Civeo Corporation (CVEO) Q3 2022 Earnings Report, Transcript and Summary

Greetings, and welcome to the Civeo Corporation Third 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] As a reminder, this conference is being recorded. It is my pleasure to introduce your host Regan Nielsen, Senior Director, Investor Relations. Thank you, Mr. Nielsen. You may begin.

Thank you, and welcome to Civeo's third 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, Regan, and thank you all for joining us today on our third quarter earnings call. I'll start with the key takeaways for the third quarter and then give a brief summary of our third quarter 2022 performance, after which Carolyn will provide a financial and segment level review. And I will conclude with our updated full year 2022 guidance, and the regional assumptions underlying that guidance. I will also provide preliminary comments regarding our 2023 outlook. And then, we will open the call for questions. Key takeaways from our call are, we had strong third quarter and year-over-year revenues up 19% and adjusted EBITDA of 34% driven by increased activity across all three geographic segments. Our occupancy related to pipeline construction is expected to continue into 2023, which will result in continued Canadian mobile camp activity through the end of 2022 and into 2023. This development will push our demobilization costs of those camps end of 2023. The strong third quarter performance coupled with the deferral of the Canadian mobile camp demobilizations from 2022 into 2023, drove the increase to our full year guidance, which I will detail later in the call. We generated $38.6 million of free cash flow in the quarter, which led to a significant milestone of us reducing our net leverage to below 1.0 times. We're committed to investors that we would prioritize deleveraging and this achievement would not have been possible without the efforts of the entire Civeo team over the last few years. Our continued debt reduction provides us with flexibility to both weather the current market volatility and further evaluate opportunities to deploy capital. Lastly, after repurchasing approximately 715,000 shares since September 2021, including 475,000 shares in the third quarter of 2022. We announced that our Board of Directors has renewed its share repurchase authorization for Civeo to repurchase up to 5% of its total common shares outstanding over the next 12 months. Let me take a moment to provide a business update across the three segments. In Canada, revenues and adjusted EBITDA increased year-over-year, driven by an increase in large occupancy as well as increased Canadian mobile camp activity. We experienced a sequential decrease in revenues and adjusted EBITDA due to typical seasonal wind down in the third quarter of turnaround activity. In Australia, our revenues and adjusted EBITDA were in line with our expectations, increasing year-over-year and sequentially. This was primarily driven by increased year-over-year and sequential integrated services activity, due to the recently announced contract awards starting in the third quarter. Increased occupancy in several Bowen Basin villages also contributed to a strong third quarter performance. Turning briefly to the U.S. Revenues and adjusted EBITDA increased year-over-year due to increased activity positively impacting our wellsite and offshore businesses, partially offset by the sale of our West Permian launch, which we did in the fourth quarter of last year. In September, we sold our wellsite business. While the business was improving with increasing drilling activity in the U.S., we unfortunately were unable to create scale in the business despite the sales and service efforts of our team. And 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 third quarter of $184.2 million, with GAAP net income of $5.2 million, or $0.32 per diluted share. During the third quarter, we generated adjusted EBITDA of $35 million, operating cash flow of $38.7 million and free cash flow of $38.6 million. As Bradley just mentioned, the increased adjusted EBITDA that we experienced in the third quarter of 2022 as compared to the same period last year was largely due to increased build rents in our Canadian lodges and increased Canadian mobile camp activity coupled with increased Australian village billed rooms and integrated services activity. The quarter-over-quarter increase in operating cash flows and free cash flow was primarily due to these same factors. Let's now turn to the third quarter results for our three segments. I'll begin with a review of the Canadian segment performance compared to its performance a year ago in the third quarter of 2021. Revenues from our Canadian segment were $103 million, as compared to revenues of $84.1 million in the third quarter of '21. Adjusted EBITDA in Canada was $25.6 million, an increase from $19.8 million in the third quarter of last year. Results from the third quarter of 2022 reflect the impact of a weakened Canadian dollar relative to the U.S. dollar, which decreased revenues and adjusted EBITDA by $3.7 million and $0.9 million respectively. On a constant currency basis, the increase in both revenues and adjusted EBITDA was largely driven by a 19% year-over-year increase in billed rooms, related to the recovery in oil prices and increased turnaround activity, coupled with increased mobile camp activity. During the third quarter, billed rooms in our Canadian lodges totaled 731,000, which were up 19% year-over-year from 613,000 in the third quarter of 2021 due to the factors I just discussed. Our daily run rate for the Canadian segment in U.S. dollars was $99, which is relatively flat year-over-year, largely due to a weakened Canadian dollar relative to the U.S. dollar. Turning to Australia. During the third quarter, we reported revenues of $73.8 million, up from $65.1 million in the third quarter of 2021. Adjusted EBITDA was $16.9 million, up from $14.8 million last year. Results from the third quarter of 2022 reflects the impact of a weakened Australian dollar relative to the U.S. dollar, which decreased revenue and adjusted EBITDA by $5.5 million and $1.3 million, respectively. On a constant currency basis, the increased results were driven by both increased billed rooms in our villages and increased integrated services activity. Australian billed rooms in the quarter were $525,000, up 7% from $491,000 in the third quarter of last year, due again to the 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 $73 in the third quarter, down from $78 in the third quarter of 2021, the decrease was entirely driven by the weakened Australian dollar. Moving to the U.S. Revenues for the third quarter were $7.4 million as compared to $5.9 million in the third quarter of 2021. The U.S. segment adjusted EBITDA was a loss of $33,000 in the third quarter, up from the loss of $544,000 during the same period last year. The increase in adjusted EBITDA was primarily due to increased activity positively impacting our wellsite services and offshore businesses. Offset by the impact of the sale of the West Permian Lodge in the fourth quarter of '21. On a consolidated basis, capital expenditures for the third quarter of 2022 were $8.8 million compared to $3.4 million during the same period in 2021. Capital expenditures in both periods were predominantly related to maintenance spending on our lodges and villages. Our total debt outstanding on September 30, 2022, was $126.2 million, which is a $28.4 million decrease since June 30. The decrease consisted of $19.5 million in debt payments from cash flow generated by the business and favorable foreign currency translation of $8.9 million. And our net leverage ratio for the quarter decreased to 0.9 times as of September 30 from 1.2 times as of June 30. As of September 30, we had total liquidity of approximately $117.3 million, which consists of $108.9 million available under our revolving credit facilities and $8.4 million of cash on hand. Bradley will now discuss our updated guidance for the full year 2022 and preliminary comments on our 2023 outlook. Bradley?

