Civeo Corporation (CVEO) Q2 2022 Earnings Report, Transcript and Summary

Greetings. Welcome to the Civeo Corporation Second Quarter 2022 Earnings 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] Please note the conference is being recorded. At this time, I’ll now turn the conference over to Regan Nielsen, Director of Corporate Development and Investor Relations. Regan, you may begin.

Thank you. And welcome to Civeo’s second quarter 2022 earnings conference call. Today, our call will be led by Bradley Dodson, Civeo’s President and Chief Executive Officer; and Carolyn Stone, Civeo’s Senior Vice President, Chief Financial Officer and Treasurer. Before we begin, we would like to caution listeners regarding forward-looking statements. To the extent that our remarks today contain anything 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 and uncertainties disclosed in our Forms 10-K, 10-Q and other SEC filings. I’ll now turn the call over to Bradley.

Thank you, Reagan. And thank you all for joining us today on our second quarter earnings call. I’ll start with key takeaways for the second quarter and then give a brief summary of our second quarter of 2022 performance, after which Carolyn will provide a financial and segment level review and I’ll conclude with our updated full year 2022 guidance and the regional assumptions that underlie that guidance, then we’ll open up the call for questions. The key takeaways from our call today are, we had a strong second quarter, with year-over-year revenues up 20% and adjusted EBITDA 15%, primarily driven by an increase in Canadian lodge build rooms and increase Canadian mobile camp activity, as well as an increase in Australian village builders segment, where performance coupled with improving customer demand drove our upward revision to our full year guidance. We continue to be encouraged by customer conversations and increasing customer activity and robust pipeline construction work particularly in Canada and expect increased maintenance and turnaround spending for the remainder of the year. As a result, we are raising the upper end of our full year 2022 adjusted EBITDA guidance, which I’ll detail later in the call. Our announcement earlier this month of a 12-year contract renewal for Wapasu Creek Lodge for long-term partner Imperial Oil Resources Limited reinforces our investment thesis that our services are necessary to support the continued demand in Canadian oil sands region for many years to come. This morning, we’re pleased to announce a five-year integrated services contract with a new customer in South Australia with expected revenues of AUD120 million. This contract is a testament to the growth and diversification potential of our integrated services business as it encompasses a new customer, a new state in Australia and a new commodity. From a capital perspective, we continue to deleverage our balance sheet in the second quarter with debt repayments of $80 million positioning Civeo to be opportunistic going forward regarding capital allocation. The contract renewals and awards granted in the second are consistent with our strategy of collaborating with long-term partners to maximize value in the current operating environment and mutually beneficial way. Overall, we’re pleased with our second quarter results compared to our expectations. Although we are encouraged by the current operating environment, we remain committed to capital discipline. Let me take a brief moment to provide business update on the three segments. In Canada, our revenues and adjusted EBITDA were slightly above our expectations increased year-over-year, driven by recovery and large build rooms and increase Canadian mobile camp activity. We also experienced a significant sequential increase in adjusted EBITDA due to an uptick in activity in the central oil sands area as a result of seasonal turnaround activity, as well as a rebound from a slower start to the year and improved weather conditions, which lowered our operating costs. For Australia, our revenues and adjusted EBITDA were in line with our expectations, increasing year-over-year and relatively flat sequentially. This was driven by increased year-over-year in village occupancy in our Coppabella village due to recovery in demand with sequential improvement offset by weakening Australian dollar relative to the U.S. dollar. Turning briefly to the U.S. Revenues increased year-over-year due to increased drilling activity positively impacting our wellsite services business, partially offset by the sale of our West Permian lodge, which we did in the fourth quarter of 2021. Adjusted EBITDA decreased slightly year-over-year primarily due to the sale of West Permian lodge, largely offset by increased drilling activity, which again impacted the wellsite services business. With that, I’ll turn it over to Carolyn.

