UPDATE 3-DryShips Q2 beats Wall Street on lower costs

* Q2 adj EPS $0.30 vs est $0.22

* Q2 rev up 8 pct to $224.2 mln vs est $216.2 mln

* Shares up 3 pct (Recasts; adds additional comments, updates share movement)

By Arup Roychoudhury

BANGALORE, July 28 (Reuters) - Greek drybulk shipper and deepwater driller DryShips Inc (DRYS.O) reported a second-quarter profit that beat analysts' estimates, helped by lower costs and operating expenses.

"The earnings beat was driven by cost savings. They were able to save money on vessel operating expenses, which were down," Credit Suisse analyst Gregory Lewis said by phone.

For the quarter, DryShips' vessel operating expenses and drilling rigs operating expenses fell around 9 percent each. General and administrative expenses were cut by 23 percent.

"Our operating costs in the drilling side have come down a bit. Over time we expect costs should go down even further," Chief Operating Officer Pankaj Khanna told Reuters.

Since its foray into deepwater drilling business, DryShips had been plagued with financing and had been delaying its plans of an initial public offering for the segment. [ID:nSGE64G0L8]

The company has two functional rigs. Despite funnelling money into the drilling segment, it has struggled not only to win contracts for the four rigs under construction but also to garner funds to finish building two.

Analyst Lewis said he continued to expect the company to use most of its cash flow to pay down the expenses on its under-construction rigs.

"The balance sheet continues to get stressed as they continue to make expenses on the rigs," he said, adding that employment opportunities for deepwater rigs were very limited at the moment.

The U.S. moratorium on deepwater drilling, imposed in late May due to the Macondo well blow-out, has been extended till Nov. 30 as clean-up efforts still continue.

DryShips' Khanna, however, said he believed the moratorium will only be a short term negative for the industry.

"We are seeing a lot of demand. When we look at the open inquires, there are fifteen we are dealing with mostly for 2011 and 2012. I will not, however, speculate on when our remaining drilling vessels will be under contracts," he said.

SHIELDED FROM VOLATILITY

The company's drybulk fleet of 39 vessels have all been tied up under long term charters, thus shielding them from volatility in the spot markets.

"Right now, we prefer the charter rate market. A lot of our vessels start coming off contracts by the middle of next year, and by 2012, we will have 24 of the 39 vessels on the spot market. At that point we will reassess where we are in the market," Khanna said.

For the latest second quarter, DryShips' net profit was $8.7 million, or 2 cents a share, compared with $51.5 million, or 24 cents a share, a year ago. The latest quarter included charges of 28 cents a share.

Excluding items, the company earned 30 cents a share. On that basis, analysts on an average had expected the company to earn 22 cents a share, according to Thomson Reuters I/B/E/S.

Revenue rose 8 percent to $224.2 million against market estimates of $216.2 million.

Shares of DryShips were up 12 cents in extended trade after closing at $4.50 Wednesday on Nasdaq. (Additional reporting by Krishna N. Das in Bangalore; Editing by Unnikrishnan Nair and Maju Samuel)