UPDATE 2-DryShips Q3 profit up on higher rates, shares soar

* Q3 adjusted EPS $3.53 misses estimates by 7 cents

* Revenue, including drilling contract $329.0 mln

* Net voyage revenue $228.2 mln

* Spin-off of Ocean Rig on time

* Shares up 20 percent (Recasts; adds details, conference call, analyst comments)

By Sakthi Prasad

BANGALORE, Nov 3 (Reuters) - Greek dry bulk carrier DryShips Inc (DRYS.O) posted a 71 percent rise in quarterly profit, helped by higher freight rates due to a change in the company's chartering strategy, sending its shares up 20 percent.

The company, which predominantly operated in the spot market, changed its chartering strategy by employing its vessels for long-term charter contracts, protecting the company's earnings from a record fall in spot freight rates.

"We have secured half a billion of revenue per year, having covered annually between 54-59 percent of our dry bulk fleet operating days under fixed time charters with an average duration of five years," Chief Executive George Economou said in a statement.

Credit Suisse analyst Gregory Lewis said DryShips' fourth-quarter contract coverage would be about 63 percent to 65 percent and for 2009 the company had covered about 55 percent.

The rest of DryShips' fleet not covered by long-term contracts would have to operate in the volatile spot market.

But Lewis said that should not pose a problem to DryShips.

"Those vessels can operate in the spot market and more than cover the operating costs because they won't necessarily be a drag on earnings," the analyst said by phone.

Since striking a record high in May, the London-based Baltic Drybulk index, which tracks spot-charter rates, has lost about 93 percent as it has been knocked down by stormy financial markets, falling commodity prices and worries about global economic growth.

In a conference call with Wall Street analysts, Economou attributed the fall in the spot rates to the global financial crisis and the temporary halt of iron ore exports from Brazil to China.

"The lack of financing of global trade has temporarily brought the spot market to a virtual standstill, but we expect this situation to normalize as the credit crunch subsides," Economou said.

Quarterly average time charter equivalent rates rose about 40 percent to $63,965 per day, while quarterly vessel utilization stood at 99.7 percent.

The company's unit Ocean Rig, an ultra deep-water drilling operator, contributed $89.0 million to DryShips' bottomline.

DryShips said the spin off of the ultra deep-water driller is on time and the spun off entity would be renamed as "Ocean Rig UDW Inc".

Day rates for ultra-deep water drilling remains very strong as it recently announced a fixture between $640,000 and $650,000 a day for a term of 5 years, the company said.

Lewis said Dryships' liquidity position on account of Ocean Rig business is a "bullish sign," which has helped push up the share price today.

"The stock was unnecessarily punished," said Lewis, who has an "outperform" rating on the stock.

Shares of the company were trading up 20 percent at $23.23 in afternoon trade on Nasdaq.

( Editing by Anil D'Silva;)