Civeo: What To Watch Out For

| About: Civeo Corporation (CVEO)

Summary

With earnings approaching, it's important to know what to expect from a small company like Civeo Corp.

Analysts currently have low expectations for the business just like last quarter, so this could be a concern, but there's more to it than just that.

Investors should keep an eye on the impact of the Fort McMurray wildfire, but also on its cost structure and on its debt, all of which is very important.

After the market closes on July 28th, the management team at Civeo Corp. (NYSE:CVEO) is due to report financial results for the second quarter of its 2016 fiscal year. Heading into that release, I figured it would be a wise idea to revisit the company and see not only what analysts expect, but what I also am expecting to see from the business.

Analysts have low expectations

According to analysts, this quarter isn't slated to be all that pretty. If they turn out to be correct, Civeo should generate sales this past quarter of around $99.30 million, a decrease of 30.6% from the $143.15 million the business saw in the second quarter of its 2015 fiscal year, driven by lower sales across all three of its geographic regions (Canada, Australia, and the U.S.). If last quarter is an indicator of this quarter, however, the drop could be larger. For its first quarter, management reported sales of $95.04 million, slightly beating out the $90 million to $95 million it had expected, but coming in lower than the $101 million (compared to $170.99 million a year earlier) analysts anticipated.

On the bottom line, the company is expected to perform poorly as well. Based on current expectations, the firm should generate a loss per share of about $0.13, a deterioration from the second quarter of 2015 when the firm's loss came out to $0.05 per share. During its first quarter this year, management reported a loss (excluding impairment charges) of $0.19 per share, a decrease from the adjusted gain of $0.03 per share seen a year earlier and narrowly missing estimates that called for a loss of $0.16 per share.

What I'm expecting

Heading into earnings, there are a few things I'm expecting from the management team at Civeo. While I do not pretend to know what it will report in terms of sales or profits, I do believe the company will make some progress on its cost structure. Last quarter, the firm saw its service costs average 66.9% of its service-related sales, an increase over the prior year's quarter when the cost structure came out to 59.4% of sales. I believe it's likely that this bad trend will continue this quarter as well, but as the business becomes more acclimated to the low energy price environment, it wouldn't be unreasonable to see costs come in lower this quarter (relative to the service sales) than it did last quarter. I hope to see similar improvements on Civeo's selling, general and administrative costs as well, but I'm not getting my hopes up there.

The second item of significance that I believe probably relates to debt. Last quarter, management reported that long-term debt stood at $409.96 million, a modest increase compared to the $396.88 million the firm reported at the end of its 2015 fiscal year. This quarter, as the tough energy environment continues and as lenders in countries like Canada and the U.S. have shown little flexibility with companies that owe them money, it would be nice to see management address this debt to some degree. By how much is something I do not know but by cutting costs in key areas, the firm should be able to generate some positive cash flow that it can utilize toward paying down its debts.

The last item that I believe Civeo will address relates to the Fort McMurray wildfire that raged through Alberta through a good portion of this year. In articles here and here, I wrote about the fire and discussed, to some degree, the impact it may have on Civeo. In general, based on phone conversations I had with investor relations, I figured out that the business would not be charging residents, but that there would be "some sort of accounting" with the government. Furthermore, as some of its facilities are within a relatively short distance of the impacted areas, I suspect that management will be able to give some indication about the ability to increase room rates and/or occupancy rates during the rebuilding of Fort McMurray and surrounding locales.

Takeaway

Because of the Fort McMurray wildfire earlier this year, this earnings release from Civeo should be especially interesting and could either be extremely positive or extremely negative (likely positive in my opinion). Having said that, even without factoring that in, I believe management has a couple of things that it should be working on that wouldn't be unreasonable given the current environment. Moving forward, I am anxiously awaiting the firm's earnings release, but I am more optimistic about the possibilities associated with the business now than I have been in a while.

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.