Thank you, Bradley, and thank you all for joining us this morning. Today we reported total revenues in the second quarter of $185 million, with GAAP net income of $9.1 million or $0.54 per diluted share. During the second quarter, we generated adjusted EBITDA of $37.1 million, operating cash flow of $21.7 million and free cash flow of $17.6 million. As Bradley mentioned earlier, the increased adjusted EBITDA we experienced in the second quarter of 2022, just compared to the same period in 2021 was largely due to increase build rooms in our Canadian lodges and increase Canadian mobile camp activity, coupled with increased Australian village build room. The quarter-over-quarter increase in operating cash flow and free cash flow was primarily due to these same factors. Let’s now turn to the second quarter results for our three segments. I’ll begin with a review of the Canadian segment performance compared to its performance a year ago and the second quarter of 2021. Revenues from our Canadian segment were $109 million, as compared to revenues of $83.3 million in the second quarter of 2021. Adjusted EBITDA in Canada was $28.7 million and increase from $22.6 million in the second quarter of 2021. Results for the second quarter of 2022 reflect the impact of a weakened Canadian dollar relative to the U.S. dollar, which decreased revenues and adjusted EBITDA by $4.4 million and 1.2 million, respectively. On a constant currency basis, the increase in both revenues and adjusted EBITDA was largely driven by a 7% year-over-year increase in build rooms related to the recovery of all prices and the reduced effects of the COVID-19 pandemic, coupled with increased mobile camp activity. During the second quarter, build rooms in our Canadian lodges totaled 771,000, which was up 7% year-over-year from 723,000 in the second quarter of 2021 due to the factors just discussed. Our daily room rate for the Canadian segment in U.S. dollars was $103, a 7% year-over-year increase largely due to client mix. Turning to Australia, during the second quarter, we recorded revenues of $67.8 million, up from $64 million in the second quarter of 2021. Adjusted EBITDA was $15.5 million, in line with the same period of 2021. Results for the second quarter of 2022 reflect the impact of a weakened Australian dollar relative to the U.S. dollar, which decreased revenues and adjusted EBITDA by $5.3 million and $1.2 million, respectively. On a constant currency basis, the increased results were driven by both increased build rooms and daily room rates in our villages. Australian build rooms in the quarter were 505,000, up 8% from 466,000 in the second quarter of 2021, due again some recovery of customer maintenance activity in our villages, resulting from a more muted impact of the China-Australia trade dispute. While the average daily rate for our Australian villages in U.S. dollars was $77 in the second quarter, down from $81 in the second quarter of 2021. The decrease was entirely driven by the weekend Australian dollar. Moving to the U.S., revenues for the second quarter were $8.1 million, as compared to $6.9 million in the second quarter of 2021. The U.S. segment adjusted EBITDA was $221,000 in the second quarter, down slightly from $290,000 during the same period last year. The decrease in adjusted EBITDA was primarily due to the fourth quarter 2021 sale of our West Permian lodge, largely offset by increased drilling activity, which positively impacted our wellsite services. On a consolidated basis, capital expenditures for the second quarter of 2022 were $5.1 million, compared to $3.2 million invested during the same period of 2021. Capital expenditures in both periods were predominantly related to maintenance spending on our lodges and villages. Our total debt outstanding at June 30, 2022, was $154.6 million, a $23.3 million decrease since March 31st. The decrease consisted of $18 million in debt payments from cash flow generated by the business and favorable foreign currency translation of $5.3 million. As a result, our net leverage ratio for the quarter decreased to 1.18 times as of June 30th from 1.4 times as of March 31, 2022. As of June 30th, we had total liquidity of approximately $95.3 million, which consisted of $90.5 million available under our revolving credit facilities and $4.8 million in cash on hand. Bradley will now discuss our updated guidance for the full year 2022. Bradley?

