Civeo Corporation (CVEO) Q1 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the Civeo Corporation First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Collin Gerry, Senior Director of Corporate Development and Investor Relations for Civeo Corporation. Please go ahead, sir.

Thank you, and welcome to Civeo's first quarter 2016 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 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 would like to begin with an overview of our overall operational performance in the first quarter. Frank will than walk you through detailed financial results for the quarter and then I will wrap up with our prepared remarks with a discussion of each segment and our near term outlook before we take your questions. Energy markets and activity levels in North America in the first quarter of 2016 turned out to be weaker than expected. Met coal, mining sector in Australia remains challenging. The value of Canadian and Australian currencies against U.S. dollar also weighed on our reported financial results as we compared to prior period. Even so, we were within our guidance for the first quarter coming in at the upper end of our revenue forecast and in line with our EBITDA guidance. We also generated more than $8 million of free cash flow as defined and reconciled in our earnings release. The strategy we have put in place several quarters ago to help us weather this downturn, which is to drive free cash flow, reduce leverage and capture organic growth opportunities, hasn’t changed. But our immediate priority in this difficult market has been on generating and preserving cash and it's working. We continue to reduce our operating and overhead cost and look to enhance our financial footing while we pursue new business opportunities in our major markets. Quality and client satisfaction are big part of our competitive advantage and we have been careful to maintain that edge and that quality of service even as we continue to realign and right size our business. Operationally, we got off to a slightly slow start in January than we expected in Canada due to warm weather in Canada and a slow return from the holidays. But we are starting to pick up and are -- we are starting to see a pickup in available business that is being put for bid. Although we are still waiting for positive investment decisions on a couple of major LNG projects in British Columbia that we are in the planning stages, we believe that this is real opportunity for us in this segment. Hopefully, before the end of the year in addition to the Sitka Lodge we built for Shell led project at Kitimat. I will come back to this in a moment. As you are aware, the rig count in the U.S. dropped sharply in the first quarter and activity remains weak in pretty much every area except the Permian basin. As a result we took a charge against some of our assets in the Bakken and realigned our management in the U.S. to further optimize our operations and our cost structure there. Australia continues to be negatively affected by the impact of slow economic growth in China on demand for coal for steel making. But there is a couple of new business opportunities that we are actively pursuing. Now I would 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. Before I get into more discussion about the financial results for the first quarter, a reminder on foreign exchange. Our average currency rates for the quarter, for the first quarter of this year were down compared to the first quarter of 2015. But we saw strengthening of exchange rates in both Canada and Australia towards the end of our first quarter 2016, which as you will notice, had an impact on our balance sheet. Looking at the first quarter financial results, we reported a net loss on a GAAP basis of $26.8 million or $0.25 per diluted share on revenues of $95 million. If you exclude the impact of $8.4 million of pretax impairment charges on some of the U.S. assets located in the Bakken because of reduced drilling activity in the region and a $1 million cost related to our migration to Canada, our adjusted net loss would have been $20.7 million or $0.19 per diluted share. For the quarter adjusted EBITDA excluding the impact of these two charges was a positive $16.8 million and cash flow from operations was $11.3 million. The continuing evaluations of the Canadian and Australian dollars against the U.S. dollar negatively impacted us again in the first quarter. Although the Canadian dollar held up slightly better than we had figured in our first quarter guidance. The Canadian dollar was down 10% against the U.S. dollar year-over-year and the Australian dollar was down 8%. If you adjust for foreign exchange rates impact, consolidated revenues would have been $9.3 million higher and adjusted EBITDA would have been $2.5 million higher. We spent $4.8 million of CapEx in the first quarter exclusively for maintenance purposes. Our full-year CapEx guidance remains at $30 million for 2016 with a downward bias as we continue to be disciplined in our spending and drive free cash flow. Should some of the positive organic growth projects materialize, the back amendment that we executed in February gives us additional flexibility to be able to finance that growth. At March 31, our total debt balance was $415 million, exclusive of debt issuance cost of $5 million, and we had cash on hand of $3 million. The uptick of our debt level was somewhat deceiving in the first quarter of this year. While we made net repayment of debt totaling $11 million in U.S. dollars, long-term debt as shown on the balance sheet increased by $15 million in U.S. dollars. The increase reflects the impact of a stronger Canadian dollar at March 31 compared to December 31, 2016. As of March 31, we had $66 million of available capacity on our revolving credit facility and totally liquidity of approximately $69 million. We expect to continue to pay down additional debt in the second quarter 2016. A reminder, most of our debt balances are in Canadian and Australian dollars and our cash balances are predominantly Canadian and Australian dollars. So reported debt balances in the U.S. will fluctuate as foreign exchange rates continually fluctuate. The migration of the company to Canada helped us mitigate some of our exchange rate risk as it relates to debt servicing, although declines in the Canadian and Australian currencies impact our results from operation. And lastly, we are very pleased to have regained continued listing compliance with the New York Stock Exchange earlier this month based on a sustained uplift in our stock. Now I will turn it back over to Bradley for providing a more detailed look at our segments and an update on our strategic initiatives. Bradley?

