Civeo Corporation (NYSE:CVEO)
Q2 2016 Results Earnings Conference Call
July 29, 2016 11:00 AM ET
Collin Gerry - Corporate Development and IR
Bradley Dodson - CEO
Frank Steininger - SVP, CFO and Treasurer
Blake Hancock - Howard Weil
Aaron MacNeil - AltaCorp Capital
Greetings and welcome to the Civeo Corporation Second 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, Collin Gerry, Senior Director of Corporate Development and Investor Relations. Thank you, sir. You may begin.
Thank you, Christine, and welcome to Civeo's second 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 protections afforded 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, Collin. Good morning to all of you and thanks for joining us. Today, I'd like to begin with an overview of our operational performance in the second quarter and some comments on the industry environment, then Frank will take you through a detailed review of our results for the quarter, with a discussion of each segment's results, and I will wrap up with a near term outlook before we take your questions.
Second quarter results were better than expected for revenues and EBITDA, as a result of both a more efficient cost structure, and a surge of additional occupancy resulting from forest buyers in the Fort McMurray area. Frank will provide more color on the impact of the fires on our financial results, but generally speaking, we saw an increase in occupancy, both related to emergency responders and personnel working to restart our customer's operations, which when coupled with our improved cost structure, resulted in strong incremental margins.
Our margins in Australia remain generally strong, and our U.S. segment continues to suffer from the substantial weakness in U.S. drilling and completion activity. On a consolidated basis, Civeo generated free cash flow of $19 million in the quarter and again as a result of free cash flow from our operations and our strict cost containment initiatives during the quarter.
I'd like to take a quick minute to discuss Civeo's response to the catastrophic fires in Alberta this quarter. We immediately opened our doors to thousands of evacuees from the town of Fort McMurray. During that time, families who had been displaced were provided shelter and food at Civeo's expense. While moving a family into a room that is designed to house a Canadian oilsands worker is not ideal, that was the only alternative for many evacuees. And our operations team response was remarkable. I want to take this opportunity to thank our Canadian team for their tireless work that they did and for taking great care of the residents in Fort McMurray, our customers and the emergency responders.
From an operational perspective, the surge in occupancy driven by the forest fires in Alberta highlighted the strong incremental margins our assets can generate with very little capital or startup costs in a period of rising occupancy.
Unfortunately, the recent rebound in oil prices from their historic lows in the first quarter has not translated into immediate increase in customer activity or spending. However, we continue to win new work in an otherwise very difficult market. We won new contracts in the second quarter totaling $21 million in both Canada and Australia. In Canada, we won some more turnaround work for major oilsands producers and we will house them at our Athabasca and Beaver River locations. In Australia, we won a contract for up to 250 rooms for an international energy producer to support a large scale gas project in Western Australia. This contract will utilize existing rooms at our Karratha location.
We also renewed a contract for one year for 360 rooms with an international mining company to support its ongoing met coal mine operations in the Bowen Basin and we will do that from our Coppabella location.
We continue to be very focused on three things, drive free cash flow, reduce leverage, and capture organic growth opportunities. We generated positive free cash flow in the second quarter and reduced debt by another $17 million. We continue to be disciplined in our capital spending, and as a result, we have lowered our full year 2016 CapEx guidance from $30 million to $25 million. We remain confident that we should generate solid free cash flow for the balance of the year.
For the foreseeable future, the commodity price outlook is still continuous to drive new incremental investments for oilsands or LNG projects in Canada. Met coal prices in Australia have increased by more than $10 a ton since the first of the year, will have ongoing weakness in economic growth in China that hasn't translated into demand for growth of coal projects in Australia.
In the U.S., which represents a very small portion of our business, activities picked up slightly, in tandem with an upswing in the U.S. rig count, but pricing pressure remains. It appears the U.S. drilling and completion activity has bottomed and we are optimistic that we could see some very modest improvement in the second half of 2016.
