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
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