Thanks, Frank. I will begin with our Canadian segment and as usual I will compare our sequential performance, that is first quarter 2016 compared to fourth quarter 2015. We got a slower start than expected in the New Year in Canada. During holidays, a seasonal drag in fourth quarter and post-holiday rebound was slow. Revenues from our Canadian segment were $65.5 million which is down slightly from the fourth quarter. Adjusted EBITDA increased by about $0.5 million to $14.2 million sequentially mainly due to lower SG&A expense and also to better occupancy and smaller pipeline driven camps. The decline in the Canadian dollar which fell from an average of 0.75 to less than 0.73 from the fourth quarter to the first quarter, reduced Canadian segment revenues by $1.9 million and adjusted EBITDA by $0.4 million. Average occupancy in our Canadian lodges was 60% versus 52% in the prior quarter. The new Sitka Lodge in British Columbia opened towards the end of last year and we saw increased seasonal occupancy at other locations. We also reopened the Athabasca lodge in mid-March to support a customer's turnaround activity that we discussed during our last call. So these rooms will so up in our second quarter results. The adjusted EBITDA margin in our Canadian operations was 22% in the first quarter of 2016 versus 21% in the fourth quarter of 2015 primarily due to reduced SG&A. Looking at our expectations for the second quarter in Canada, assuming a Canadian dollar exchange rate of 0.79, we are guiding to revenue of $72 million to $75 million in U.S. dollars for our Canadian segment and adjusted EBITDA of $17 million to $19 million in U.S. dollars for the second quarter of 2016. This is based on 9,500 rentable rooms and we expect lodge occupancy to be between 55% and 68% with a room rate of approximately $140 per night in Canadian dollars. For the full year in Canada, we are assuming a Canadian dollar exchange rate of 0.77. We are also assuming revenue of $270 million to $290 million. We expect adjusted EBITDA to be between $60 million and $67 million. This assumes rentable rooms of 8,900. We expect lodge occupancy to be between 59% and 62% with a room rate of approximately $149 to $151 per night in Canadian dollars. Now moving to the Australian segment. Revenues declined by $1.2 million versus the fourth quarter $25.5 million which is toward the upper end of our guidance range. Adjusted EBITDA was $10.8 million, which is about $600,000 higher than the prior quarter if you exclude the FX gain recognized in the fourth quarter of 2015 and again towards the upper and of our guidance range. The Australian dollar was mostly flat versus the fourth quarter at $.72 to the U.S. dollar and so far in the second quarter has averaged $.77. Average daily rate for Australian villages was $68 in the first quarter, down from the fourth quarter. Occupancy was two percentage points down from the prior quarter to 47%. Adjusted EBITDA margins continue to be strong in Australia increasing to 42% in the first quarter versus approximately 39% in the fourth quarter. You are probably aware of U.S. bankruptcy of Peabody Coal in early April. The sign did not include the Australian operations. Peabody represents less than 10% of our Australian business. They remain current on their payments for our village lodging in Australia and obviously we will continue to monitor the business but as of today we do not believe it is an issue. Moving on to guidance for Australia. Assuming an exchange rate of 0.77 Australian dollars to U.S. dollars in the second quarter of 2016, we expect $25.3 million to $26.4 million of revenues and adjusted EBITDA of 9.1 to 9.7 from Australia. This is based on 8760 rentable rooms and village occupancy