DryShips Re-Raises the Ante

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If you've already bet everything but the kitchen sink, you might as well go all-in. That's precisely what DryShips (NAS: DRYS) has done with its latest acquisition, as the greatest gamble in stocks continues to raise the stakes.

Under the notorious command of "Curious George" Economou, the shipper has confronted the prolonged malaise of the dry bulk shipping industry with a tireless quest for aggressive countercyclical growth. The approach has landed DryShips deep in the trash heap as risk-averse investors shun the shares, while penalizing some die-hard thrill-seekers with mountains of debt and epic dilution.

Please indulge me in this brief Foolish rant
Announced Tuesday, the company's latest move to acquire dry bulker OceanFreight (NAS: OCNFD) for $118 million uses its 78% stake in Ocean Rig like an ATM immediately prior to that subsidiary's long-awaited IPO. Although the transaction will sacrifice only 2.3% of DryShips' Ocean Rig stake, with the remainder funded by cash on hand, it nonetheless skims from investors part of their just reward for withstanding an uncommonly grueling journey.

At the same time, OceanFreight's existing debt burden -- which is greater than its market cap even after Tuesday's 79% post-announcement surge -- compounds DryShips' already-weighty debt position. Perhaps more disturbing to this Fool was Economou's focus upon OceanFreight's low-cost credit facility of $142.8 million as a benefit of the move, particularly when combined with his mention of "further strategic acquisition opportunities." Give this guy a line of credit, and watch him find bold ways to spend it. We've seen that pattern repeat ad nauseum over the past several years. The part we have yet to witness is where shareholders have something to show for it. It reminds me of Obamanomics!

The unfathomable upside potential
With Economou's drubbing now freshly delivered above, we are clear to turn our attention to the all-important counterpart to DryShips' unspeakable risk profile. If DryShips can manage to survive this prolonged period of acute vessel oversupply -- which rival Diana Shipping (NYS: DSX) expects will claim some high-profile casualties before it's through -- then the enormous wager of DryShips' ceaseless expansionary stance will likely pay off in an ultimate jackpot of explosive revenue growth.

Although this latest transaction is orders of magnitude smaller than the company's collective moves to expand Ocean Rig's fleet of top-of-the-line drillships, it nonetheless has the capacity to prove a meaningful driver of long-term growth for the dry bulk segment. For starters, the addition of OceanFreight's fleet of four Capesize vessels will give pro forma DryShips the largest fleet of the behemoths operated by any public company in the world. Along with two Panamax vessels, the six carriers from OceanFreight offer a rejuvenation of DryShips' aging fleet, and come complete with "attractive long-term charters" in tow. The additions account for about a 25% expansion in the tonnage of DryShips' existing dry bulk fleet.

Meanwhile, I believe the real hidden gem in this transaction is the accompanying set of contracts to construct five new very large ore carriers for delivery in 2012 and 2013. At around 200,000 deadweight tons apiece, these gargantuans offer DryShips some timely fleet diversification for this period when Capesizes and Panamaxes represent by far the most acutely oversupplied segment of the industry. Evidence is mounting, furthermore, that the nature of ore demand will trend toward a preference for ever-larger vessels.

Take for example the move by Diana Shipping to construct two Newcastlemax carriers of

206,000 DWT, which are purpose-built to serve the very Australian export facilities that miners BHP Billiton (NYS: BHP) , Yanzhou Coal Mining (NYS: YZC) , and others have joined forces to rapidly expand. China, India, and other key growth markets are creating an unprecedented scale of global demand for coal and iron ore, Rio Tinto (NYS: RIO) and others are building mining operations of unprecedented scale to meet that demand, and it seems clear the ships used to transport those materials will mirror this monumental expansionary trend.

For confirmation of the trend, one need look no further than Vale's (NYS: VALE) bold campaign to construct at least 35 Valemax carriers that are twice the scale of DryShips' pending VLOCs. Sitting in the water, VALE's giants are as tall as a 22-story building. If you balanced one on its stern -- good luck! -- its bow would tower over the tip of the Eiffel Tower! Vale's armada will revolutionize the overall composition of the global dry bulk fleet, and while DryShips' VLOCs may look puny by comparison, they are nonetheless a strong step in the right direction.

The final word on DryShips' stock
Although ultra-high-risk ventures are generally not my cup of tea, I have found myself unable to resist building a small speculative position in DryShips. I consider the risks far too elevated to consider wagering a penny more than I'm prepared to lose outright, but I intend to hold shares in both entities after the Ocean Rig IPO to keep my high-stakes wagers on the roulette wheel.

At the time this article was published Fool contributorChristopher Barkercan be foundblogging activelyand acting Foolishly within the CAPS community under the usernameTMFSinchiruna. Hetweets. He owns shares of Diana Shipping and DryShips. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy.

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