Civeo Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Amounts are U.S. dollars; financial statement amounts are in millions unless stated otherwise. Civeo provides workforce accommodation, logistics and facility services to natural-resource industries across Canada, Australia and the United States.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $101.5 | $91.4 |
| Operating loss | $(52.5) | $(17.7) |
| Net loss attributable to Civeo | $(55.5) | $(21.0) |
| Basic and diluted loss per share | $(0.42) | $(0.17) |
| Cash from operating activities | $2.8 | $9.8 |
| Capital expenditures | $2.7 | $3.9 |
- Revenue increased 11%, while cost of sales and services rose 25% to $77.3 million. Consolidated operating margin was negative; the filing reports segment gross margins of 18.7% in Canada, 45.0% in Australia and negative 2.3% in the U.S.
- Q1 net loss included a $28.7 million Canadian long-lived-asset impairment and $1.0 million of Noralta acquisition costs. Other income of $2.3 million primarily reflected gains on asset sales. Income tax benefit was $0.7 million.
- At March 31, cash was $42.0 million. Debt was $320.8 million before unamortized issuance costs ($318.4 million carrying amount), including $16.2 million current debt. Total available liquidity was reported at $243.7 million, including $201.7 million of unused revolver availability.
- Operating cash flow fell from $9.8 million to $2.8 million, primarily because of lower operating margins. Investing activities used $23.6 million, including $23.8 million for the Lakeland asset acquisition; financing activities provided $31.0 million.
Changes versus the prior-year quarter
- Canada revenue rose 5% to $63.4 million, but Canadian gross margin fell to 18.7% from 28.5%. Lower accommodation rates and a greater mix of lower-margin mobile rental and manufacturing work weighed on margin; the Canadian impairment drove the segment’s $39.9 million operating loss.
- Australia revenue increased 3% to $27.9 million; gross margin declined to 45.0% from 50.4%, partly because of lower take-or-pay revenue on expired contracts.
- U.S. revenue increased 162% to $10.2 million amid stronger drilling and offshore activity. The segment remained loss-making, though its gross margin improved to negative 2.3% from negative 27.5%.
- Higher SG&A, including compensation and professional fees, and the impairment more than offset revenue growth. Depreciation and amortization declined 6% to $30.8 million.
Outlook, risks and notable events
- Management expected 2018 capital expenditures, excluding acquisitions, of approximately $20–25 million, including Noralta-related capital expenditures. It said cash on hand and operating cash flow should meet anticipated liquidity needs over the next 12 months. No specific earnings or revenue guidance was provided.
- Management saw improving commodity prices but did not expect an immediate improvement in its business. Demand depends substantially on oil and metallurgical coal prices, customer spending, and infrastructure and regulatory developments. Pipeline constraints and the WCS–WTI differential remain risks to Canadian activity; customers in Australia continue cost-efficiency efforts.
- On April 2, 2018, Civeo completed its Noralta acquisition for approximately C$207.7 million in cash, 32.8 million common shares and preferred shares initially convertible into 29.3 million common shares. The cash portion was funded with cash and borrowings. Noralta results were to enter the Canadian segment beginning in Q2.
- Also effective April 2, the credit agreement reduced revolver commitments to $239.5 million and extended maturity to November 30, 2020. Maximum leverage covenant limits step down from 4.50:1 at March 2018 and June 2018 to 3.50:1 from March 2019 onward. Civeo reported covenant compliance at March 31.
- A Canadian lodge was written down to zero after expected customer commitments and market developments indicated its carrying value was not recoverable. Separately, approximately $78 million of net book value related to assets that support or could support potential British Columbia LNG projects; delayed project decisions could expose these assets to impairment.
- A shareholder class action concerning disclosures for the Noralta transaction remained pending; Civeo said it believed the claims were without merit and intended to defend itself. Management believed other pending claims would not have a material adverse effect.
Key facts for investors to verify
- Impairment assumptions and the outlook for Canadian lodge utilization, rates and customer commitments.
- Noralta’s final purchase accounting, operating contribution, financing costs, and potential dilution from its common and convertible preferred shares.
- Debt covenant headroom after the Noralta acquisition, availability under the amended facility, and the effect of scheduled covenant tightening.
- Progress and customer commitments for British Columbia LNG and pipeline projects, including implications for the approximately $78 million of related assets.
- Whether revenue growth in the U.S. and mobile rentals converts into improved segment margins and operating cash flow.