Thank you, Carolyn. I want to discuss our updated full year 2022 guidance on a consolidated basis, including the underlying outlook for each of the regions, as well as the underlying assumptions related to our guidance. Based on our second quarter results and improving outlook for the remainder of the year, we’re raising our full year revenue and EBITDA guidance to $660 million to $675 million of revenues and $95 million to $105 million of EBITDA -- adjusted EBITDA. As previously announced, we are raising our full year capital expenditure guide -- expenditure guidance to $24 million to $29 million, with the increase related to capital spending tied to the Wapasu Creek lodge contract renewal. Based on the increased EBITDA and CapEx guidance that I just outlined, expected interest expense of $10 million for 20 -- for full year 2022, minimal expected cash taxes and our expected free cash flow forecast is in the range of $56 million to $71 million, modestly down from the previous free cash flow guidance of $60 million to $72 million. This free cash flow range assumes the first half of 2022’s working capital increase unwind in the second half of the year, consistent with prior working capital trends. The increase for our revenue and EBITDA guidance is primarily driven by recent customer conversations and contract awards and renewals related to maintenance and turnaround activity across our Canadian lodges and Australia villages. We are seeing our customers increase their maintenance plans for the year due to sustained commodity prices at very healthy levels. The single largest uncertainty for our 2022 guidance continues to be the timing and duration of our Canadian mobile camp activity related to pipeline projects in British Columbia. Regarding this matter, we have not changed our assumption related to the demobilization of the three Canadian mobile camps in the fourth quarter of 2022. Should these projects extend into 2023 we can see our 2022 adjusted EBITDA improve anywhere from $3 million to $10 million. I will now provide a regional outlooks and corresponding underlying assumptions by region. In Canada, as we look at the remainder of 2022, we’re encouraged by our recent customer conversations surrounding increased demand for maintenance and turnaround related rooms for the summer and early fall. We continue to expect an increase in Canadian oil sands lodge build rooms from 2021 levels in the third quarter of this year. There is a risk that customer labor availability in the region could dampen our customer’s ability to execute these larger turnarounds and we have baked in a portion of that risk into our guidance. As I mentioned earlier, we are still forecasting the majority of our Canadian mobile camp activities to wind down by the end of the year and we’ve included the related demobilization of costs in our fourth quarter -- our full year and fourth quarter guidance. Turning to Australia, we’ve seen -- we’ve also seen encouraging signs of improvement in customer demand, albeit not at the same levels as our Canadian business. Although, met coal prices remain in very healthy levels, and at historically high levels of historic volatility in the coal pricing, anemia weather and lingering China-Australian trade dispute continues to impact customer spending. Iron ore prices remain at constructed levels and customer activity in Western Australia remains strong, while we are seeing gradual progress as it pertains to COVID-19 related labor issues that we experienced last year and into this year is a slow process and we expect labor shortages to remain a factor and our integrated services business for the remainder of the year. For our U.S. business, the oil and gas price environment is strong. We expect to continue to benefit from increased drilling and completion activity in the US. We expect our wellsite and offshore businesses to continue to improve throughout the rest of the year. I’ll conclude our prepared comments by underscoring the key elements of our strategy as we navigate this extraordinary market climate. We will continue to prioritize the well being of our guests, employees and communities, who manage our cost structure in accordance with occupancy outlook across each of three regions. We will continue to enhance our best-in-class hospitality offerings and we will allocate capital prudently to maximize free cash flow, while we continue to reduce that and returning capital to shareholders through our share repurchase program. And lastly, we will seek opportunities to further our revenue diversification and free cash flow generation as organic and M&A opportunities. With that, we’re happy to take your questions.

Thank you. [Operator Instructions] Thank you. And our first question is from the line of Stephen Gengaro with Stifel. Please proceed with your questions.

Thanks and good morning.

Good morning, Stephen.

So a couple of things, one of the things I was struggling with is sort of squaring what I think about the third quarter should be a fairly solid quarter relative to where the second quarter flushed out and the full year guidance. And I think it’s probably related to the mobile camp demob. Can you talk a little bit about what the severity of that that you’ve kind of baked into your guidance?

