Civeo Corporation — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. Financial amounts are U.S. dollars unless stated otherwise. Civeo provides workforce accommodations and related services to natural-resource customers, principally in Canada and Australia, with smaller U.S. operations.
Business context and results
Operations span Canada, Australia and the United States. Canada generated about 70% of 2016 revenue, Australia 27% and the U.S. 3%. Lodges and villages accounted for more than 75% of consolidated revenue; demand is strongly affected by customer activity and oil, metallurgical coal and natural-gas markets.
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $397.2 million | $518.0 million |
| Operating loss | $95.8 million | $145.0 million |
| Net loss attributable to Civeo | $96.4 million | $131.8 million |
| Diluted loss per share | $0.90 | $1.24 |
| Cash from operating activities | $62.1 million | $186.1 million |
| Capital expenditures | $19.8 million | $62.5 million |
| Cash and cash equivalents at year-end | $1.8 million | $7.8 million |
| Debt principal outstanding at year-end | $357.3 million | $401.6 million |
Revenue fell 23% year over year, reflecting lower Canadian room rates and lower occupancy in Australia and the U.S., as well as adverse currency translation. Operating loss narrowed mainly because impairment charges were lower; the business remained loss-making. Consolidated gross profit was approximately $137.6 million, or 34.6% of revenue, versus approximately $190.4 million, or 36.7%, in 2015, calculated from reported revenue and service and product costs.
At year-end, total assets were $910.4 million and shareholders’ equity was $476.0 million. Reported debt, net of unamortized issuance costs, was $353.3 million. The company reported $164.5 million of unused revolver availability and total available liquidity of $166.3 million, including cash; borrowing availability was restricted by leverage-covenant calculations.
Material changes and unusual items
- Long-lived asset impairment expense was $46.1 million in 2016, including $37.7 million for Canadian mobile-camp assets and undeveloped British Columbia land tied to potential LNG projects, and $8.4 million for U.S. assets. Management said a 10% reduction in estimated cash flows for certain unimpaired assets could indicate a further $25 million to $35 million impairment.
- Revenue declined in each segment. Canada revenue fell 19%; lodge average daily rate decreased from $121 to $104, while occupancy rose from 60% to 63%. Australia revenue fell 21%, with occupancy declining from 56% to 44%; average daily rate increased from $74 to $76. U.S. revenue fell 68%, and its segment gross margin was negative 43%, as activity was insufficient to cover fixed costs.
- Operating cash flow declined to $62.1 million from $186.1 million, primarily reflecting lower revenue from reduced rates and occupancy. Investing cash use was $12.7 million; financing cash use was $58.3 million.
- Fourth-quarter 2016 revenue was $90.9 million and net loss attributable to Civeo was $15.9 million, compared with revenue of $97.3 million and net loss of $10.6 million in fourth-quarter 2015. The filing reports no significant unusual items recognized in fourth-quarter 2016.
Outlook, liquidity and risks
- Management expected full-year 2017 revenue and EBITDA to be materially below 2016 levels, despite improved commodity-market sentiment. No numerical 2017 revenue or EBITDA forecast is provided.
- Expected 2017 capital expenditures were $15 million to $18 million, excluding unannounced or uncommitted projects.
- Management said it expected cash on hand and operating cash flow to meet anticipated liquidity needs over the following 12 months. In February 2017, after year-end, Civeo issued 23 million shares for net proceeds of $64.9 million, intended for revolver repayment and general corporate purposes. A February 2017 credit amendment reduced aggregate revolver commitments from $350 million to $275 million and revised pricing and leverage-covenant terms.
- The credit facility required an interest-coverage ratio of at least 3.0x and a maximum leverage ratio of 5.50x at December 31, 2016; Civeo reported covenant compliance on that date. The facility was secured by substantially all company and subsidiary assets and was scheduled to mature May 28, 2019.
- Key risks include prolonged weak commodity prices and customer spending, customer contract nonrenewal or termination, customer concentration, foreign-exchange movements, high debt and covenant capacity, further asset impairments, and the delayed final investment decision for LNG Canada’s proposed project. Most Sitka Lodge rooms were contracted through September 2017; the larger Cedar Valley Lodge project depended on a positive final investment decision. Management warned that failure of LNG projects to proceed could impair Canadian assets further.
- Management noted that metallurgical coal prices had rebounded by early 2017 but said sustained spot prices above $150 per tonne for nine to twelve months would be needed before expecting a meaningful customer-activity response. Commodity-price improvement was not yet reflected in customer spending plans.
- The company had commitments for 27% of rentable rooms for 2017 and 18% for 2018; 6,651 rooms, or 39% of rentable rooms, were under contract as of year-end. Contract renewals and replacement business were not assured.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective as of December 31, 2016. Pending legal matters were not expected by management to have a material adverse effect, although outcomes were not assured.
Important facts for investors to verify
- Whether 2017 revenue, EBITDA and operating cash flow follow management’s expectation of being materially below 2016.
- Actual post-offering debt reduction, remaining revolver availability, interest costs and covenant headroom under the amended facility.
- Renewal or replacement of near-term room contracts, including LNG Canada’s Sitka Lodge commitment and the status of the Cedar Valley Lodge final investment decision.
- Whether commodity-price changes translate into customer spending, occupancy and room-rate recovery in Canada and Australia.
- Potential additional impairments, especially given the sensitivity of asset valuations to projected cash flows and customer activity.