Business context and reporting period
Civeo provides workforce accommodations and related services to resource-industry customers in Canada, Australia and the United States. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2015. Unless stated otherwise, dollar amounts are U.S. dollars.
Comparability is affected by the 2014 spin-off: the three months ended June 30, 2014 include two months of Oil States’ accommodations business and one month of Civeo as a standalone company; the six-month comparison includes five months and one month, respectively. The 2015 periods reflect Civeo’s consolidated results.
Financial performance and position
| Metric | Three months ended June 30, 2015 | Six months ended June 30, 2015 |
|---|---|---|
| Revenue | $143.1 million, down 37% | $314.1 million, down 35% |
| Operating income (loss) | $(14.1) million | $(9.3) million |
| Net income (loss) attributable to Civeo | $(13.5) million; $(0.13) per diluted share | $(13.5) million; $(0.13) per diluted share |
| Operating cash flow | Not provided as a quarterly figure | $94.3 million, versus $154.7 million in 2014 |
| Capital expenditures | Not provided as a quarterly figure | $24.1 million, versus $141.7 million in 2014 |
Cash from operations less capital expenditures was approximately $70.2 million in the first half of 2015. The filing attributes the operating cash-flow decline primarily to lower lodge and village occupancy. Working capital provided $14.0 million in the period.
Revenue fell principally because of reduced occupancy in Canada and Australia and weaker Canadian and Australian currencies. Q2 Canadian revenue was $90.1 million, with lodge occupancy of 63% versus 88% and RevPAR of $59 versus $110. Australian revenue was $38.3 million, with village occupancy of 61% versus 65% and RevPAR of $45 versus $65. U.S. revenue was $14.8 million; lower drilling activity and weaker margins reduced performance.
At June 30, cash was $315.2 million, total assets $1.70 billion and total debt $775.0 million, including $38.8 million classified as current. Total liabilities were $941.4 million. At July 27, following the credit-facility amendment and debt repayment, reported debt was $497.6 million, cash $50.5 million and total available liquidity $295.9 million. June 30 available liquidity was $487.2 million; $472.5 million of facility capacity was unavailable because of covenant-related borrowing constraints.
Material changes versus the prior comparable period
- Q2 revenue declined $84.0 million year over year; first-half revenue declined $165.8 million. Canada accounted for the largest reduction.
- Q2 operating results moved from $16.2 million of income in 2014 to a $14.1 million loss in 2015; first-half operating results moved from $69.1 million of income to a $9.3 million loss.
- First-half Canadian lodge occupancy fell to 65% from 89%; Australian village occupancy fell to 62% from 71%. U.S. first-half gross margin declined to 12.9% from 26.2%.
- Foreign currency translation contributed to a $92.7 million first-half other comprehensive loss. Accumulated other comprehensive loss reached $291.1 million at June 30.
- Capital spending was sharply lower than in 2014, primarily because construction of the McClelland Lake Lodge was largely completed by year-end 2014.
Outlook, management commentary, risks and unusual items
- Management expected 2015 capital expenditures of approximately $80 million to $90 million, subject to industry conditions, project approvals, customer commitments and construction timing. It stated that cash on hand and operating cash flow should meet liquidity needs over the following 12 months.
- Management expected Canadian weakness to continue through the rest of 2015. Depressed oil prices, project delays and cancellations, high costs and limited prospects for new oil-sands construction could further pressure occupancy, earnings and asset values. Management also cited lower Australian occupancy amid weak metallurgical-coal demand and expected lower third-quarter contract prices to affect Bowen Basin occupancy in the second half. U.S. drilling activity was also weak.
- Civeo reported an LNG Canada contract and planned a new Sitka Lodge in Kitimat, initially with 436 rooms and potential expansion. The filing described planned development, not a completed facility.
- On July 17, 2015, after quarter-end, Civeo completed its redomicile to British Columbia, Canada and amended its credit facility. The amendment provided for a $325 million Canadian term loan, reduced the U.S. term loan to $50 million, and established $375 million of revolving commitments. The filing reports $497.6 million total borrowings as of July 27. Interest margins vary with leverage; the amendment increased margins by 0.25% within existing leverage levels and adjusted the leverage covenant schedule. Civeo said it was in covenant compliance at June 30.
- The second-quarter Kambalda impairment was $9.5 million, attributed to weak gold-mining activity and lack of contract renewals. First-half impairment expense was $12.2 million, including a $2.7 million write-down of the Johnstown, Colorado manufacturing facility held for sale; an additional $1.1 million inventory write-down was recorded. Management also reported $2.4 million of second-quarter costs related to the redomicile and credit amendment and expected less than $10 million of further redomicile-related costs in Q3, plus a debt-extinguishment loss.
- The quarterly dividend was suspended in late 2014 to preserve financial flexibility. Future dividends are discretionary and subject to debt covenants and other factors. Legal claims and proceedings are disclosed; management said it did not expect their ultimate liability to have a material adverse effect, subject to the stated uncertainties.
- Key risks include commodity-price and customer-capital-spending weakness, foreign-exchange movements, floating-rate debt, covenant and refinancing constraints, customer concentration and possible impairment of assets. A 1% increase in rates on June 30 floating-rate debt would have increased annual interest expense by approximately $7.75 million; the filing estimated a $5.0 million annual increase using July 27 debt.
Important facts for investors to verify
- Whether customer occupancy, room rates and new project commitments stabilize, particularly in Canadian oil sands and Australian coal markets.
- Post-amendment debt, cash, revolver usage, covenant headroom and interest costs; distinguish June 30 balances from July 17–27 subsequent events.
- Whether the $80–$90 million 2015 capital-spending outlook and Sitka Lodge plans proceed on schedule and with customer commitments.
- Potential further asset impairments, the Johnstown facility sale, redomicile expenses and the expected debt-extinguishment charge.
- The effect of currency translation and commodity prices on reported revenue, earnings, asset values and liquidity; confirm how the non-comparable 2014 spin-off periods affect year-over-year interpretation.