Civeo Corporation — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Unaudited results; amounts below are in U.S. dollars. Civeo provides workforce accommodations and related services to natural-resource industries in Canada, Australia and the United States.
Financial results and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $104.2 million | $106.5 million | $306.3 million | $420.7 million |
| Gross profit and margin | $36.3 million; 34.8% | $36.8 million; 34.5% | $107.8 million; 35.2% | $158.6 million; 37.7% |
| Operating loss | $49.0 million | $122.8 million | $81.2 million | $132.1 million |
| Net loss attributable to Civeo | $42.1 million; $0.39/share | $107.7 million; $1.01/share | $80.4 million; $0.75/share | $121.2 million; $1.14/share |
- Cash from operations for the nine months was $48.8 million, versus $174.9 million a year earlier. Investing activities used $11.5 million, including $15.2 million of capital expenditures; financing activities used $45.8 million.
- Cash was $2.5 million at September 30, 2016, compared with $7.8 million at year-end 2015. Total available liquidity, including unused revolver availability, was $176.6 million, down from $204.1 million.
- Debt outstanding before unamortized issuance costs was $378.3 million, versus $401.6 million at year-end 2015. The balance sheet reported $15.8 million current and $358.0 million long-term debt, net of issuance costs.
- Total assets were $978.1 million and shareholders’ equity was $514.8 million at quarter-end. The filing reports no consolidated net profit; operating and net losses include significant impairment charges.
Material changes and operating trends
- Nine-month revenue fell 27% year over year, with declines in every segment: Canada down $62.3 million, Australia down $28.6 million and the U.S. down $23.5 million. Lower occupancy and weaker Canadian and Australian currencies contributed.
- Canada revenue rose 3% in Q3, supported by lodging needs associated with the Fort McMurray fires, while mobile, open-camp and product revenue declined. Canadian lodge occupancy was 64% versus 57%; average daily rate was $100 versus $112.
- Australian Q3 revenue declined 5%; occupancy was 43% versus 50%. For the nine months, revenue declined 26% and occupancy fell to 45% from 58%, reflecting weaker mining activity and expired take-or-pay contracts.
- U.S. Q3 revenue declined 49%; nine-month revenue declined 71%, amid lower drilling activity in the Bakken, Rockies and Texas. The U.S. segment recorded negative gross margins in both periods presented in the filing.
- Q3 impairment expense was $37.7 million, relating to Canadian mobile-camp assets and undeveloped land positions tied to potential British Columbia LNG projects. Nine-month impairment expense was $46.1 million, including $8.4 million for U.S. assets. Prior-year nine-month impairment was $122.9 million, including a $43.2 million Canadian goodwill impairment.
- SG&A decreased 18% in Q3 and 19% year to date, mainly due to workforce reductions and lower professional and incentive costs. Depreciation and amortization also declined, in part because of prior impairments.
Outlook, risks and unusual items
- Management expected 2016 capital expenditures of $20 million to $25 million, subject to industry conditions, customer commitments and project timing. The filing provides no specific earnings or revenue guidance.
- Management expected depressed Canadian oil-sands activity and lower revenues and earnings to continue through the rest of 2016. Australian demand remained weak despite a sharp increase in met-coal contract prices; management said sustained higher prices for six to twelve months might be needed before customer activity responds.
- The LNG Canada final investment decision for the proposed Kitimat project was delayed with no new date specified. Civeo expected LNG Canada to use Sitka Lodge rooms through September 2017 under the existing contract, while discussions to extend the contract were ongoing. A further delay or cancellation could affect utilization and asset values.
- The filing says a 10% reduction in estimated future cash flows for certain assets not impaired in the analysis could indicate an additional impairment of $25 million to $35 million.
- Civeo was in compliance at September 30 with its credit-facility covenants, including a maximum leverage ratio of 5.50:1 and minimum interest coverage of 3.0:1. However, $125.0 million of borrowing capacity was unavailable to maintain leverage-covenant compliance. The maximum leverage threshold is scheduled to tighten over time.
- All $378.3 million of debt outstanding was floating rate. A 1 percentage-point increase in rates would increase annual interest expense by approximately $3.8 million. Currency movements also pose risk; the filing estimates that a 10% adverse move in the Canadian and Australian dollars would produce translation losses of about $18 million and $47 million, respectively, in other comprehensive income.
- Management believed cash, operating cash flow and credit availability would meet liquidity needs for the next 12 months. Legal claims and proceedings were disclosed; management did not expect them to have a material adverse effect, subject to outcomes and insurance or indemnity coverage.
Most important facts for investors to verify
- Whether Canadian oil-sands activity, Australian mine occupancy and U.S. drilling demand stabilize or continue to weaken.
- The status and timing of LNG Canada’s final investment decision, Sitka Lodge contract duration and any further impairment exposure.
- Actual cash generation, capital spending and usable revolver capacity as covenant limits tighten.
- Debt balances, floating-rate exposure and compliance with leverage and interest-coverage covenants.
- Whether reported losses and asset values remain affected by further impairments, and how currency movements affect reported results.