Civeo Corporation (CVEO) Q3 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the Civeo Third 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, Mr. Regan Nielsen, Manager, Corporate Development and Investor Relations for Civeo. Thank you Mr. Nielsen please go ahead.

Thank you, Michelle, and welcome to Civeo’s third 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 projections that are supported 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, Regan. Good morning to all of you and thanks for joining us. I’d like to begin with some comments on current industry environment, and then provide a brief overview of our operational performance in the third quarter. Frank will then provide a more detailed financial review of our results for the quarter with a discussion of each segment’s results, and then I will wrap up with our near-term outlook before we take your questions. For the third quarter of 2016, energy market and activity levels in North America improved modestly. However customer spending remained subdued due to the continued uncertainties about the pace and magnitude of a prospective recovery in the price of oil. The metallurgical coal mining sector in Australia also remains challenging, but we are encouraged by a recent favorable market development and an impressive year-to-date rally in met coal prices. Despite the challenging macroeconomic headwinds facing our core end markets, we exceeded our revenue and EBITDA expectations from the third quarter. Out performance relative to our expectations was primarily attributable to increased Canadian occupancy levels due to turn around work and recovery efforts from the forest fires in Canada. Continued cost cutting initiates and modestly higher than expected occupancy levels and rates in Australia. Our strategy to weather this market downturn is unchanged. We continue to strive to maximize free cash flow and reduce leverage while pursuing organic growth opportunities. During the third quarter, we generated positive free cash flow of $10.7 million and reduced debt by $15 million. We also continue to deploy capital spending judiciously, and as a result, we are lowering our full-year 2016 CapEx guidance from $25 million to a range of $20 million to $25 million. We remain confident in our ability to generate free cash flow and reduce debt for the remainder of the year as we continue to focus on revenue generation and cost containment. Our Canadian segment results exceeded guidance during the quarter as occupancy levels remained elevated due to the operational recovery efforts of our E&P customers after the forest fires in Alberta. While this additional occupancy is temporary in nature, we are very proud of our lodge teams for their tireless efforts and remarkable response to this crisis-situation. From an operational standpoint, the significant margin generation generated by the additional occupancy speaks to the operational efficiency and economies of scale of our business model. Our base business in Canada also benefited from a modest uptick in customer occupancy during the third quarter related to increased occupancy at Beaver River, Conklin and Mariana lodges. We are also actively pursuing additional occupancy related to maintenance projects and pipeline construction. Moving to Australia, in Australia we are encouraged by the recent rally in metallurgical coal prices. However, the improving supply-demand dynamics have yet to noticeably impact our business. With that said, we are encouraged by the following. The Chinese government has implemented a policy to curb production by no longer subsidizing unprofitable domestic met coal mines. Capital spending devoted to new productive capacity from the global net coal producers has been trending sharply downward since 2012. Domestic met coal inventories in China have declined substantially during 2016, potentially opening the door for higher imports. Met coal producers increased profitability at current price levels should allow quicker debt reduction and potentially larger CapEx budgets going forward. Market conditions in Australia today remain challenging, but we will continue to monitor developments closely as we maintain a dialogue with our customers about their occupancy requirements for 2017. In the U.S., the U.S. rig count continued to climb in the third quarter and it appears likely that the drilling and completion activity has bottomed. Operational results in the third quarter improved modestly, a trend we are expecting to continue in the fourth quarter, and we are encouraged by the prospects for a gradual recovery in 2017. 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 everyone. Before I get into my discussion about the financial results in the quarter, a reminder of foreign exchange. The average exchange rates for the Canadian dollar relative to the U.S. dollar had a negligible impact on the Company’s results in the third quarter of 2016 compared to the third of 2015. A stronger average exchange rate between the Australian dollar, relative to the U.S. dollar in the third quarter of 2016, compared to the third quarter of 2015 increased revenue by $1.2 million. This morning, we reported net loss on a GAAP basis of $42.1 million or $0.39 per diluted share on revenues of $104.2 million. The loss included a $39.4 million pretax loss of $28.8 million after-tax or $0.27 per diluted share, resulting from the impairment of fixed assets, a write-down of inventory and severance costs associated with the termination of certain executives. Excluding these charges, the adjusted net loss was $13.3 million or $0.12 per diluted share. During the third quarter, adjusted EBITDA was a positive $12.4 million [ph], and cash flow from operations was $13.7 million. I will begin with our Canadian segment, and I will be comparing our sequential performance – that is third quarter 2016 to second quarter of 2015. Revenues from our Canadian segment were $37.5 million – $33.5 million, which is down 5% from the second quarter. Adjusted EBITDA decreased by 18% sequentially to $19.6 million due to the Fort McMurray fire-related occupancy ramping down towards the end of the third quarter, which was offset by an improvement in customer occupancy at our Beaver River and McClelland Lake lodges. Average occupancy in our Canadian lodges was 64% versus 62% in the prior quarter. The number of marketable rooms decreased to approximately 10,600 rooms from approximately 10,900 rooms in the prior quarter. Our average daily rate was US$100 versus US$108 in the second quarter. In the third quarter, our occupancy at Canada benefited from continued activity related to the Kearl and Fort Hills projects, support of a second turnaround in 2016 and trailing occupancy related to forest fires in July and some in August. The adjusted EBITDA margin on our Canadian operations was 27% in the third quarter versus 31% in the second quarter as Fort McMurray-related occupancy – fire-related occupancy ramped up. To echo Bradley’s comments, our outperformance relative to our third-quarter guidance was driven by the combination of fire-related occupancy, some additional customer release at our Beaver River, Conklin, and Mariana lodges and reductions in our operating cost structure. Moving next to the Australia segment, revenues of $27.7 million were essentially flat relative to the second quarter. Adjusted EBITDA of $11 million was also consistent with our second quarter results. The average daily room rate for the Australian villages increased to US$81 in the third quarter versus US$76 in the second quarter, due to the strengthening of the Australian dollar and the recognition of a termination fee. Village occupancy declined sequentially by 2 percentage points to 43%. Adjusted EBITDA margins in Australia were 40%, staying relatively flat versus the second quarter of this year. In the U.S., the land rig count climbed from multi-decade lows in the third quarter, driving modestly higher drilling and completion activity. Nonetheless, pricing remains competitive, due to lingering overcapacity. U.S. revenues for the quarter improved to $3 million versus $2.4 million in the second quarter of 2016. Our adjusted EBITDA loss of $1.3 million narrowed from negative adjusted EBITDA of $2.4 million sequentially, due to top-line improvement and cost reduction efforts. Moving to CapEx, on a consolidated basis, we spent $5.4 million on CapEx in the third quarter, exclusively for maintenance purposes. We have further reduced our full year CapEx guidance to a range of $20 million to $25 million from a prior target of $25 million with the expectation of coming in towards the bottom end of that range. However, these growth opportunities materialize; our bank agreement provides us with additional flexibility to finance growth. We made $50 million in debt reduction payments during the third quarter for a total of $44 million of debt reduction payments during the first nine months of 2016. As of September 30, we have $174 million of available capacity on our revolving credit facility and total liquidity of approximately $177 million, and we expect to continue to reduce our debt balance in the fourth quarter. Now I will turn the call back over to Bradley who will provide our view on earnings for the fourth quarter and full year and an update on our strategic initiatives. Bradley?

