Civeo Corporation (CVEO) Q4 2015 Earnings Report, Transcript and Summary

Good morning, and welcome to the Civeo Corporation Fourth Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now turn the conference over to Mr. Collin Gerry, Corporate Development and Investor Relations for Civeo Corporation. Thank you, Mr. Gerry. You may now begin.

Thank you, Manny. Welcome to Civeo's fourth quarter 2015 earnings conference call. Our call today will be led by Bradley Dodson, Civeo's President and Chief Executive Officer; and Frank Steininger, Senior Vice President and Chief Financial Officer. Before we begin, we would like to caution listeners regarding forward-looking statements. To the extent that our remarks today contain information other than historical information, please note that we're relying on the Safe Harbor protections afforded by Federal Law. Any such remarks should be read in the context of the many factors that affect our business, including risks disclosed in our Form 10-K, 10-Q and our other SEC filings. I will now turn the call over to Bradley

Thank you, Collin. Good morning to all of you, and thank you for joining us. I’d like to begin first with a review of our full-year and fourth quarter performance for 2015. Frank will provide some details on our credit facility amendment we announced today, and then walk you through our detailed financial results for the fourth quarter. And lastly, I'll discuss each segment in our near-term outlook. 2015 was, without a doubt, one of the more challenging years over the past two decades of our operations. Our lodge and village revenues declined by 43% as occupancy fell in response to lower oil and metallurgical coal prices, and the related impact on customer spending and activity that was coupled with the weaker Canadian and Australian dollars. Prior to the beginning of 2015, we laid out our expectations for the year in how we were going to respond to the downturn. While the absolute results for 2015 are disappointing, in the phase of macroeconomic headwinds not seen since the 1980s, we were successful in accomplishing those operational, financial and strategic initiatives that we said we were going to do. With following occupancy and revenues, we saw to maintaining guest service levels and client satisfaction while managing the things we've controlled namely our operating cost and capital spending. We won new contracts supporting the new - the potential LNG market in British Columbia and we prudently deployed capital by managing maintenance spending while funding two new organic investments. We completed the migration to Canada and refinancing of our credit facility during the summer, which enabled us to meet the majority of our outstanding debt to Canada. As a result, we made progress towards mitigating our current derisk that is weighted on our financial results this year in both Canada and Australia. Going forward, we will not only benefit from the lower effective tax rate in Canada but a more efficient movement of capital among our three primary operating regions. In 2015, we reduced our total debt outstanding by almost 50% year-over-year and we expect to further reduce our debt level and strengthened our liquidity in 2016. We recently committed - completed second amendment to our credit facility that not only gives us more flexibility to manage this downturn, but also allows us to pursue organic growth projects that are supported by customer contracts. We believe these collective actions positions Civeo for long-term success. Now looking at the fourth quarter. I'm pleased to say that we delivered on our guidance. Revenues were in the mid-range of our forecast and we exceeded the top end of our adjusted EBITDA guidance range, even as the Canadian and Australian dollars continued to weaken against the U.S. dollar. Now I'd like to turn it over to Frank to take you through the details of our consolidated results and our financial position. Frank?