Thank you, Carolyn. I'd like to discuss our updated full year 2022 guidance. On a consolidated basis, including the underlying outlook for each of the segments as well as the underlying assumptions related to the guidance. I'll provide a few preliminary comments regarding our 2023 outlook. Based on our third quarter results and the deferral of the majority of our Canadian mobile camp demobilization costs ended 2023, we are raising our full year 2022 revenue and EBITDA guidance to $675 million to $685 million revenues and $110 million to $115 million of adjusted EBITDA. We are maintaining our full year 2022 capital expenditure guidance, which is $24 million to $29 million. Based on this EBITDA and CapEx guidance, we expected interest expense of $10 million to 2022 and minimal expense of cash taxes. We expect our 2022 free cash flow forecast is expected to be in the range of $71 million to $81 million. The increase to our revenue and EBITDA guidance is primarily driven by the deferral of our mobile camp demobilization costs into 2023. Our Canadian mobile camp activity is primarily related to the construction of the Coastal GasLink and other pipelines. This pipeline construction is now expected to continue into 2023 and should require the use of our mobile camps supporting that project. Construction of this pipeline is nearing completion, so we expect to see a reduction in our occupancy and profitability related to mobile camps as this activity winds down into 2023, and we recognize the majority of the expected demobilization cost next year. I will provide the regional outlooks, guidance on the regional outlooks and corresponding assumptions. In Canada, as we look to the remainder of 2022, we are expecting to experience a decrease in billed rooms due to turnaround activity winding down, coupled with typical holiday downtime. We are also experiencing inflationary pressures on our utility costs, which will be exacerbated by winter weather. Turning to Australia. We continue to see encouraging signs of improvement in customer demand for our integrated services activity and as well as our village business. The fourth quarter of 2022 will also be burdened by the typical fourth quarter seasonality that will negatively impact our village occupancy. Iron ore prices remain at constructive 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've experienced in the last two years, it's a slow process, and we expect leverage mortgages to remain a factor for the remainder of this year and into next. I'll now move to the 2023 outlook, and I'll provide some preliminary comments. Customer spending, specifically customer capital spending, drives our occupancy at our Canadian lodges and our Australian villages. While commodity prices for oil, natural gas, met coal and iron ore continue to be constructive, our customers continue to be focused on cash flow generation, capital discipline and returning capital to shareholders. So as a result, at this point, we do not see a material increase in occupancy in 2023 for either the Canadian lodges or the Australian villages. In Canada, we are expecting relatively flat occupancy in our Canadian lodges, perhaps with some modest upside. As we've discussed on previous calls, we expect our Canadian mobile camp activity to significantly decline as we meet our completion of the coastal gasoline pipeline as well as others. This decline in mobile camp activity profitability will be exacerbated by the recognition of demobilization costs in 2023. In Australia, we're expecting a modest increase in occupancy in our villages due to customer expansionary activity. We're also expecting an increase in Australia integrated services business due to some internal contracts the team has won. However, we are expecting margin compression due to labor shortages and fed inflation. While this has improved over several quarters, we're expecting only a gradual improvement in 2023. Given the significant progress that we've made in reducing our total leverage, we expect capital allocation going forward to focus on opportunistically repurchasing our stock under our authorized buyback plan and weighing those returns against the expected returns on growth opportunities, both organic and inorganic. With that, I'll conclude our prepared remarks by underscoring the key elements of our strategy as we navigate this market climate. Our mandate remains as follows. We will prioritize the safety and wellbeing of our guests, employees and communities. We'll manage our cost structure in accordance with our outlook across all three segments. We will continue to enhance our best-in-class hospitality offerings. We'll allocate capital prudently. We will seek opportunities to further our revenue diversification and free cash flow generation through organic growth and M&A opportunities that have a superior anticipated return. With that, we're happy to take your questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Stephen Gengaro with Stifel. Please go ahead.