Thank you, Frank. I will walk you through our guidance for the fourth quarter and the full year. In Canada, we are assuming a Canadian dollar exchange rate of CAD0.76, and we are guiding to segment revenue of $60 million to $62 million and adjusted EBITDA of $12.5 million to $14.5 million for the fourth quarter of 2016. Our expectations are based on 20,000 rentable rooms. We expect lower large occupancies sequentially to be between 58% and 60% due to holiday shutdowns with a room rate of approximately CAD124 per night. For the full year in Canada, assuming a Canadian dollar exchange rate of CAD0.76 to the U.S. dollar, we are guiding to revenue of $276 million to $278 million, and we expect full year adjusted EBITDA from Canada to be in the range of $70 million to $72 million. This assumes full year rentable rooms of 9,900 with lodge occupancy between 61% and 63% and a room rate of approximately CAD137 per night for the full year of 2016. Moving to Australia, we are assuming an exchange rate of AUD0.78 to the U.S. dollar for the fourth quarter of 2016. We expect $26 million to $28 million of revenues and adjusted EBITDA of $9 million to $10 million from the Australian segment. This is based on 8,840 rentable rooms and village occupancy of 40% to 41% with average daily rates of approximately AUD104 to AUD106 per night. For the full year 2016, assuming an exchange rate of AUD0.75 to the U.S. dollar, we are expecting $107 million to $109 million of revenues and adjusted EBITDA of $42 million to $43 million for our Australian segment. This is based on full year rentable rooms of 8735 and village occupancy of approximately 44% with average daily rates of AUD101 to AUD102 for the full year of 2016. On a consolidated basis, for the fourth quarter, we expect revenues to be in a range of $88 million to $92 million and adjusted EBITDA in the range of $15 million to $18 million. Today, altogether for the full year, we expect revenues to be in the range of $394 million to $398 million with our adjusted EBITDA guidance for the full year of $84 million to $87 million, and that is an increase from our full year guidance given last quarter. I would like to close with some comments on our strategic focus at this point. As we close out the year and embark on our 2017 budgeting and operational planning, we are mindful of this challenging economic environment across our core end markets. Accordingly, we plan to maintain a conservative approach that will enable us to deliver on our strategy of being the leader in workforce accommodations while driving free cash flow to reduce leverage and position Civeo for organic growth opportunities. In Canada, we continue to prudently manage our operations and the balance sheet in accordance with the delayed LNG projects at Liease and a modestly improving but still subdued customer spending environment in the oil sands and unconventional oil and gas plays. In Australia, we are encouraged by the recent surge in spot metallurgical coal prices, although we do not expect any dramatic improvement in the business conditions in the near term. In the interim, we will continue to pursue occupancy and to monitor the market fundamentals for signs of a sustainable recovery as we head into 2017. The emergence of green shoots in the U.S. market suggest that activity is poised to recover from multi-year lows in 2017, but we will remain vigilant with respect to cost management as pricing remains very competitive. Before we get to questions, I want to reiterate that Civeo is well-positioned to both weather the downturn and pivot opportunistically should the recent stabilization in our core markets be a harbinger of a broader recovery in 2017. We remain committed to improving our liquidity, generating free cash flow from operations and delivering exceptional service quality to our customers. That concludes our prepared comments, and we are ready for your questions now.