Thanks, Bradley, and good morning to everyone. I'd like to begin with some details on the credit facility amendment we announced this morning. The second amendment to our credit facility provides additional covenant relief to manage through the current activity levels and the flexibility to deploy capital on growth projects. As we pointed out in our release, our 2016 capital budget is solely devoted to maintenance CapEx, but if we get a new contract with the customer, it requires expansion capital. We will now be able to pursue that organic growth. Under the amendment, our maximum leverage ratio increases to 5.5x in the third and fourth quarters of 2016. It then decreases a quarter turn every six months to 4.75x in the first quarter of 2018. The amendment also establishes higher interest rates for leverage above the previous maximum leverage ratio or 4.5x. In conjunction with this amendment, we replay $25 million for our U.S. term loan and reduced our Canadian revolver by $25 million. So we reduced our total borrowing capacity going forward by $50 million to approximately $700 million. This clearly gives us a lot of flexibility over the next couple of years to take advantage of growth opportunities, if and when, they become available. Now looking at our fourth quarter results. We reported a net loss on a GAAP basis of $10 million or $0.10 per diluted share on revenues of $97.3 million. If you exclude the impact of $1.9 million of costs related to our migration to Canada in the fourth quarter of 2015, our adjusted net loss would have been $9 million or $0.09 per diluted share. Our adjusted EBITDA was a positive $22.1 million for the quarter. The ongoing evaluations of the Canadian and Australian dollars against the U.S. dollar continued to negatively impact us in the fourth quarter. The Canadian dollar was down 15% against the U.S. dollar year-over-year, and the Australian dollar was down 16%. If you adjust for the foreign exchange rate impacts, consolidated revenues would have been $17 million higher and adjusted EBITDA would have been $5 million higher for the quarter. Cash flow from operations were $11.2 million for the fourth quarter and a $186.1 million for the full-year. We invested $18.7 million on CapEx in the fourth quarter, with the majority of the spending related to our new Sitka Lodge in British Columbia. For the full-year, capital outlays totaled $62.5 million. For 2016, we had a CapEx budget of approximately $30 million, which is almost exclusively for maintenance capital. If we succeed in winning term contracts for organic growth projects, our latest covenant revisions give us the flexibility to be able to finance that growth. As Bradley mentioned earlier, we reduced our outstanding debt over the course of 2015 by 48%. As of December 31, our debt balance was $401.6 million, down from $775 million a year earlier, and we had cash on hand of $7.8 million. Taking into account changes included in our credit agreement that we announced, we have approximately $140 million of available capacity on our revolving credit facility and total liquidity of approximately $160 million. A reminder, most of our debt balances are denominated in Canadian dollars, and our cash balances are predominantly in Canadian and Australian dollars, so our reported net balances in the U.S. dollars will fluctuate as foreign exchange rates fluctuate. Lastly, the average closing price of our shares over a recent period of 30 consecutive trading days has fallen below a $1 per share, which is the minimum average closing price per share required to maintain listing on New York Stock Exchange. We received a non - a delisting notice from the New York Stock Exchange this morning with respect to this non-compliance with the listing standards. Under the New York Stock Exchange rules, a company generally has a period of six months following the receipt of the notice to regain compliance. Our Board of Directors intents to propose a reverse share split as 2016 annual shareholders meeting to cure the non-compliance. The company will issue a subsequent press release and file a Form 10-K as required by the applicable SEC and New York Stock Exchange rules. Now I'll turn it back over to Bradley, who will provide a more detailed look at our segments and an update on our strategic initiatives. Bradley?

