Civeo Corporation — Q2 2019 Form 10-Q
Business context and reporting period. Civeo provides lodging and related hospitality services to natural-resource customers in Canada, Australia and the U.S. This unaudited report covers the three and six months ended June 30, 2019; amounts below are U.S. dollars unless noted.
Financial performance and liquidity
| Metric | Q2 2019 | Six months 2019 |
|---|---|---|
| Revenue | $122.2 million, down 6% year over year | $230.7 million, down 0.4% |
| Operating loss | $12.1 million, versus $15.5 million | $29.9 million, versus $68.0 million |
| Net loss attributable to Civeo common shareholders | $15.3 million, or $0.09 per share | $32.8 million, or $0.20 per share |
| Operating cash flow | Not separately provided for the quarter | $10.0 million, versus $14.0 million |
| Capital expenditures | $11.5 million | $21.2 million |
- Q2 revenue weakness was concentrated in Canada, where revenue fell $8.4 million. Lower oil-sands lodge demand, the absence of prior-year customer turnaround work and Alberta production curtailments were key factors. Australia revenue was broadly flat and U.S. revenue was also broadly flat.
- For the first half, reported segment gross margin was 21.4% in Canada, 47.7% in Australia and 24.7% in the U.S. Canadian margin declined from 23.0%, primarily on lower lodge occupancy; U.S. margin improved from 9.9% with stronger wellsite activity and mix.
- At June 30, cash was $13.5 million. Debt carrying value was $403.1 million, or $405.3 million before unamortized issuance costs; total debt less cash was approximately $389.6 million on a carrying-value basis. Current debt maturities were $34.8 million.
- Reported available liquidity was $33.2 million, down from $102.7 million at year-end 2018. This comprised $13.5 million cash and $19.8 million unused revolver availability. The company said $51.9 million of borrowing capacity was unavailable to maintain compliance with its leverage covenant.
- Working capital used $22.7 million in the first half, largely due to increased Canadian receivables. Cash used in investing activities was $15.0 million; financing activities provided $6.1 million, including net revolver borrowings.
Changes, outlook and material items
- Operating loss improved year over year, mainly because of lower SG&A and depreciation and lower impairment charges than in 2018. The prior-year period included Noralta acquisition costs and $48.5 million of preferred-share dividends; these dividends were substantially greater than the $0.9 million attributable in the first half of 2019.
- Q2 2019 included $5.5 million of Australian long-lived-asset impairment expense. The filing cites market developments, including non-renewal of certain land-development approvals; the affected assets were written down to estimated fair value of $0.5 million.
- The company also corrected an immaterial prior-period asset-retirement-obligation error in Q2: it recognized a $2.3 million liability and recorded related accretion, depreciation and impairment charges. Management stated the error was not material to previously issued financial statements.
- Other income included $2.6 million of first-half insurance proceeds related to a lodge closure in 2018. Q2 included $1.1 million of those proceeds.
- Management expected 2019 capital expenditures, excluding acquisitions, of $40 million to $45 million, primarily including the Sitka Lodge expansion. Spending depends on industry conditions, project approvals, customer room commitments and construction timing. Management believed cash and operating cash flow would be sufficient for anticipated liquidity needs over the next 12 months, while noting that changed assumptions or acquisitions could require additional capital.
- Management did not expect an immediate improvement in the business despite positive developments in some markets. Demand remains sensitive to oil and metallurgical-coal prices, customer spending, pipeline capacity, regulatory decisions and project timing. The company highlighted potential Canadian oil-sands and LNG/pipeline opportunities, but delays could affect customer activity and revenue realization.
- Credit facilities mature November 30, 2020, carry floating rates and are secured by substantially all company and subsidiary assets. Civeo reported compliance with its covenants at June 30, 2019; permitted leverage limits tighten later in 2019. A 100-basis-point increase in floating rates was estimated to increase annual interest expense by about $4.1 million.
- On July 1, 2019, Civeo acquired Australian catering business Action Industrial Catering for $17.0 million, funded with cash and credit-agreement borrowings. Its results are to be included from Q3 2019.
- Other risks include foreign-exchange exposure, commodity and customer concentration, possible impairment of long-lived assets, and pending legal claims. Management said it did not expect the claims to have a material adverse effect, subject to outcomes and available insurance or indemnity.
Important facts for investors to verify
- Available revolver capacity, covenant headroom and the tightening leverage limits ahead of the November 2020 debt maturities.
- Whether Canadian lodge demand, occupancy and margins recover, and how Alberta production curtailments and pipeline developments affect customer activity.
- Whether the Australian impairment and corrected asset-retirement obligation have further financial or operational consequences.
- Actual 2019 capital spending versus the $40 million to $45 million forecast and the funding impact of the Action acquisition.
- Receivables collection and working-capital trends, along with the company’s sensitivity to floating interest rates and Canadian and Australian currency movements.