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

Hey, good morning guys.

Good morning, Blake.

Good morning.

Bradley, maybe you could talk a little bit about -- I know the big roll-off in 2017 here is McClelland Lake and Fort Hills. Can you maybe just talk about how those discussions are going on right now and maybe an update of where those stand and how that may look as we enter 2017?

Sure. Be happy to. And you are correct. The current contract is set to expire at the end of the first quarter of 2017. But, as we talked on the last call, there is not much change from the negotiating position that we are with the client. We expect them to need additional rooms throughout the rest of 2017, potentially into 2018, at roughly the same level of occupancy that we could experience this year. We have been very clear with our investors in the market. We do expect to have some pricing pressure on that renewal. However, we will do our best and expect to be able to largely keep our profitability by adjusting our scope and our cost structure upon that rollover. So we are still in that process. That process is roughly the same spot we were last quarter, and our expectations have not changed.

That’s great. I appreciate it. And then, secondly, I know the LNG Canada project has been delayed, but I mean, can you just – have those conversations completely stopped? Are you guys still talking to Shell? I mean, just help us understand how that process has evolved now that they have kind of indefinitely suspended that project. Are they still communicating with you guys, or has this kind of been shut off for the time being?

We are in consistent dialogue with the LNG Canada team around the two contracts that we have with them. Just to lay that out for everybody, we have a contract for them at our Sitka lodge, which is in Kitimat, British Columbia, and then we also have a contract with our partner, Bird Construction, to build a 4500-room facility on their site called Cedar Valley lodge. Our expectation right now is both those contracts will remain in place through the dormancy of the FID decision, and that we will -- should they reach a positive FID, we will be in a position to serve them on both contracts. So the dialogue continues. Certainly, we were disappointed with the delay in FID, but we remain in contact with the customer and continue to work with them to try and serve the needs that they have while they are trying to get through their FID process.