Good morning, everybody.

Good morning, Stephen.

So a couple of things from me. I think the first would be around the fourth quarter. Like when we think about your revenue guidance, and I know you mentioned some of the margin headwinds in the fourth quarter, but if you look at the two segments, where do you see the bigger kind of margin degradation in the fourth quarter because of seasonality?

Canada. It will be in Canada. Right now, based on customer labor curves, it looks like we're going to have significant downturn in terms of occupancy, both at the pipeline camps as well as at the lodges. So I would say based on guidance as well as we start getting into winter and we'll start to see increased propane and diesel costs as we have to keep the lodges, so it will be a combination of both. Australia, we'll see some holiday downtime, but it's much more muted. So...

Got you. Great. Thanks. And then you mentioned the demo cost. I mean if you had a crystal ball right now, which I know it's tough, would you see that? Any sense for kind of when that occurs next year? Is it first quarter? Is it still too early to tell?

Fortunately, Stephen, it's too early to tell. We -- I think we feel confident that all -- well, we moved -- since last quarter, we've moved to be confident, although we kind of hinted that it would happen. The demo costs and activity would continue into 2023. But how long it continues into 2023 is still very opaque, and so we'll look forward to giving hopefully some better guidance on our fourth quarter earnings call as we get better insight from the customers.

Okay. Great. Thank you. And then just one final one for me. And as I look back historically, I mean, you guys have always done a good job sort of managing cost pressures, and I know we're in an unusual cost environment right now. Can you talk about both what you guys -- the leverage you have to pull operationally and maybe the contractual discussions in terms that you have with customers to help offset that impact?