Guidance in terms of the demob cost, guidance assumes $10 million of demobs U.S. or demobilization costs in the fourth quarter this year.

And Bradley, does that have a -- and that impacts the mobile camp revenue line as well, right? So it’s cost, as well as the revenue coming down?

Yeah. We’ll lose. Yes. When demob we lose the risk revenues? Yes.

Okay. Can you quantify that at all the revenue impact?

Well, in the -- so we’ve been running about $24 million quarter of mobile camp revenue for the last couple of quarters. It’ll be consistent in that range in the third quarter and it drops to about $11 million in the fourth quarter.

Okay. Great. Now, that’s very helpful. The -- from a -- so what I was trying to get to, when we think about this going forward and we think about the stability of your Canadian operations, right. And obviously, the big 12-year contract that you announced a couple of weeks ago, sort of speaks to that. But can you talk about the Canadian lodge and village side and the visibility that you have at least for, I think, a relatively large portion of our business going forward. That’s one of the things we get asked a lot, but it seems like it’s more stable than people think given the reserve life for the oil sands?

Right. So the cost to the Wapasu contract locks up that asset that was rolling from a 10-year contract now into a 12-year contract. So that’s got some good visibility to it with take-or-pay minimums. The McClelland Lodge is one that has been going year-to-year. So we’re working with the client on a longer term option there. We have the core region. We’ve got two primary customers Syncrude and Suncor. We have an exclusivity agreement with Suncor, which runs through 2027. And then the Syncrude, we’re currently working on an extension of that five-year contract that’s coming to -- that ends this year. We’re working with the clients negotiate a longer term solution there. And so if we get all of that done, then really the variability will be customers using rooms above their take-or-pay minimums and turnaround work during the second and third quarters. But it will be very firm. Now that the contract camp work, right now we have nothing from the clients to indicate an extension into 2023, but I think that’s more likely than not. And so, there’s an upward bias to move those demob costs into 2023 as it’s been well documented. Those pipeline projects are running along.

Great. Thanks. And then just one final one for me on the new contract in Southern Australia, is that related to the Action business that that you guys acquired and is that pretty -- is that five-year contract? When do we start to see the impact of the revenue from that award?

In the third quarter, and yes, it is the Action business.

Great. Thank you.

The next question is from the line of…

Yeah. Thank you.

…line of Steve Ferezani with Sidoti & Company. Please proceed with your question.

Good morning, everyone. Appreciate all the color on the call. Just want to ask about what you’re seeing both on labor availability both in Canada and in Australia. In terms of Canada, certainly, it seems like we’re heading into a much healthier turnaround season this year, CapEx indicated it, yet the concern was whether there were and you talked a little bit about this the labor availability to get the workers up there. How would you characterize turnaround activity this season versus pre-COVID levels and do you think it’s still being impacted by labor availability?

Thank you for the question. Definitely, labor availability continues to be an issue. We had one customer in particular that was not able to source labor. But others are having success. And so some of that, it appears to be labor rates. So others are really labor rates up and they’re getting labor and others are trying to hold fast and it’s proving to be more difficult. For us we continue to struggle with getting labor. We’re short staffed both in Canada and Australia. And we are -- the team is working very hard to maintain service levels when we don’t have a full complement of employees.

How -- so in terms of Australia and you had indicated you expected margin pressure this year, largely due to where you’re going to find the ability to fill positions, given the visa restrictions. Have you seen that loosen enough now where margins can move back to earlier levels and also how does that affect you ramping up staffing for the new contract?

Well, it’s been a challenge on the later question. But we should be able to mobilize and staff that up. I would say on our integrated services business, which is, for that contract, we’ve had net additions to employment for the last five months in a row. We still have a lot of turnover. But we’re starting to make headway. And so kudos to our HR and ops teams down there for achieving that and we’re still fighting that battle. But it’s moving in the right direction. We’re starting to get some foreign chefs on visas to be able to come into the country and so we’re making progress. It’s just not resolved.