of 42% to 43% and average daily rates of approximately $100 per night in Australian dollars. For the full-year of 2016 assuming an exchange rate of 0.75 to the U.S. dollar, we expect $93 million to $98 million of revenues. For 2016 we expect adjusted EBITDA of $34 million to $37 million from Australia. This is based on approximately 8680 rentable rooms. Village occupancy rates of 42% to 44% and average daily rates of approximately $95 to $96 per night in Australian dollars. Now looking briefly at the U.S. U.S. rig count fell throughout the first quarter. A continued decline in drilling activity, particularly in the Bakken impacted our operational and financial results. As a result, we took an impairment charge on a couple of assets in the Bakken as Frank has described earlier. We don't anticipate a near-term rebound in the U.S. We are continuing to be very diligent in managing costs and during the first quarter we continued the management realignment that we think will result in enhanced leadership and additional cost efficiencies going forward. U.S. revenues in the quarter were $4 million and adjusted EBITDA was negative 3.1. We expect these markets to continue to weaken as the rig count in the Bakken continues to decline. Now moving, on a consolidated basis we expect revenues in the second quarter to range between $97 million and $101 million and adjusted EBITDA to range between $17 million and $20 million. For the full-year we have not changed guidance. We expect revenues to be in range of $385 million to $415 million and adjusted EBITDA to range between $72 million and $82 million. Before we go to questions, I would like to provide a quick update on our outlook for the Canadian LNG business and our view on opportunities this developing industry may hold for Civeo. We are continuing to have active conversations with developers of the two most near-term viable projects, LNG Canada led by Shell and the Pacific Northwest project led by Petronas. When I say active conversations, I mean that we are working on several components of these projects almost on a daily basis. Each of these projects represents tens of billions of dollars of total investment and would require thousands of workers to build the liquefaction facilities and gas pipelines. As a result, LNG represents a significant opportunity for Civeo to diversify beyond oil sands business in Canada. These projects are moving slower than we would have liked due to the global surplus of LNG and slowing Pacific economies. But the fact that we are still actively engaged in discussions and planning around these projects is encouraging sign that the opportunity is there. And we are in a strong competitive position to pursue the business. Throughout our system we are continuing to do a lot of positive work on cost reduction and we have made significant strides in operational efficiencies. We are working to take out additional costs in the second half of the year and to sell underutilized assets, particularly in the U.S. to further enhance our cost structure and liquidity. We are always looking for opportunities to drive revenue from the service operations from our lodgings. We believe there are pockets of demand for rooms to accommodate turnaround and maintenance activity and we hope to win it over the next couple of quarters. In Australia, coal prices are likely to remain under pressure this year due to continued slumping economic activity mainly in China but we believe the long-term fundamentals, particularly in low cost basin, Bowen Basin, are solid. Operationally, our focus remains the same in 2016. 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. This completes our prepared comments. We are ready for questions at this point.

