Customer Concentration Risk

Express Scripts just recently announced the loss of Anthem as a customer when the contract between the two ends in 2019. Anthem is Express Scripts largest customer representing 17% of Express Scripts revenues and an even higher portion of earnings. This loss is a great example of the risk associated with customer concentration.

Express Scripts Faces Tough Test – WSJ


An Update on Oil and Gas

It’s been an interesting few months in the Oil and Gas sector. Just over 4 months ago, I made a post about the low price of oil and the many undervalued companies in the sector. Since then, things have gotten worse. Brent crude was selling at just under $50 per barrel in early August and The most recent price is just under $37.

The continued decline in oil prices can still be attributed to oversupply and stagnant demand. OPEC met in early December and decided to continue producing oil at the same rate, instead of cutting back the supply to allow oil prices to rise again after supply and demand stabilize. Check out this presentation called The Twin Oil Crashes of 2014-2015 by Nawar Alsaadi.

One of the big takeaways I got from this presentation is at the price of oil is currently well below the break even cost for new supply. If the price stays low enough, supply will start to come offline and supply and demand will be more in balance, most likely at a higher price. It’s hard to tell when this might happen, but eventually it will.

The other interesting part of the presentation is how much oil companies have cutback on capital expenditures. This lack of CapEx from the industry could lead to even higher prices in the future because of the constraints it puts on the supply of oil. The higher prices will result in increased investment and competition in the industry, which will eventually get us right back to where we are today. And so goes the boom and bust cycle.

The bottom line here is that it seems to me that current oil prices are not sustainable. I can’t tell you what the right price is and I most definitely can’t tell you when it will get there. In the meantime, I’ve put my money in companies that are conservatively capitalized that I believe can weather this storm. The hard part is looking at them in my portfolio everyday and watching them torture me.

Oil Prices and Oil & Gas Companies

Part of my portfolio is invested in companies that are involved in one way or another in the oil and gas industry. I’ve seen the values of these companies, selling at extremely low valuations in relation to tangible book value, dip even further. All of the share price movement seems to be based on the movement of oil prices.

A Wall Street Journal article posted today shows Brent Crude oil prices are off 4.5% down to $49.84. This price is within $4 of its 6-year low. The gist of the article is that the supply of oil is continuing strong while demand is waning. There is a lot of uncertainty in oil and gas companies right now because of the depressed commodity prices. This has led to what I would consider very undervalued companies in the industry.

I can’t tell you when oil and gas prices will rebound, but eventually they will once the supply and demand imbalance is gone. When the commodity prices come back, I believe the oil and gas companies will follow suit. Until then, my money is in oil and gas companies with strong balance sheets that should be able to weather this storm.

Source: Oil Falls Below $50 a Barrel