Civeo Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Amounts are in U.S. dollars; financial statement amounts below are in millions unless noted. Civeo provides workforce accommodations and related services to natural-resource customers in Canada, Australia and the United States.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $120.5 | $97.5 | $352.2 | $280.9 |
| Operating loss | $(12.9) | $(21.3) | $(80.9) | $(52.4) |
| Net loss | $(13.5) | $(22.2) | $(68.6) | $(57.8) |
| Net loss attributable to common shareholders | $(14.3) | $(22.3) | $(118.0) | $(58.1) |
| Basic and diluted loss per share | $(0.09) | $(0.17) | $(0.76) | $(0.46) |
| Net cash from operating activities | Not stated for quarter | Not stated for quarter | $25.9 | $45.5 |
- Margins: Q3 consolidated gross margin, calculated as revenue less service and product costs, was approximately 32.1%, versus 32.8% a year earlier. Nine-month gross margin was approximately 29.6%, versus 33.5%. Operating loss was 10.7% of Q3 revenue and 23.0% of nine-month revenue.
- Segment trends: Q3 Canada, Australia and U.S. gross margins were 26.6%, 51.1% and 19.3%, respectively. Canada’s margin declined from 32.1%, while Australia’s improved from 47.5%; the U.S. moved from a negative 26.6% to a positive 19.3%.
- Cash and liquidity: Cash was $4.5 at September 30, down from $32.6 at year-end 2017. Total available liquidity was $44.4, including $39.9 of unused revolving capacity. Operating cash flow fell by $19.7 year over year for the nine-month period.
- Debt: Debt carrying value was $420.3, including $28.1 current maturities; gross principal outstanding was $423.1. Debt was primarily floating-rate, and the company reported compliance with its covenants at September 30.
Material changes versus comparable periods
- Revenue increased 24% in Q3 and 25% for the first nine months. The April 2 Noralta acquisition was a major contributor; it contributed $31.1 of Q3 revenue and $63.1 for the nine-month period. U.S. activity and Australian occupancy also rose.
- Despite higher revenue, nine-month operating loss widened by $28.5, chiefly because of a $28.7 Canadian long-lived-asset impairment and higher SG&A. Q3 operating loss improved by $8.4, largely because the prior-year quarter included a $4.4 impairment.
- Nine-month common-shareholder loss included $49.1 of preferred-share dividends, primarily the deemed dividend from a beneficial conversion feature. The company issued 32.8 million common shares and 9,679 preferred shares in the Noralta transaction.
- Nine-month investing cash use was $186.1, primarily reflecting Noralta and Acadian Acres acquisitions. Financing provided $133.9, including net revolving borrowings; capital expenditures were $8.7.
Outlook, management commentary and risks
- Management expected 2018 capital expenditures, excluding acquisitions, of $15–$20 million, dependent on market conditions, project approvals, customer commitments and timing. No specific earnings or revenue guidance is stated in the supplied filing text.
- Management said it did not expect an immediate broad improvement in the business and planned to focus on operating quality, financial discipline and integrating Noralta. It believed cash on hand and operating cash flow would meet anticipated liquidity needs over the next 12 months, while noting that changed assumptions or acquisitions could require additional capital.
- Canadian activity faces a significant commodity-price and infrastructure risk: the WCS differential widened to $34.90 per barrel at September 30 and $43.31 on October 22, 2018. Management cautioned that this could defer customer spending and said near-term improvement was not expected.
- On October 1, LNG Canada’s participants announced a positive final investment decision for the Kitimat LNG facility. Civeo described prospective room and pipeline-related work, subject to notice to proceed and project execution. It expected about C$10 million of capital for four Coastal GasLink locations, primarily in 2019, and about C$15 million to expand Sitka Lodge; anticipated revenues and deployment remain conditional.
- On October 26, after quarter-end, the credit agreement was amended. Term-loan amortization rises from 10% to 12.5% annually beginning December 31, 2018, and leverage covenant limits were revised, including a 4.75:1 maximum for March 31, 2019, declining to 3.50:1 from December 31, 2019 onward.
- Other exposures include floating-rate debt (a 100-basis-point rate increase was estimated to add about $4.2 million annual interest expense), Canadian and Australian currency translation risk, and possible impairment if planned investments do not secure contracts. The company reported no off-balance-sheet arrangements and said pending claims were not expected to have a material adverse effect, while acknowledging outcomes are uncertain.
Important facts for investors to verify
- Whether Noralta’s acquired contracts, occupancy and margins support the purchase price and the $119.4 million goodwill balance; the purchase price allocation was still preliminary.
- Canadian lodge occupancy, room rates and margins, particularly after the $28.7 million impairment and continued weakness in the WCS differential.
- Actual liquidity, covenant headroom and debt repayment capacity under the amended credit agreement, including the impact of higher required term-loan amortization.
- Whether LNG Canada and Coastal GasLink commitments proceed, when customer notices to proceed are issued, and whether planned capital spending and revenue expectations are realized.
- The preferred shares’ conversion, dividend and liquidation terms and their effect on common-shareholder dilution and reported losses; the filing reports an initial liquidation preference of about $96.8 million, with dividends payable in cash or in kind.