Sure. I would say that -- so I'll start with contractually. All of our multiyear contracts will have annual adjustments for inflation, but they're annual, so there's going to be a lag. Historically, they have done an adequate job of managing an inflation. This is certainly a atypical situation. So I would say we're probably losing 200 basis points on margin because of inflation, both labor and food costs. And then in Canada, the power or utility costs are more exacerbated. But I think the team has done a good job so operationally, what we did. So in Canada, as it relates to utility costs, we work on loading to the extent that we can ask customers to move their occupancy from one location to another, so we can increase the loading on a given location and improved efficiencies there. We have and we'll do that. On food costs, it's around managing to scope but looking for opportunities where we can change the exact food that we're offering, specifically protein, to manage that cost. On labor side, it's around managing shifts and making sure as efficient as we can be. In Australia, I think the team has done a great job around trying to get labor. We're in a much better position now on a labor situation in Australia than we were at the beginning of the year, but we're not back to where we want to be. We're trailing in terms of labor cost to budget, but it's within a margin that I think is less than the inflationary pressures. So on the food cost side, we've got to get better on procurement, and we're working on that. So overall -- and you still have the same scope discussion that I mentioned on Canada. So I think in light of where we are from a global economy standpoint, I think the team is doing a good job. It's just not -- it's not -- we could be doing better given where activity levels are, absolutely inflation.

Great. No. That’s very good color. I appreciate it. Thank you.

Thank you, Stephen.

Next question comes from Steve Ferazani with Sidoti. Please go ahead.

Good morning, Bradley. Good morning, Carolyn. I did want to follow up Stephen's question on the winding down of the mobile camps. And just do you have any ability to quantify how quickly some of that revenue comes out? Just because when I'm thinking about your fourth quarter revenue guidance or sort of backing into it, its year-over-year down. Is that primarily on starting to see that decline in mobile camps or are there other pieces to that?

It's some mobile camp activity, which is not really a wind-down, it's more holiday downtime issue as -- well, we have a partial demo but one of the camps in the fourth quarter, which is contributing to it. But the biggest piece is just overall oil sands activity in the fourth quarter, which as of right now, the labor curves look like it's going to be a pretty significant downturn in occupancy in oil sands region. I think it's exacerbated by FX. So there's a little bit of that going on. But in terms of where the mobile camps land, in terms of occupancy for next year, I wish I had a better answer, quite honestly.

I understand.

Yes. Right now, as close as we are for our customers, there's not a clear picture of how long those camps are going to be active. I think the good news is, is that our team operationally and from a sales perspective, the customers have choices. The pipeline construction is winding down. They can choose which cans to keep or demo. And I think the teams did a good job of operating and staying close to the customer such that our camps are being chosen to continue into next year. So it's a win for us. But eventually, we're going to have to find a replacement for those earnings. I'm hoping it's later in 2023, but we'll see.

Okay. When you give your early look at Canadian expectations for 2023, not super positive or bullish. I'm just trying to think about the fact that Trans Mountain comes online late 2023. Labor availability should be getting better. We're still not -- turnaround is still not back to pre-COVID levels. There seem to be reasons. And I know day-to-day oil prices don't matter much, but certainly, the differential should narrow next year. I mean there would seem to be a lot of reasons to be more bullish, but you're not.

No. Well, I think what we need to see from here is what are the CapEx plans for the customers. We're kind of treading water the last couple of years in terms of total Canadian CapEx. It also applies to Australia on the eastern side of the business. But CapEx is what's going to drive our occupancy in both the Canadian lodges and the villages. So as we start to see CapEx plans by our customers come out, we'll adjust accordingly. We've got a little bit of a tailwind in Australia because there are a couple of expansionary projects that are driving incremental occupancy there. It's getting eaten up a little bit on, I would say, exacerbated inflation there. But overall, it's going to be CapEx. So I'd like to be more bullish and certainly say sitting here at high 80s oil prices and the other commodity prices that we would see more activity. But again, it's customer discipline and returning count (ph) shareholders. They're enjoying higher commodity prices, and they're not spending money that we would see historically. So until that changes, it's hard to say. Now I think the good news is that we're largely supporting day-to-day operations. So we're not seeing the volatility as it relates to that. I think the other piece, which I didn't mention earlier is we'll have to see how Canadian turnaround activity is next year. I think right now, I believe, it will be relatively consistent with this year. So I would say that we're in Canada in terms of billed rooms, kind of flat with some modest upside. In Australia, with the expansion projects, we've got some upside there. The team has done a good job on the integrated services side in Australia of winning new work. And so we're cautiously optimistic that will continue. But again, that's a lower-margin business. It's good work. We want to win it. And, it should add to the results.