We will continue to look for opportunities to reduce our operating overhead costs. We saw improvement in the second quarter, resulting from initiatives undertaken in the first quarter, and will strive for additional operational savings in all regions, as we move through 2016 and into 2017.
We are disappointed by LNG Canada's decision to delay further its final investment decision, or FID, based on the ongoing commodity price environment. Remember that in early May, the consortium awarded Civeo and our partner Bird Construction, a contract to build a workforce accommodation center to house the LNG project construction workers. This was contingent on a positive FID. Given the contingency of the FID, we had not included this contract in our guidance, but the delay in FID negatively impacts our expectations for 2017 and beyond.
Now I'd 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. Looking at our second quarter financial results, this morning, we reported a net loss on a GAAP basis of $11.5 million or $0.11 per diluted share on revenues of $107 million. The only unusual item was a $200,000 pre-tax charge related to the migration to Canada we did a year ago, which had a negligible impact on an earnings per share basis. We don't expect any additional migration related charges going forward. Adjusted EBITDA was a positive $26.9 million and cash flow from operations was $23.9 million for the quarter.
I will begin with our Canadian segment, and I will be comparing our sequential performance, that is second quarter 2016 to first quarter 2016. Revenues from our Canadian segment were $77.1 million for the quarter, which is up 18% from the first quarter. Adjusted EBITDA increased by 68% sequentially to $23.9 million, mainly due to increased occupancy related to the Fort McMurray forest fires. Average occupancy in our Canadian lodges was 62% versus 60% in the prior quarter. But please note, the number of marketable rooms increased to close to 11,000 rooms from 9,100 rooms in the prior quarter. Our average daily rate was $108 versus $111 in the first quarter.
In the second quarter, our occupancy benefitted from the reopening of the Athabasca lodge in mid-March to support a customer's turnaround activity, and the reopening of a wing at the Wapasu lodge in early May to support our customers and firefighters. We also increased occupancy at Mariana Lake lodge related to our pipeline project and first responders to the forest fires. In addition, we opened the Conklin and Anzac lodges, which usually operate only in the winter months.
The adjusted EBITDA margins on our Canadian operations was 31% in the second quarter versus 22% in the first quarter, primarily reflecting the benefit of higher revenue against fixed costs and operational efficiencies we have implemented during the downturn. We clearly outperformed the guidance we gave last quarter rather significantly. To echo Bradley's comments, this outperformance was mostly driven by the combination of the increase in fire related occupancy and our lower operating cost structure.
Moving next to the Australian segment, revenues increased sequentially to $27.9 million, which is an increase of about 8%. Adjusted EBITDA increased $300,000 sequentially to $11 billion in the second quarter. The average daily room rate for the Australian villages was $76 in the second quarter versus $68 in the first quarter. But occupancy declined another two percentage points from Q1 to 45%. Adjusted EBITDA margin in Australia were 40% versus 42% in the first quarter of this year.
Looking now at the U.S.; the U.S. rig count decreased in the second quarter, driving a decrease in the activity levels for our well site and open camp assets, and our U.S. business continued to be impacted by pricing pressures in the market. U.S. revenues for the quarter were $2.4 million, down from $4 million in the first quarter. Adjusted EBITDA was a negative $2.4 million, up from the negative $3.1 million in the prior quarter. We don't currently anticipate a near term rebound in the U.S. and we took additional costs out of our U.S. business in June that should be reflected in our Q3 results.
On a consolidated basis, we spent $5.1 million of CapEx in the second quarter, exclusively for maintenance purposes. We have reduced our full year CapEx guidance from $30 million previously to $25 million, with a continued downward bias. Having said that, if growth opportunities come to fruition, our cash flow and liquidity under the amended bank agreement provide us with the flexibility to finance growth.
As Bradley stated, we made $17 million in debt reduction payments during the second quarter for a total of $28 million of debt reduction payments during the first six months of 2016. As of June 30, we have almost $130 million of available capacity on our revolving credit facility and total liquidity of approximately $132 million. We expect to continue to reduce our debt balance in the third quarter.