[Operator Instructions] Our first question comes from the line of Blake Hancock with Scotia Howard Weil. Please proceed with your question.

Bradley, first I would like to touch on Australia a little bit. Maybe a two part question here. So first, I know you have got some contracts and renewals that are coming up here. Can you refresh us maybe how many rooms are at risk and then how this is progressing? And I know last [indiscernible] you kind of thought, hopefully by the 2Q call you might have some updates. Is that still kind of the path forward right now?

In Australia, I would say generally things are steady as they go. The conversations around renewals are generally constructive. To answer your specific question, we [framed] [ph] at the beginning of the year that somewhere between 500 and 750 rooms were at risk in terms of renewal. That’s the same number today. And generally we feel good about our ability to renew those rooms. Fuel prices are up recently as are iron ore prices. Met coal prices have trended up. So I think it's probably a little early for us to move Australian guidance up but I would say the trend is positive overall. So the team has done a good job of maintaining the existing occupancy and chasing the work that’s there. We are chasing a couple of organic opportunities to grow the business. None of which are related to met coal, they are all related to either LNG or civil projects. But generally speaking, the Australian business is, quite frankly, in pretty good shape.

And that was coming out to be my follow on right there, was regarding those opportunities you are talking about. What's kind of the -- can you give us an update on maybe the timing of those? Is that a 2016 or is that likely going to probably more impactful here in 2017?

It's more of 2017 issue. I think we will hopefully secure them in 2016 but the impact, much like LNG in Canada, at this point is going to be announced this year and impact next year.

All right. That’s great. And then kind of turning to the Canadian operations. As we think about the turnaround work that you discussed, are their more opportunities for this year, and I know you said opened Athabasca, given the new contract that was announced earlier this year. Are there more opportunities for this year to become available and keep utilization high in those lodges?

They've show interest, yes. I mean we are pursuing a couple of turnaround projects in addition to the work we already secured, I guess earlier this year and that has opened up Athabasca, middle part of March. Our hope is that if we secure this work we will be able to keep Athabasca and Beaver River, actually nicely occupied for the rest of the year. That will effectively fill the bucket, if you will, relative to guidance for the year. So not an opportunity to really push it forward but certainly secures and firms up the guidance for the rest of 2016.

That’s great. And then last one, I will throw it to you, Frank. Great job, flowing cash here in 1Q. Assuming -- if we assume the $30 million in CapEx, right, and obviously there could be some, that number could move higher if you win some of these LNG projects. But have you guys, can you help us with what you are modeling or what you are thinking free cash flow could actually be for 2016. In more of a steady state, right. And that’s not assuming more growth CapEx gets put through the system.

Yes. I mean I think right now we would spend about $30 million for the year. I mean looking at the guidance we have given you on EBITDA, [indiscernible] to $30 million plus what we see in interest cost for the year, you will get to around a number of about $30 million.

All right. That’s fine.

And the team -- I am sorry, I would like to interrupt there. I would say the team has done a really good job of managing maintenance CapEx. We are maintaining guest services and client satisfaction but at the same time we are trying to be smart about the way we spend capital. And last year kind of came in at about $14.5 million on maintenance CapEx. I think this year, our guidance is 30 because it's early. That’s our budget. But the fact of the matter is, is that I think we could probably be closer to 20. So we are very focused on driving the top line and managing the operating costs and capital expenditures.

And Blake, just as Bradley mentioned in his comments, we are looking at opportunities in the U.S. to sell excess or underutilized assets that will add to that cash generation.

Thank you. [Operator Instructions] Our next question comes from the line of [Arif Cole with Cole Capital]. Please proceed with your question.

I have a couple of questions but I will just ask you one at a time. Regarding the LNG bidding opportunities, can you clarify as to the number of rooms your firm has that are located in the right places that potentially could be rentable on a long-term basis, if you win part or some of these potential bid.

