Civeo Corporation — Q2 2016 Form 10-Q
Business and period: Civeo provides workforce accommodations and related services to natural-resource industries in Canada, Australia and the United States. This unaudited report covers the quarter and six months ended June 30, 2016; financial amounts below are U.S. dollars.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $107.0 million | $143.1 million | $202.1 million | $314.1 million |
| Operating loss | $6.0 million | $14.1 million | $32.2 million | $9.3 million |
| Net loss attributable to Civeo | $11.5 million | $13.5 million | $38.3 million | $13.5 million |
| Diluted loss per share | $0.11 | $0.13 | $0.36 | $0.13 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $35.1 million | $94.3 million |
- Q2 revenue fell 25% year over year; first-half revenue fell 36%. Lower occupancy was the primary pressure, with weaker Canadian and Australian currencies also reducing reported revenue.
- Q2 operating loss narrowed by $8.1 million year over year, mainly because Q2 2015 included a $9.5 million impairment and 2016 depreciation was lower. First-half operating loss widened by $23.0 million as reduced activity outweighed lower expenses.
- Q2 2016 gross margin was 38.3% in Canada, 52.3% in Australia and negative 59.9% in the U.S. Australia’s margin declined from 58.1%; Canada’s improved from 31.9%. U.S. under-absorption of fixed costs contributed to its negative margin.
- First-half capital expenditures were $9.9 million, versus $24.1 million in 2015. Cash decreased to $2.3 million from $7.8 million at year-end 2015. Total available liquidity was $131.8 million, including $129.6 million of unused revolver availability.
- Debt carrying value was $391.1 million, including $15.9 million current maturities; gross principal outstanding was $396.0 million, predominantly floating-rate. Total assets were $1.05 billion and shareholders’ equity was $545.7 million at June 30, 2016. Current assets exceeded current liabilities by $25.7 million.
Material changes and management commentary
- Canada revenue declined 14% in Q2. Lodge occupancy was 62% versus 63% and average daily rate was $108 versus $120. First-half Canadian revenue fell 31%; lodge occupancy was 61% versus 65% and average daily rate was $110 versus $127.
- Australia revenue fell 28% in Q2 and 34% in the first half. Q2 village occupancy dropped to 45% from 61%; first-half occupancy was 46% versus 62%. Management attributed the weakness principally to reduced mining activity and lower occupancy; expired take-or-pay contracts also weighed on margins.
- U.S. revenue fell 84% in Q2 and 76% in the first half, reflecting lower drilling activity in the Bakken, Rockies and Texas and weaker offshore sales. The company recorded an $8.4 million first-quarter impairment on U.S. assets due to continued Bakken drilling reductions.
- First-half operating cash flow fell to $35.1 million from $94.3 million, primarily due to lower revenue from reduced lodge and village occupancy. Financing activities used $30.4 million, including $33.1 million of term-loan repayments; the company also made net revolver borrowings of $4.8 million.
- The February 2016 credit-facility amendment increased borrowing margins and commitment fees, revised leverage-covenant limits and included a cash-triggered revolver prepayment requirement. Civeo reported compliance at June 30, when the maximum leverage covenant was 5.25:1.0. Covenant restrictions reduced borrowing capacity by $158.5 million; actual leverage ratio is not stated in the supplied filing text.
Outlook, risks and unusual items
- Management expects lower Canadian revenue and earnings to continue through the rest of 2016 and expects historically low met-coal prices to continue pressuring occupancy in Australia. The company forecast approximately $25 million of 2016 capital expenditures, excluding unannounced or uncommitted projects, and said spending depends on customer commitments, project approvals and schedules.
- The planned Cedar Valley Lodge project in Kitimat depends on LNG Canada’s final investment decision, which was delayed to an undetermined date. Management said further delay or cancellation could hurt results and could lead to impairment of Canadian long-lived assets. Sitka Lodge was expected to serve LNG Canada through September 2017 under the existing contract.
- Commodity prices, customer capital spending and occupancy are significant risks. The filing also identifies foreign-exchange and interest-rate exposure: a 1% increase in rates would add approximately $4.0 million to annual interest expense; a hypothetical 10% adverse move in the Canadian and Australian dollars would result in translation adjustments of approximately $23 million and $48 million, respectively.
- Other notable items: the first half included $1.3 million of redomicile-related costs and a $0.3 million debt-extinguishment loss. Q2 benefited from temporary room demand related to the Fort McMurray fires. The company does not currently pay dividends. Management stated that pending claims and proceedings are not expected to have a material adverse effect, although outcomes cannot be assured.
- Management said cash, operating cash flow and credit-facility resources should meet liquidity needs over the next 12 months. This expectation is subject to continued operating performance and access to financing. Forward-looking statements are not guarantees; interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Subsequent occupancy, daily rates and customer commitments by segment, particularly in Australia and the U.S.
- Status and timing of LNG Canada’s final investment decision and the related Sitka and Cedar Valley Lodge contracts.
- Actual leverage and interest-coverage ratios, remaining covenant headroom, borrowing availability and the effect of the amended credit terms.
- Whether management’s approximately $25 million capex estimate and 12-month liquidity expectation remain achievable under the commodity-price and demand outlook.
- Potential further asset impairments, collections of receivables and the evolution of operating cash flow as revenue declines.