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Update DRYS

April 23rd, 2008 · 2 Comments

This is what we wrote on April 18:

“the chart is a an absolutely crucial point, sitting right at it’s 200 day moving average, and if you draw a line through the tops, it also happens to sit right on that one too. Actually, a little above it, which is why we think it’s likely that it will break out to the upside, rather than the downside. 

Well, that turned out to have been a rather good call, as today, it had quite a feast. The catalyst is actually somewhat surprising. They’re going to make a tender for deep ocean rig producer Norwegian Ocean Rig ASA.

The economic literature on takeovers is actually not terribly favourable (more than half fail), and almost invariably the company doing the takeover is punished for it on the markets when the announcement is made.

Not this time. I think the way they approached the takeover has something to do with that. They have, with the help of it’s own CEO George Economou who bought a 4.4%, manoeuvred themselves in a position to make a mandatory offer, that was pretty smart play.

Also, putting it’s gigantic earnings to work to expand is a smart move. It’s a big takeover, but they will use cash and a pre-secured loan to finance it. It also provides diversification from the highly volatile dry shipping business, and deep ocean drilling certainly seems an attractive business right now (better technology and higher energy prices will act as a spur, not to mention the two huge finds of Petrobras).

That sector seems poised for a take-off. Dry shipping is in it’s cash-generating boom and with new shipping coming on-line in 2010, these things might not last. So taking money off the table here and putting it to work in a sector that is in it’s early stages is smart, although we do not see large synergies, so they have to run it independently.

So, this time, we tend to believe the usual blurb that is uttered when the deal is announced. This thing looks good. Of course, we had an 11% rally today, but for the medium term (provided world economic growth holds up), there is room for more.

Tags: DRYS

2 responses so far ↓

  • 1 Update on our puppies. // May 3, 2008 at 7:16 pm

    […] Dry-bulk shipper DRYS diversified into deep ocean drilling, which we thought is an excellent move, taking some of the extreme volatility out of its business and positioning it very well in the […]

  • 2 Dryships (DRYS) shipping ahead. // May 5, 2008 at 5:34 pm

    […] is not as bad as feared, and hence day-shipping spot rates are doing well. They made a terrific take-over buying a majority stake in a Norwegian deep ocean drilling company, diversifying into an industry […]