Just as a reminder, most of our debt balances are in Canadian and Australian dollars, and our cash balances are also predominantly in Canadian and Australian dollars. So the reported debt balances in U.S. dollars will fluctuate, as foreign exchange rates continue to fluctuate.
One final item, we will be filing a Form S3 shelf registration later today, [indiscernible] their specific plans associated with this shelf filing, rather we want to be as prepared as possible, should opportunities arise, both organically or through M&A activities.
Now I will turn the call back over to Bradley, who will provide our view on earnings for the third quarter and full year and an update on our strategic initiatives. Bradley?
Thanks Frank. As we look to the balance of the year, our outlook is largely consistent with what we have been saying, absent the fires of course. While we were disappointed with the LNG Canada's decision to delay FID, given our contracts for this project, we have been and will continue to manage the operations and the balance sheet, under a conservative no FID approach.
Looking at our expectations for the third quarter, in Canada; while we are continuing to support the recovery and restart efforts of our oilsands clients from the Fort McMurray fires this quarter, we expect most of that surge in recovery occupancy to wind down in the third quarter of 2016. We will continue to benefit from turnaround activity at our Athabasca and Beaver River locations in the third quarter as well.
Assuming a Canadian dollar exchange rate at 0.76, we are guiding to revenue of $66 million to $69 million for our Canadian segment, and adjusted EBITDA of $16 million to $18 million for the third quarter of 2016. This is based on 10,000 rentable rooms and we expect lodge occupancies to be between 61% and 63%, with an average room rate of approximately $128 per night in that same Canadian dollars.
For the full year in Canada, we are assuming a Canadian dollar exchange rate again of 0.76 to the U.S. dollar, and we are guiding to revenue of $275 million to $280 million, and we expect full year adjusted EBITDA from Canada to be in the range of $66 million to $71 million. This full year guidance assumes 9500 rentable rooms, with lodge occupancy between 62% and 63% and a room rate of approximately $138 a night in Canadian dollars for the full year of 2016.
In Australia, we are assuming an exchange rate of 0.75 to the U.S. dollar for the third quarter of 2016. We expect $25 million to $26 million of revenues and adjusted EBITDA of $9 million to $10 million from Australia. This is based on 8750 rentable rooms and village occupancy of 40% to 42%, with average daily rates of $103 to $105 per night in Australian dollars.
For the full year of 2016, we are assuming an exchange rate of 0.745 to the U.S. dollar. We expect $102 million to $104 million of revenues and adjusted EBITDA of $39 million to $41 million. This is based on approximately 8700 rentable rooms for the full year, and village occupancy of 43%, with average daily rates of approximately $100 to $101, again that's in Australian dollars per night for the full year.
There is currently no near term catalyst to stimulate incremental mining activity or spending in Australia. Until we start to see stabilizing in the economic growth trajectory in Asia, primarily China, that will increase the demand for steel, we don't expect an appreciable increase in results from Australia from existing locations. We continue to pursue a couple of non-mining related projects, that can provide incremental revenues and occupancy, by utilizing existing assets.
We still believe in the long term fundamentals, particularly in the low cost Bowen Basin, that are solid, and we will continue to manage the business very carefully, keeping a close eye on margins and capital spending.
On a consolidated basis, for the third quarter, we expect revenues to be in the range of $93 million to $99 million, and adjusted EBITDA in the range of $18 million to $21 million. For the full year, we expect revenues to be in the range of $390 million to $400 million, and we are tightening our adjusted EBITDA guidance for the full year to be in the range of $74 million to $82 million. This again reflects the strong performance from Canada in the second quarter.
Before we get to questions, I want to underscore that Civeo is well positioned, with improving liquidity, solid service delivery and management stream, to weather a downturn that is running deeper and longer than any of us had envisioned. While we take control of the macroeconomic factors obviously, our team has done a great job of managing the business, reducing costs to match the lower levels of activity, and making sure that we have the service capability to ramp up quickly, like we did in response to the Alberta fires, to handle shorter term customer needs.
