In an article published on “The Motley Fool”, the author highlighted one crucial risk that Seadrill Ltd (NYSE:SDRL) investors might not be aware about. As of now, the two big largest threat faced by investors are declining oil prices and the surplus of oil rigs, particularly of the ultra-deepwater, high margin variety.
These two are major reasons that resulted in an 85% decline in SDRL stock since mid-2013 highs. However, there is an additional risk that has gone unnoticed and can have serious consequences for the company and its shareholders.
As per the author, customer concentration is becoming an additional risk for the oil companies during an industry downturn. As per the form 20-F filed by Seadrill at the end of last year, the company obtained 20% of future contracted revenue from just one customer, and that is none other than Brazilian national oil giant company Petroleo Brasileiro Petrobras SA (ADR)(NYSE:PBR).
Overall, company’s five largest client earlier in the year recorded 63% of its total sales in coming period, with four clients representing 10% or over of future revenue. Among all the offshore drillers, the customer concentration at Seadrill is worrisome.
In fact, two of Seadrill’s peers, ENSCO PLC (NYSE:ESV) and Transocean LTD (NYSE:RIG) have comparatively diversified customer bases. For example, earlier in 2015, Transocean’s two largest clients, BP plc (ADR)(NYSE:BP) and Chevron Corporation(NYSE:CVX) accounted 9% and 11% of its operating revenue, respectively. Also, no other clients formed for over 10% of sales. At the same time, Ensco’s five largest clients represented 49% of its total consolidated revenues.
The major reason why it is important to consider the problem of customer concentration at Seadrill is not the dependence on a few oil companies, but rather it is about the credibility and reliability of its largest customer. Seadrill’s dependence on Petrobras has adversely affected company’s performance and the problems can deepen more in coming period.