Yeah. Yeah.

So margins are moving in the right direction in Australia and integrate services business, but they’re not to where we want them ultimately.

Yeah.

Margins in our villages in Australia have been relatively consistent. We’ve probably lost 100 basis points from what we were hoping or maybe 150 basis points on margins year-to-date, but I think given the environment that’s pretty good outcome.

Slowly. And then on capital allocation, obviously, you have a little bit of additional CapEx now with the long-term contract, but still a CapEx…

Right.

… it’s very, very subdued. How are you thinking about -- you haven’t used a lot of the share repurchase, how are you thinking about that or other opportunities?

Sure. So we were sent to a dry powder on the share repurchase program for potentially using or being able to execute on the right of first refusal to buy the shares from…

Yeah. yeah.

…our shareholder. That didn’t occur in the quarter. So we didn’t get as much done in the second quarter as we had hoped and we’ll have to step it up in the third quarter, while still remaining ready to execute on the ROFR should it come available.

Yeah.

We have every expectation that we’ll continue to execute on the program and we just -- we’ve run into some bumps along the way year-to-date, but we’ll get it back up in the third quarter.

Fair enough. Thanks so much for the commentary. Thanks.

Thank you. The next question is follow-up from the line of Stephen Gengaro with Stifel. Please proceed with your questions.

Thanks. I have two more if you don’t mind. The first was around -- your leverage ratio is obviously come down significantly over the last year plus, where do you -- where does it sell out, where you decide, I’m going to just stop buying back that and if so, and maybe a better question is, what are the other options you might be looking at outside of clearly continuing exercise on the share repurchase?

Well, I would say, we’ve reached a level on the debt where if when we continue to pay it down, it’s because the other alternatives have not been available for capital allocation. So we’ll continue to do that, saving our dry powder for the ROFR as the first use of capital beyond debt repayment. But we will be -- we’re very comfortable levering back up for capital returns, so should that opportunity present itself we should -- we’ll be able to execute under it. Right now, what the discretionary capital that we’re spending is in support of contracts. So Wapasu contracts, one, there’s a little bit of capital going into the new contract in South Australia. Should we continue to win work in our integrate services business down there, we will -- this contracts typically have a modest amount of capital associated with them. We are in the process of refurbishing and refreshing some of our Bowen Basin rooms in Australia. Right now, we’ve been running near full capacity at Coppabella. And so we’ve been rotating rooms out of service and bringing mothballed rooms into service. So $5 million, $6 million worth of capital in the guidance that’s related to refreshing those rooms and bring them back online. Part of that is due to demand and part of that in that we’ve been very stingy on capital in the last three years as we’re trying to get our debt under control and we need to put some more money into the rooms. I expect that we’ll be in this range of plus or minus $25 million of capital going forward with it with a more healthy refur program in place.

Great. Thank you. And then just one final one, obviously with inflationary pressures out there, are you seeing much on the pricing side and you’ve clearly done a good job offsetting inflation and delivering margin performance. Can you talk a little bit about those dynamics?

We have some contractual protection in our multiyear contracts around inflation. This is obviously a very extreme situation to which we work with the client. First, we work on scope. So if there are items that are concrete, above scope, we bring those back in to reduce our costs. We work with the client on scope and see if there are ways that we can adjust the scope to reduce our costs and not have to pass that through to them. But, generally speaking, there’s an upward bias on pricing in both of our major regions.

Great. Thank you.

Thank you. At this time, we’ve reached the end of the question-and-answer session. I’ll turn the call back to Bradley Dodson for closing remarks.

Thank you, Rob. Thank you everyone for joining the call. Thank you, Stephen and Steve for the questions and we appreciate your interest in Civeo. We will continue -- we look forward to speaking with you in the third quarter earnings call in about three months. So hope everyone has a good weekend. Take care.

Thank you. This will conclude today’s conference. You may disconnect your lines this time. Thank you for your participation.