We still see shorter term demand, both in Canada and Australia, around turnaround and maintenance activity, and we have been very successful in winning this work that has been up for bid.
That concludes our prepared comments. We are ready for questions.
[Operator Instructions]. Thank you. 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.
Bradley, I guess now, for the last 12 months or so, you have been focused on LNG Canada projects and what that could mean. And clearly now, we are getting back to kind of the focus on operations and what we have at hand. And clearly 2016, I think we have had a pretty good grasp on. Can you may be kind of walk through the moving pieces for 2017 operationally, and then I know we are not through the budget season yet, but CapEx, cash flow from that perspective, maybe that to you Frank, if you guys could take care of that, that would be great?
Be happy to. And as you mentioned, I will kind of kick off with some overall comments and then turn it over to Frank to add some color. As you mentioned, the budgeting process for us doesn't begin for about another month. But we can walk through and are happy to walk through kind of the known pieces of that process today. We start in Canada, the largest asset is the Wapasu asset, we have got the Imperial Kearl contract, that goes through August of 2022. We expect the activity to be roughly the same. I guess, the variable piece would be how much, in addition to the operation staff we will be housing. That number this year has been in for a magnitude of around 300 to 500 people, but generally closer to 300. So that's a piece that we will have to watch and see how that demand develops.
Second largest asset is the McClelland asset, where we are serving the Suncor led Fort Hills project; that contract goes right now through the end of the first quarter. We fully expect they will need additional rooms there. We have not begun the discussions with them on how many rooms and how long. But we do feel confident it will extend beyond the first quarter.
The third piece, in terms of talking about the Canada outlook would be around turnaround work. We have been very successful in winning work this year, that has helped the Q2 results, it will help the Q3 results, indicated that. It's too soon to know, what the current turnaround work we will have, going forward for 2017. But hopefully, we have been fairly successful in winning the turnaround work, both this year and last year, just uncertain right now what the customer outlook for that activity is for 2017 yet.
In terms of the other types of revenue and profits out of Canada, very easy comp. There is not a lot of manufacturing work in 2016. There is not a lot of mobile camp work in 2016. So there could be upside there, but there is not a year-over-year concern there, as it relates to the other non-[indiscernible] revenue in Canada.
In Australia, as you have seen, the occupancy has been really lower. I think we will continue to see that going into next year. Right now my best guess is, that we could see results in Australia down about 10% plus or minus, just as occupancy continues to drift lower. The met coal prices have improved, but we have not seen that turn around into significant customer spending. We have seen fairly good casual occupancy. We have got some casual uncontracted occupancy built into our second half 2016 guidance, and the question will be, as we get closer and through the budgeting process, what our expectations around that casual or shorter term occupancy is, as we go into 2017.
As we do every year, when we give our full year guidance, we will be very clear about the revenue guidance and of the occupancy guidance, how much of that is contracted and how much of that is either -- dependent on renewals or dependent on shorter term uncontracted work.
In the U.S., just to complete the operational side of things, the team has done a very good job and adjusting to an exceedingly difficult market. I don't think our results differ from many of the onshore or generally U.S. related oilfield services company. It’s a difficult market. We have picked up a little bit of activity recently, but it's uncertain how long we will hold on to that. Our goal, my goal for next year would be to continue to reduce the operating loss. Unclear how far we will get there. Obviously, longer term, we want to get it back to profitability, but we will have to get through that budgeting process before I can be more specific there.
That's kind of the total what I know today, right. Frank, if you have any cash flow or CapEx…?
I think when you look at CapEx and where we are, you could see, we started the year thinking $30 million. We brought that down to $25 million. I think we will continue to bring that down for the rest of the year. And when I look at what we are expecting for CapEx, going into 2017, I think it will be even lower than where we end up in 2016. That's not to say, we are not taking care of the assets.
