What I'm Expecting From Civeo Corp.

| About: Civeo Corporation (CVEO)

Summary

After seeing oil prices and shares of Civeo rise, management now has to prove itself worthy of the increased market cap.

With sales and earnings due to be very low this quarter, there's some risk, but I do have some expectations (one good and one bad) from Civeo's release.

Overall, I like and believe in the business, but I'm hoping to see additional debt reductions and positive cash flow this quarter.

After the market closes on April 27th, the management team of Civeo Corp. (NYSE:CVEO) is due to report revenue and earnings for the first quarter of the company's 2016 fiscal year. At a time when shares of the business are off their lows and when oil prices have started to show some positive signs of recovery, the pressure will be on management to report nice results for the quarter in order to justify the market's most recent action. In what follows, I will talk about what analysts anticipate from Civeo this quarter and I will also lay out my own expectations for the enterprise and discuss what it could mean for investors in the long run.

Analysts have mixed expectations

For the quarter, there's no denying that everybody understands the picture will be less favorable than it was a year ago. This is due not only to lower room rates across the board (in Canada, the U.S., and Australia), but also due to much lower occupancy rates. In fact, analysts currently expect Civeo to report sales during the quarter of $101 million, down 40.9% from the $170.99 million management reported the same quarter last year. It should be mentioned, however, that even this is optimistic compared to management's own expectations.

If the business's top brass is correct, the level of sales this quarter should be around $90 million to $95 million. For the entire year, the expectation from management is to see revenue of $385 million to $415 million (compared to $426.9 million from analysts). To be fair to analysts, I do think a case can be made for somewhat higher revenue because, although early this year was incredibly tough for commodities, some areas, especially oil, have shown signs of a price recovery, which could bring on additional revenue. However, I am personally preparing for something in the range of what management is talking since they ultimately know the enterprise better than anybody else and second-guessing them, based on what I know, would be arrogant.

On the bottom line, the picture doesn't look really any better. If analysts are correct about Civeo, then investors should anticipate earnings per share of around -$0.16 this quarter, an amount that is materially different from the $0.03 in earnings seen the same quarter last year. This will likely be driven largely by the company's big drop in revenue, accompanied by high depreciation rates on its property, some of which should be offset by Civeo's flexible structure (from an operational standpoint).

Given the tough times that the business is facing, however, it may be a better idea to not include depreciation in the equation. Although it is a cost for the business and its shareholders, it's non-cash for the time being. If you add back depreciation expense from last year (but on a quarterly basis) and if you figure that the share count for the business remains unchanged (which is likely since I can't see management buying back shares when it's probably paying down debt), operating cash flow should likely be around $0.20 per share, or around $21.5 million.

A couple things I believe to be likely

In addition to seeing positive cash flow for the quarter but negative earnings on the back of falling sales, I believe it's likely that management will engage in debt buybacks. Last time management provided data on debt, it claimed to have repaid $25 million of its U.S. Term Loan and another $25 million on its Canadian revolving credit facility, bringing long-term debt down from $401.56 million to $351.56 million. Because of the poor energy environment, I hope management has kept capital expenditures down to a minimum and that it has, instead, allocated as much cash flow toward paying down debt as possible. By doing so, management can effectively increase Civeo's probability of surviving this downturn while cash flow is still positive.

Paying down some debt is a great thing, in my opinion, and is the single largest development that I can think of that investors should hope and look out for. However, one negative I'm expecting relates to Civeo's daily room rates. Last year, the average daily rate came out to $100, a big drop from 2014's $125 rate. This occurred because of lower demand for lodgings as occupancy rates fell from 78% to just 58%, and I would imagine that, as sales and earnings continue to take a beating, the biggest driver will be these factors.

Takeaway

At this moment, Civeo is an important holding in my portfolio because of the business's flexibility and fairly low debt but it's not without its risks. I do think it's likely that management will report a big drop in sales and will likely report negative earnings for the quarter but I suspect that a continued approach toward lowering debt and positive cash flow will more than offset the concerns regarding the company's top and bottom lines.

Disclosure: I am/we are long CVEO.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.