That is great. I appreciate it, guys. Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Stephen Gengaro with Loop Capital Markets. Please proceed with your question.

Thank you. Good morning, gentlemen.

Good morning, Stephen.

I guess two things, if you don’t mind. First, on the Canadian front, can you give us some sense for what you are hearing from customers as far as shorter-term needs for rooms around maybe some shorter-term projects, turnaround work, maintenance, et cetera, in the near-term?

I would be happy to. I would say that we have seen certainly in the third quarter to a certain degree and we have got some built into our guidance for the fourth quarter as well where there is some unexpected or at least unexpected – I would say 90 days ago occupancy in some of our key lodges, mainly Beaver River/Athabasca. As you know, the McClelland lodge is completely full, and Wapasu is handling the operational needs of Kearl. I would say that as we stated here today relative to, let’s say, 90 or 120 days ago, the pipeline of bids feels better. There is more pipeline work that is being bid right now, and I think our team has done a very good job of unearthing those opportunities. So the problem with pipeline work – and you have seen in our guidance – is that it is always a question of when that work is going to start because it is very weather dependent in the fourth quarter and then certainly it will be busy in the first quarter. So, as we work through the budgeting process, we are hopeful we will have a better idea of, our hit ratio, our win ratio on the bid that we have outstanding, and then build that into our guidance and our budgeting process for 2017. But it feels a little bit better in terms of the opportunity set that is out there in the Canadian oil sands. Now, it is not – I don’t want people to get overly excited, but it is a relative – the only thing that does feel better.

Thanks.

And then, just to complete that, we also are pursuing some turnaround work. We already have one turnaround contract for 2017 and are working to get more that can really help fill Beaver River/Athabasca.

Okay. Great. And then, on the Australian front, a similar question. I mean, obviously, met coal prices have moved higher nicely here this year. Have you seen anything on that front that is encouraging from a customer demand perspective?

Great question. The answer is not yet. Certainly, just for the benefit of the – all the participants on the call that the contract price for met coal started the year in the $81 range. The third-quarter contract price was $92.50, and it looks like, although it hasn’t settled – while we are settling at $200 a ton in the fourth quarter with spot prices well above that. So certainly, the commodity price movement has been positive. Certainly, given where the Australian dollar is – and it is important to remind everyone that our customers sell in US dollars and predominantly all of their costs are in Australian dollars. And so, relative to a few years ago when the Australian dollar was at par, it being at AUD0.75 or AUD0.78 also helps our customer base. So what we are seeing right now is probably a customer base that is getting off significantly better cash flow than they were a couple of quarters ago. For the majors, I think that is helpful. For the juniors, it is probably more helpful in the sense that it allows them to accelerate their deleveraging process. And with that deleveraging, we are cautiously optimistic that maybe some of the juniors might move forward with incremental projects. Now, is that a 2017 item or a 2018 item? That is unclear yet. But certainly, the movement – the increased cash flow at our customer level does bode well for us longer-term.

Great. Thank you. And one final question, and I am not sure you’re going to be willing to respond, but when you think about the 4Q run rate for EBITDA, would you guess that 2017 is greater or equal to that run rate at this point? I know there’s a lot of moving pieces, but just based on your…

There are lot of moving pieces and we need to work through the budgeting process. But just directionally, I would say we would likely do better in the first quarter than that run rate, and then we really need to work through the budgeting process to answer. But I would say that is kind of a base level and then let us work through the budgeting process, get a little more clarity as we get to the end of the year on where our customers’ thinking is, and then, as we get to the fourth quarter call, we will certainly do as we always do and give very clear guidance on full-year revenues, full-year EBITDA, how much is contracted for both Canada and Australia.

Okay. Great. Thanks. It has been impressive the EBITDA has stayed this positive, but I appreciate your answers.

Thank you.

Thank you. There are no further questions at this time. I would like to turn the call back over to Mr. Dodson for any closing remarks.

Well, thank you, everyone. We always know that every earnings season is a busy one for all involved. We appreciate you joining us today, and thank you for your interest in Civeo. We look forward to talking to you in February on the fourth-quarter call.

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.