Clearly, it's interesting. I mean, I see a request for capital and we are taking care of the assets. But we are doing it in a very prudent manner, and making sure that we are not spending CapEx that's not needed. So very disciplined there. The other aspect of it that I think we are beginning to see some benefits from is, is a lot of the cost reduction efforts that we have made throughout last year and into this year. Second quarter has got a lot of noise there because of the fires, but those -- our margins were benefitted as a result of those efforts that we have made. I think we will continue to do that, and you will see the value of that or the impact of that, by not significantly decreasing our margins, even if occupancy does go down.
That's great, and I appreciate it. And Bradley, maybe just one more; I think we have all kind of moved away from the M&A commentary for you guys for a while here and it sounds like it’s maybe back on the table as we kind of hopefully are in a recovery. Can you maybe just talk about what assets you are looking at, would that be Canadian related or is there a possibility that it may roll up in the United States? It's tough when everybody is probably generating negative EBITDA in the U.S. to justify valuation there. But maybe what sort of targets could you be looking for, with the shelf filing on the M&A front?
Sure. Starting off in Canada, there, I would say it’s strategic in a sense that we will be adding to the capabilities that we currently have. There are certain potential partners or targets that would have incremental customer access, First Nation relationships, geographic regions, we have been fairly upfront than we'd like to be. Have a little more exposure to the Northeastern BC gas market, obviously with where LNG is in Canada you have to weigh that in that context. But longer term, we are believers in that, and we'd like a better position in that market. There are also certain service capabilities in Canada that we could add, that would be incremental to what we do now, that would help us garner a larger piece of the pie of our customer spending, that would be the goal.
In the U.S., and this is I think fairly consistent with what other [indiscernible] of the industry are looking at, there needs to be consolidation, and how we play a part in that we don't know yet, but we'd be looking to get bigger scale. But your point about most people having either breakeven or negative EBITDA does present a struggle. So hopefully, that will start to turnaround and in that will allow some of that consolidation to occur.
In Australia, we are looking to expand our capabilities in terms of the service offering to their customer. There are some smaller transactions we are looking at there, that could be additive. There are a couple, I guess selected markets, where some asset consolidation could be helpful, that we are looking at, and we are looking at some non-energy projects that could be interesting. Some of which would take the form of moving existing assets. Some would require a combination of existing assets and new assets and some might be an acquisition.
That's great guys. I appreciate it. I will turn it back.
Our next question comes from the line of Aaron MacNeil with AltaCorp Capital. Please proceed with your question.
Good morning guys.
So obviously, netting out the impact of the forest fires and turnaround, your revised guidance range implies some sequential weakness in the fourth quarter, relative to the third quarter. So I guess I am just wondering, is that conservatism on your part, or are there any read-throughs we should be thinking about?
Well there will always be some seasonal reduction in occupancy. Most of our customers have built into their contract, that their take or pays go down during November and December months. Also during the holidays, they let their teams go home, our guests go home. So some of that is built in. We have taken out the forecasts, effective of all of the fleet work, our mobile camp work for the fourth quarter. That's the real driver there. Its lower occupancy seasonally in the lodges, and right now, they are expected to pick up for the winter months for the fleet work.
Got it. And so it's fair to say you are not seeing any sequential pricing pressure or anything like that?
Not right now. No. Most of what we are doing is contracted, and there is some mix in play right now, as we go into renewals next year. But across the company, we never [indiscernible]. There is risk of cost or price reductions. But what our team has done a really good job of, is working on the operational efficiencies and working on ways to bring down our costs, so that we can maintain as much of that margin. While the top line might be down due to pricing pressure from the customer, we have been trying to hold on to as much margin as we can there. I think we have done a pretty darn good job.
Okay. Absolutely. That's really helpful guys. Thanks. That's all for me.
Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. Mr. Dodson, I'd now like to turn the floor back over to you for closing comments.
Thank you. Thank you all for joining us today. Thanks for your interest in Civeo. We look forward to speaking to you at the end of the third quarter. And that concludes our comments.
Ladies and gentlemen, that does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.
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