could all act as catalysts for DRYS’ first drillship charter and upside in shares, with its fixed dry bulk fleet underpinning stable cash flows.
DRYS Remains In Charter Negotiations For Its Drillships
DRYS remains in negotiations to charter at least one of its drillship orders over the near-term, with DRYS likely involved in most major tenders for 2011 employment (two currently active, with 4-5 more likely opening up in the coming months). From a geographical perspective, Brazil, Angola, Nigeria, and the North Sea remain likely landing spots for at least one of DRYS’ vessels, with Petrobras remaining the most active counterparty currently in the space. According to management, tender activity industry wide has picked up steadily over the past 8 weeks, however there have yet to be any awards. Eventually transactions and charters will resume in the UDW space, and they believe the high quality of DRYS’ newbuild fleet and its preexisting relationships should help DRYS find employment for its vessels.
DRYS’ Cash Position Acts As Safety Net
Steel cutting has already begun at Samsung for two of DRYS’ drillships, with construction on the third and fourth vessels likely beginning before the end of January and March, respectively. Typically 15%-20% installment payments are made upon steel cutting, which means DRYS will likely begin paying out more than $200 million in payments over the next two months, in addition to continual installment payments on the two drillships that are currently under construction (which remain unfinanced). While the lack of financing (and employment) for DRYS’ first two delivering drillships has clearly weighed on shares, Deutsche believes DRYS’ estimated Q4 cash balance of more than $800 million ($3.20/share) provides significant breathing room. They continue to believe DRYS will look to charter at least one of its vessels before securing the remainder of the necessary financing (which has proven to be difficult), and the firm thinks DRYS’ strong overall cash position should help fortify what has been a somewhat weak negotiation position.
Notablecalls: Should see some buy interest. Can trade towards $6.30+ levels if market plays ball.
Note the Cantor upgrade is part of a group call.