Thank you, Frank. I'll begin with our Canadian segment, and I'll be comparing our sequential performance to our fourth quarter of 2015 compared to the third quarter of 2015. Revenues from our Canadian segment in the fourth quarter were $65.8 million, which is down $5.7 million from the third quarter. Adjusted EBITDA decreased $5.9 million to $13.6 million sequentially. Average daily room rates increased sequentially $5 to a $152 per day in Canadian dollars in the fourth quarter, which reflects the addition of our new Sitka Lodge in British Columbia. Our average occupancy in our Canadian lodges in the fourth quarter was 52% versus 57% in the third quarter. The adjusted EBITDA margin on our Canadian operations declined sequentially by approximately 290 basis points to 21%. We realized additional revenues from the reopening of our Mariana Lake Lodge in the fourth quarter for a contract that extends with the first quarter of 2016 with the potential extension into the next winter drilling season. We also began ramping up operations at our new Sitka Lodge in British Columbia in October, so we expect to see a more meaningful contribution in our first quarter results from that location. We announced C$41 million of new and renewed contracts in the first quarter in the Alberta Oilsands region. This includes a two-year accommodations contract to support the facilitate turnaround of an oil sands customer in the first half of 2016 and 2017. We will reopen our Athabasca Lodge and we’ll use additional rooms at our Beaver River lodge to service this contract. We also won several shorter contracts to support pipeline activity using both existing lodges and some of our mobile assets. We recently extended a catering and services contract to support 290 customer-owned rooms through the first quarter of 2017. We've been providing catering for this customer for more than 10 years. These activities are part of our strategic plan to leverage our services and assets to drive additional revenues and profits. Looking at our expectations for the first quarter and a full-year in Canada, assuming that Canadian dollar exchange rate of 0.71, we are guiding to revenue of $62.5 million to $65.5 million for our Canadian segment, and adjusted EBITDA of $13.5 million to $14.5 million for the first quarter of 2016. This assumes 8,340 rentable rooms for the quarter, and we expect lodge occupancy to be between 65% and 68% with the room rate of approximately $151 per night in Canadian dollars. For the full-year, we are assuming a Canadian dollar exchange rate of 0.72 and we are guiding to revenues of $270 million to $290 million for our Canadian segment, of which, possibly 58% is contracted. For 2016, we expect adjusted EBITDA of $60 million to $67 million. This assumes 8,010 rentable rooms, and lodge occupancy to be between 66% and 70% with a room rate of approximately $137 per night in Canadian dollars. Although, we don't expect new projects to be announced in the Oilsands region this year, we think there will continue to be plants and pipeline maintenance projects around existing infrastructure that we are well positioned to win. While most of the headcount reductions are behind us, we will be relentlessly pursuing operational efficiencies and process improvements to reduce costs, as well as identifying opportunities to leverage our existing infrastructure and our lodge-based service operations. Again as Frank mentioned, CapEx will be focused on maintenance this year, and any growth capital will be anchored by contractual commitment. Now moving to the Australian segment. Revenue declined by $2.5 million versus the third quarter to $26.7 million, which is in line with our guidance and we performed low on cost. Adjusted EBITDA included a $3.6 million FX gain. Excluding that gain, our adjusted EBITDA was $10.1 million, in line with guidance. Average daily room rate for the Australian villages was $93 per night in Australian dollars for the fourth quarter versus $98 per night in the third quarter. Occupancy was down 1 percentage point from the prior quarter of 49%, mainly due to holiday related downtime. Adjusted EBITDA margins continued to be relatively strong in Australia at approximately 38%. Slowing demand for steel-making in China continues to lay on met coal prices, and on the 2015 outlook for our Australian operations. Assuming an exchange rate of 0.71 for the Australian dollar versus U.S. dollar in first quarter of 2016, we expect $24.5 million to $26 million of revenues, and adjusted EBITDA of $10 million to $11 million for our Australian operations. This is based on 8,730 rentable rooms and village occupancy of 44.5% to 47.5% with average daily rate of approximately $98 per night in Australian dollars. For the full-year 2016, assumingly exchange rate of 0.72 for the Australian dollar to the U.S. dollar, we expect $93 million to $98 million of revenues, of which, 57% is contracted. 2016, we expect adjusted EBITDA of $34 million to $37 million for Australia. This is based on 8,820 rentable rooms and village occupancy of 42% to 44%, with an average daily rate of approximately $95 to $96 in Australian dollars. Lastly, now looking briefly at the U.S., the continued weakness in the Bakken, Rockies and Permian basin in our well site business and lower activity for our offshore fabrication business continue to impact our financial results for this region. However we had, and will continue to manage our costs to protect our cash flow. With the U.S. rig count down 13% sequentially in the fourth quarter, our U.S. revenues for the quarter were $4.8 million and adjusted EBITDA was a negative $2 million. We expect these markets to continue to weaken in the first half of 2016. On a consolidated basis for guidance, we expect revenues in the first quarter to be in a range of $90 million to $95 million, and adjusted EBITDA to be in the range of $16 million to $19 million. For the full-year of 2016, we expect revenues to be in the range of $385 million to $415 million, and adjusted EBITDA in the range of $72 million to $82 million. Before we go to questions, I'd like to make a few additional observations about our outlook for Canadian growth about our opportunities that maybe in front of us and our company's ability to take those projects on in current environment. The pace of Canadian LNG business has admittedly been slower than we anticipated as the two major proponents pursued final commercial and federal approvals. However each of these projects would require thousands of workers to build liquefaction facilities in gas transportation pipelines. As a result, LNG represents a significant opportunity for Civeo to diversify beyond our oil sands business in Canada. While these projects are moving a little slower than we expected, the size of the opportunity is material and we are well-positioned from a competitive standpoint to capture this business. Our Sitka Lodge was the first project to be awarded to support pre-FID activity for one of the possible LNG developments. We won this work to our land banking strategy and our integrated business model. While we positioned ourselves for B.C. LNG market and continue to pursue work in our core oil sands market, despite the continued deterioration in oil prices, particularly in January, oil sands construction projects that are already in place continue to move ahead and existing assets continue to operate. We continue to see small pockets of demand for turnaround and maintenance activity and this is evidenced by in January of $41 million of new and renewed contracts. In Australia, the slowdown in China's industrial sector has continued impact the global economy. Australia is the nearest and most competitive supplier of met coal to the Asia-Pacific steelmaking industry. Coal prices will remain under pressure this year but the coal producers who are operating today are our cash flow positive and we believe in the long-term - we believe the long-term fundamentals are favorable, particularly in the low cost Bowen Basin where about four-fifths of our Australian revenue is generated. Operationally, our strategic focus for 2016 remains unchanged from 2015: continue to the generate free cash flow by utilizing existing assets and applying disciplined cost and CapEx management; continue to pay down debt; and pursue organic growth opportunities. We have accomplished a lot over the last 18 months to ensure that Civeo is positioned for long-term growth and for the new opportunities that come to market. That completes our prepared comments. Manny, we’re ready for questions.

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Blake Hutchinson of Howard Weil. Please go ahead.

Good morning guys.

Good morning, Blake.

Good morning, Blake.

I just want to maybe follow on a question along with the way you conducted the presentation today. First of all, with regard to the EBITDA margin declined from 3Q to 4Q, I think you kind of immediately outlined the start-ups of Mariana Lake and Sitka in 4Q as well. Would that suggest that there was a bit of drag on margin due to start-up in those, and that's why as we forecast next year’s margins a little bit higher, you have a higher confidence level in that?

