Rising Rates Will Hurt Rig Builders' Margins

By MarEx 2013-06-27 08:11:00

Rising interest rates will squeeze margins of rig builders, as drilling companies try to pass on increased financing costs to them while the rig building market has become more competitive with Chinese yards churning out more rigs, said Religare analysts.

Federal Reserve Chairman Ben Bernanke said last week that the U.S. economy was expanding strongly enough for the central bank to begin slowing the pace of its monetary stimulus later this year, sending yields of drilling companies' bonds up.

"Given the substantial debt financing involved in rigs, when rates rise then somebody's profitability needs to be impacted and those with the weakest pricing power within the value chain are most likely to be hit," Religare analysts wrote in a note.

"Offshore yards will have much weaker pricing power vs. drillers going forward due to Chinese yards dramatically increasing the supply of rig building capacity."

Singapore's Keppel Corporation and Sembcorp Marine Ltd have seen their profit margins pressured by competition from shipyards in China that are eagerly waiting to enter the offshore oil and gas equipment industry.

Religare maintained a "sell" call on Sembcorp Marine and a "hold" recommendation on Keppel Corporation.

Keppel shares had fallen 1.8 percent so far this year and Sembcorp Marine was down nearly 7 percent, lagging behind the 1 percent loss in Singapore's benchmark Straits Times Index .