The company will acquire Ocean Freight, Inc. (NASDAQ: OCNFD) for a total consideration of $19.85/share, more than double Ocean Freight’s closing price of $9.47 yesterday. The deal includes $11.25 in cash and 0.52326 shares of Ocean Rig UDW Inc., a Norwegian company that trades over the counter and which closed yesterday at $16.44 and is 78% owned by DryShips. As part of the deal, Ocean Rig shares will be listed on the Nasdaq GS when the deal closes, now expected to happen in the fourth quarter of this year.

Shipping companies are currently suffering from a rapid expansion of their fleets before the financial crisis that has left them with an oversupply of carriers. Daily rates are quite low, although the Baltic Dry Index has risen recently from a nadir of about 1,100 to around 1,300. In May of 2008, the BDI rose to nearly 12,000.

The purchase seems a bit odd, to say the least. DryShips has been sinking time and money into building an ultra-deepwater drilling fleet at Ocean Rig. Ocean Freight owns six dry bulk carriers, four Capesize and two Panamax, and has contracted to buy five newbuild Very Large Ore Carriers for delivery in 2012 and 2013.

At the end of 2010, DryShips carried long-term debt of $2.15 billion and Ocean Freight had long-term debt of $132 million. DryShips will assume Ocean Freight’s debt as part of the deal and will also assume Ocean Freight’s existing credit facilities which include an aggregate debt limit of $142.8 million at Libor plus 250 basis points with a maturity date of October 2015.

DryShips isn’t the only shipper that is suffering. Shares in Eagle Bulk Shipping, Inc. (NASDAQ: EGLE) are down nearly -50% year to date, as are shares in Excel Maritime Carriers, Ltd. (NYSE: EXM). Shares in Genco Shipping and Trading Ltd. (NYSE: GNK) are off more than -50%.

None of these shippers has a price/book ratio above 0.5, and some are as low as 0.13. While numbers like this might often indicate a value play, in this case it very likely indicates a value trap. Shipping companies may turn around, but not this year and very probably not next year or the year after that either.

DryShips’ shares are down nearly -4.5% in early trading, to $3.66, barely within the 52-week range of $3.56-$6.44. A new low is very likely today.

DryShips clearly saw an opportunity to buy while there was blood on the ground. That some of the blood was its own didn’t stop them.

Paul Ausick

DryShips Inc. (NASDAQ: DRYS) is scheduled to report results tomorrow, and analysts are expecting EPS of $0.16 on revenue of $234 million. For the June quarter, expectations rise to EPS of $0.22 on revenue of nearly $279 million. Many other shippers have already reported quarterly results, including Genco Shipping & Trading Ltd. (NYSE: GNK), Diana Shipping Inc. (NYSE: DSX), Eagle Bulk Shipping, Inc. (NASDAQ: EGLE), and Excel Maritime Carriers, Ltd. (NYSE: EXM).

Charter rates remain low for both dry bulk and container shippers. The Baltic Dry Index, a measure of dry bulk shipping rates, currently sits at $1,344, about double its low of around $663, but still well below year-ago rates of nearly $4,000. Container shipping rates are rising somewhat, but by less than the industry would hope. From Shanghai to the Europe, the cost of shipping a twenty-foot container (teu) fell from $925 to $919. Rates had been as high as $1,300/teu earlier this year. Meanwhile, the cost of bunker fuel from Asia to Europe have risen to a record high of $776/teu.

Ironically, Diana Shipping was able to beat expectations for its first quarter by expanding the size of its fleet. The company’s average charter rate for the quarter was $31,592, compared with $31,982 in the same period a year ago. But the company averaged more than 2 more vessels in operation this year, making up for the lower rates and higher fuel costs. Genco, like Diana, also added new vessels in the first quarter, which helped the company overcome a 37% decline in shipping rates.

Eagle posted an EPS loss of -$0.09 for the first quarter, including a $6.6 million one-time loss. Excluding the item, the company posted EPS of $0.01 on revenue of about $87 million, which was up 60% compared with the same period a year ago. The company is expected to post an EPS loss of -$0.01 next quarter on revenue of $65.5 million, a sharp sequential decline from first quarter revenue of $86.7 million.

Excel posted an EPS loss of -$0.01 on a doubling of expenses. The company’s blended charter day rate was down by -20% year-over-year.

The number of dry bulk ships is expected to increase by at least 10% this year, while cargoes are expected to rise by only 5%. Add in higher fuel costs, and the outlook for shippers in 2011 is decidedly downbeat.

