Pacific Drilling Faces High Customer Concentration Risk


May. 10 2016, Published 12:33 p.m. ET

Contract backlog

As of April 29, 2016, Pacific Drilling (PACD) had a backlog of $1.1 billion—compared to $1.3 billion at the end of 4Q15. Knowing a drilling company’s backlog helps us gauge what will likely be the company’s maximum revenues based on current contracts.

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Declining backlog

Pacific Drilling’s backlog-to-TTM (trailing 12-month) revenue is declining quickly. Below are few key takeaways:

  • The company’s backlog-to-TTM ratio was at 109% as of April 29, 2016.
  • This steep fall indicates that the company is relying on its older contracts for revenue. It failed to secure new contracts in the industry downturn.

Contract termination

Pacific Drilling’s backlog faced a setback with a contract termination notice from Total. Total intends to terminate the drilling contract for the Pacific Scirocco for its convenience. It will be effective from May 19, 2016. As per the contract, Total will pay Pacific Drilling 80% of the current day rate for the remainder of the term through January 19, 2017.

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Are contracts a cause for concern?

Pacific Drilling failed to secure any new contracts in 1Q16. The company only has one contract that extends beyond 2017. One contract will expire in 3Q15, one in 3Q16, and the remaining one in 2Q017. Now, the company is operating with only three contracts in hand. Also, it’s completely dependent on one customer—Chevron. All three of the active rigs are working for Chevron. Pacific Drilling has a very high customer concentration risk.

At an analyst meeting in March 2016, Chevron announced more spending cuts for the next two years. This gives us little hope that Pacific Drilling’s contracts will be contracted by Chevron again after they expire.

Comparing the backlog with peers 

Pacific Drilling’s backlog-to-TTM ratio is lower than most of the other offshore drilling (IYE) companies. Transocean’s ratio is 218%. Noble (NE) and ENSCO (ESV) have ratios of 200% and 140%. Diamond Offshore’s (DO) ratio of 251% is also on the higher side.


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