I will be happy to. I would line out the LNG opportunity as it relates to accommodations as follows. Starting at the coast, there is obviously rooms that will be needed for the construction of the liquefaction facilities. We expect that both Shell and Petronas will have rooms that they will own and rooms that they will outsource. In rough numbers they will need somewhere between 4500 and 7500 rooms in total per project. I expect that they will in-source some of those, so that provides an opportunity to, as we can construct those rooms to build for sale. That’s an opportunity for us to then manage those assets going forward on a facility management basis. Obviously, with the Sitka Lodge and we have got land in Port Edward to support Petronas. We can do the outsourced rooms as well. So that’s kind of three opportunities related to LNG. The fourth opportunity would be on the pipeline side where we could use our mobile camp asset to service the pipeline construction. We have got plenty of assets to service that and I think we are well positioned to do that for both projects. And then lastly we have got mobile assets that will be well suited for the drilling opportunity as longer term they need to get the hydrocarbons to feed the pipelines, to feed the liquefaction facilities.

Okay. And then the question number two is, the basic discussions with these potential partners, what sort of long-term natural gas prices do they need, I guess in U.S. dollar terms with potential buyers to make it economical for them to give the green light to those projects.

Well, I think that if you look at AECO prices and the fact that the projects are expensive, but if you look at AECO prices, you look at the fact that they are going to have ambient temperature benefit. They have got Canadian dollar benefits, the Canadian dollar stands stronger. Generally speaking, they are very economic projects. Now one thing we have been doing with our customers, both customers, is working around value engineering. As I mentioned in my comments, we have been in fairly active dialog with both around trying to cut down the overall cost of building the entirety of what we manage, the accommodations. Managing the entire cost of that project. So to the extent that we can reduce that cost ultimately will be beneficial to them. So I am not a natural gas expert. I can't tell you what the exact cost is. What we are trying to do is work with our customers, try and find ways that we can do things more efficiently and reduce the overall cost of the project so that they will feel comfortable to move forward. I think given the economics, I am cautiously optimistic that they will.

Okay, fine. And then just a final question. Regarding oil prices, when you look at U.S. WTI oil prices, at what level do the oil sands, people like Suncor and others, need the prices to go to average. And what sort of, I guess, western Canadian discount are they assuming for to be economical for them to start considering expansions in Greenfields again.

In regards to the price that we need this to be for continued development of oil sands.

Well, I think it depends on what kind of project you have [indiscernible]. What we are seeing really across the entire oil and gas infrastructure system globally is massive deflation. We are seeing cost being pulled out on the labor side, on the asset side, on the equipment side, to reduce the -- to your question, the breakeven price of developing new project. Canada, if the question was Canada, we are certainly seeing that significantly. And we are constantly working with our customers to try and reduce our cost and ultimately reduce their cost in terms of developing these resources. Specific to your question, if it's talking about oil sands, I would say in the SAGD region, it's probably 55 to 65. And oil in the mining region, the northern part of the play, I would say, 85 to 95. But I think that right now those are Greenfield costs. I think most of the operators right now are looking at kind of expansion opportunities where they can leverage existing infrastructure. And that would reduce those costs significantly.

All right. So was expansion...

Just to go back on your, also your question on LNG. Don’t forget that both of those projects, the Shell project and the Petronas led project, have dedicated natural gas properties to fill basically the pipeline to get it to the LNG facility. So both of those projects have dedicated natural gas reserves ready to be developed for those projects. Which takes in their purchase, they are pretty good priced from the standpoint of bringing out the ground and moving across to make those facilities competitive.

And just one clarification on the Canadian oil sands opportunities where they are doing Brownfield expansion on a per barrel basis. What sort of cost savings do they have? So those in the Greenfield, hypothetically they need $60 U.S. to make the project economical. If they are looking just into expansion, how many dollars below that $60 would be saved on the expansion project to make it economical to go forward.

I will be honest, I think that I have not seen anything publicly that would indicate what those rates are but they inherently have to be less. But I don’t know that number.

Thank you. Ladies and gentlemen, we have come to the end of our time allowed for questions. I would like to turn the floor back to Mr. Dodson for any final remarks.

Thank you. Well, thank you all for joining the call today. That concludes all our prepared comments. We look forward to speaking to you at the second quarter results.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.