Paul Ausick

Eagle Bulk Shipping (NASDAQ: EGLE) is up nearly 4% premarket to $4.16, relative to a 52-week range of $3.91-$6.08. The shipping company was upgraded to outperform from market perform by FBR Capital.

MIPS Technologies (NASDAQ: MIPS) is down roughly 10% on light volume to $13.68, relative to a 52-week range of $3.57-$18.19. The semiconductor company reported weak 2Q earnings.

RF Micro Devices (NASDAQ: RFMD) is down 8.5% on heavy volume to $7.01, relative to a 52-week range of $3.65-$8.37. The chip manufacturer reported weak 3Q earnings.

Pacific Sunwear (NASDAQ: PSUN) is down 3% premarket on moderate volume to $4.36, relative to a 52-week range of $2.92-$6.84.

Yahoo! Inc. (NASDAQ: YHOO) which met earnings expectations, but nevertheless reported a revenue loss and weak guidance. Shares of YHOO were down nearly 2% premarket on very heavy trading to $15.71, relative to a 52-week range of $12.94-$19.12.

Michael B. Sauter

Over half of the dry shipping stocks in the Tickerspy index has risen over 100% off of their 52-week lows.  The industry was placed in serious jeopardy as global trade entered a state of decline during the credit crunch.  Shipping rates fell dramatically as recently as this summer, but have been on the rise in recent months.

Garrett W. McIntyre

Eagle Bulk Shipping, Inc. (EGLE) Cut to Sell at Cantor Fitzgerald.
InterContinental Hotels (IHG) Cut to Hold at Jefferies.
Noble Energy (NE) Cut to Market Perform at FBR.
Philips (PHG) Cut to Neutral at UBS.

JON C. OGG

Expedia (EXPE) Raised to Buy at Citigroup.
Ford (F) Started as Buy at UBS.
Johnson & Johnson (JNJ) Raised to Buy at UBS.
Citrix Systems (CTXS) Cut to Market Weight at Thomas Weisel.
Diana Shipping (DSX) Cut To Market Perform at Wachovia.
Eagle Bulk Shipping (EGLE) Cut To Market Perform at Wachovia.
General Motors (GM) Started as Sell at UBS.
Johnson Controls (JCI) Started as Buy at UBS.
Starwood Hotels (HOT) Cut to Underperform at FBR.
Urban Outfitters (URBN) Cut to Neutral at Cowen & Co.

JON C. OGG

March 20, 2009

• Allergan (AGN) Started as Outperform at Credit Suisse.
• AT&T (T) Raised to Overweight at JPMorgan.
• Carnival (CCL) Raised to Outperform at Credit Suisse.
• Chubb (CB) Raised to Buy at UBS; Started as Outperform at RBC.
• Eagle Bulk Shipping (EGLE) Raised to Outperform at Wachovia.
• FEMSA (FMX) Started as Overweight at Barclays.
• Healthcare Realty Trust (HR) Raised to Outperform at KBW.
• Mylan Labs (MYL) Started as Outperform at Credit Suisse.
• Teva Pharmaceutical (TEVA) Started as Outperform at Credit Suisse.

Jon C. Ogg
February 25, 2009

• Cepheid (CPHD) Started as Buy at Needham.
• Charles Schwab (SCHW) Raised to Market Perform at FBR.
• Diana Shipping (DSX) Raised to Overweight at JPMorgan.
• Gymboree (GYMB) Raised to Overweight at JPMorgan.
• Windstream (WIN) Raised to Overweight at JPMorgan.
• AMEDISYS (AMED) Cut to Hold at Deutsche Bank.
• Eagle Bulk Shipping (EGLE) Cut to Underweight at JPMorgan.
• Navios Maritime Partners (NMM) Cut to Neutral at JPMorgan.
• ReneSola Ltd. (SOL) Cut to Neutral at Credit Suisse.
• Verifone (PAY) Cut to Underweight from overweight at JPMorgan.

Jon C. Ogg
November 20, 2008

• Ashland (ASH) Cut to Neutral at JPMorgan.
• Borg Warner (BWA) Cut to Neutral at Baird.
• Diana Shipping (DSX) Cut to Market Perform at Wachovia.
• Eagle Bulk Shipping (EGLE) Cut to Market Perform at Wachovia.
• MGM Mirage (MGM) Cut to Hold at KeyBanc.
• Pan American Silver (PAAS) Cut to Neutral at JPMorgan.
• SonoSite (SONO) Cut to Sell at Goldman Sachs.

Jon C. Ogg
October 30, 2008

Jon C. Ogg
June 19, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.