Great. Thanks. And if I can get one more in terms of capital allocation, obviously, you've done a fantastic job with the balance sheet. You're still generating an awful lot of cash flow, good problem to have. You're limited on the normal course issuer bid. I'm not an expert on Canadian securities rules. But I mean you can couple in a substantial issuer bid, is that correct, if you wanted to, particularly with the share conversion coming or what other possible uses for cash flow are you thinking about next year?

So on capital allocation, we've gotten to a point around 1 times levered. That's where we want to be. I think that gives us flexibility that when [indiscernible] opportunities to either opportunistically buy back stock, we will. We're going to be smart about it and then and weigh those returns, expected returns against the growth projects that we have. And to your point, we're in a relatively strong commodity environment should that continue, that it will present opportunities. And so we'll be very smart in terms of how we look at growth opportunities and weigh those against buying back stock. And so that -- with a 1 time lever, we can lever up a little bit for either one of those two opportunities. And then the shift will be back to paying down that debt. So that's the plan going forward.

Thanks, Brad. I appreciate the time.

Thank you.

Next question comes from John Daniel with Daniel Energy Partners. Please go ahead.

Good morning, Bradley and Regan. Thank you for taking the call. Bradley, I got to -- might be a dumb question, and you guys can laugh at me after I hang up. And hopefully, you guys can hear me okay.

Yes.

Okay. Good. I'm driving here. And so I drive a lot around the various basins. And back in the day, go back to, call it, 2011, 2012, whatever, you couldn't find rooms in the Bakken, people are sleeping in Walmart. You go up there today, no trouble finding a room. And a lot of the places you end up staying are kind of dumpy, at least where I stay perhaps. But it would seem like, are there opportunities for opportunistic purchases of some of these places, albeit might be the hotels that you could renovate and as a growth opportunity where maybe someone built something up in the hot times? It's now faded, and so perhaps the better valuation could be had? Just a dumb question perhaps, but I'm curious on your thoughts.

Well, I would say our lodge business in the U.S. had a couple of issues. One, others have built out and gotten scale, which has really been our issue in the U.S. from -- for a while. When things are better a decade ago, we were focused on expanding our Canadian and Australian business and the returns were better there. In the meantime, we missed out on the U.S. opportunities, and so we were left with a portfolio of lodge locations that is tougher to compete against folks that have a better portfolio and can meet customer needs across the basin as the activity shifts as you well know. So I mean it's difficult for us in the U.S. to augment that because we're behind the April. So I would say our activity -- our occupancy, specifically in the Bakken, has improved. We're running better in budget. And again, our lodge occupancy there is driven by completion crews. So we've got a handful of those in our Killdeer location, and it's doing better than expected. But we just don't have the scale there, and I expect that the returns opportunities elsewhere will continue to be better than us looking to build that up.

Fair enough. If you build something really nice, I’d be happy to stay there. Good job on the…

You’ll be our guest.

Well, there's one particular nasty one in downtown Midland. I'd like someone to fix, but maybe that's for a later date. Al; right. Look, that's all I got. I'm sorry for the dumb question. But I just was curious.

No. That’s good question. Appreciate it.

Okay, guys. Thank you very much.

There are no further questions at this time. I would like to turn the floor back over to Bradley Dodson, CEO for closing remarks.

Thank you and thank you, everyone, for joining the call today. We appreciate your interest in Civeo, and we look forward to speaking with you on our fourth quarter earnings call in February.

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