There were some operational efficiencies with the start-up of those two locations as we would typically see. So it did impact margins, but as we go forward, I think we are comfortable with the cost structure. We had some additional cost reductions we made in the fourth quarter that also impacted things that will benefit from on a go-forward basis.

Okay. And then just for the last couple of quarters, you've talked about the concept of kind of casual occupancy before I pursue that the guidance line of questioning. When you use that term, I think you’ve kind of equated the spot market but if we’re actually typically either higher headcount or longer term, are they month long or week long contract. Is there any - I guess, what I'm getting too is as we look at your contracted obligations for both geographies during the year, are you actually - although it's termed casual occupancy, do you have actually a degree of visibility built into that from the way that the conversations or the terms are structured?

We'll have some visibility, but I think as you reference to your question, it will be measured in weeks and months as opposed to typically quarters or years under a longer term contracts. So as we have progressed through this downturn, we continue to get more and more comfortable with forecasting that as you’ve seen with our guidance. Where we are seeing it in Canada right now is around Beaver River location is where we are seeing casual occupancy, and then we really see it through several locations in the Bowen Basin in Australia. So we'll continue to monitor it, but we do feel comfortable and feel it's necessary to forecast that, but we are getting more comfortable in doing so.

Is it safe to say the variance in kind of the out-year estimate here is continued levels of casual occupancy as well as just picking up some turnaround activities in Canada the major variance that could push you to the higher end of the range?

Yes, there are a couple of pieces to it starting with Canada. There is additional turnaround work that we hope we move forward and then that we hope that we will win, that is out there in addition to what we already have one. In Australia, I would say the difference between the guided revenues and the contracted revenues that we referred to is really around some contract renewals in the middle part of this year. So as I expect, maybe not by the time we announce first quarter earnings, but certainly by the time we announce second quarter earnings, we’ll have a much firm review on what the second half of Australia will look like.

Great. And then just finally, with regard to Sitka. Is it your understanding - I mean assuming in this environment, that proceeding with FID may continue to - if you pushed a bit to the right, first of all, is there - is that necessarily mean that you would keep at least some level of occupancy during that phase at Sitka, even if we extended the timeframe there? And secondly, are there any hard permitting dates that might send the client back to the drawing board in terms of starting the timing meter over in terms of permitting process?

So, on the first part, we have a firm contract as it relates to the total number of man days at Sitka. And so our belief is we'll continue to have occupancy there. Obviously the delay doesn't help that, but we do expect to have occupancy at Sitka even it was built in leadership contract was put in place to serve these pre-FID work. And so we expect to continue to do so. As it relates to any permitting dates that could set things back, I'm not aware of any.

Great. Thanks. That's all I had. I appreciate the time guys.

Yes. Thank you, Blake.

Thank you. [Operator Instructions] Thank you. The next question is from Neal Miller of Fidelity Investments. Please go ahead.

Hi. I'm kind of wondering about the letter from the New York Stock Exchange, and I'm just kind of wondering what other scenarios you all have considered other than a reverse split?

Well, we just found out about that last night prior to issuing the press release. As we mentioned in the prepared comments this morning, we did received a notice. We had been tracking it as we were aware of the listing rules and had been watching it. At this point, we discussed it with our Board on a preliminary basis, and we intent to put forth to the shareholders at the 2016 meeting, a proposal for reverse split. But to answer your question, beyond that and the expectations to continue to execute on our plan and to hope that the stock price would recover on its own, beyond a reverse share split, we’ve not considered anything else.

I appreciate that. I guess that it's been a perfect storm all the way around and it's too bad - the backdrop is really tough, and so I was just thinking maybe there are other alternatives other than reverse split, and realize it doesn't impact the financial backdrop, but there is probably a pretty tough pattern that's out there for reverse splits and subsequent performance.

We remain committed to maintaining the listing, and as we move forward over the six-month period that we have secure the non-compliance we'll certainly look at all, I guess, alternatives to reverse stock split. But that was the one that initially we discussed with the Board.

Thanks so much.

Thank you.

Thank you. We have no further questions at this time. I would like to turn the conference back over to Mr. Dodson for any closing comments.

Thank you. Let me close by saying that 2016 is going to be a difficult year in line of the macroeconomic backlog that we have. However our team’s significant efforts in 2015, we have positioned the company to successfully navigate this market. We expect to generate positive cash flow in 2016 with the financial flexibility to support growth investments, should they arise. We have a smart experience and nimble management team that is working hard every day to find new opportunities both for cost efficiency and for improving the customer experience. Our focus remains on execution and getting back to growing the company. Thank you for joining us today, and thank you for your interest in Civeo. That concludes our comments.

Thank you. Ladies and gentlemen this does conclude today's teleconference. You may disconnect your lines at this time. And thank you for your participation.