Civeo Corporation (NYSE:CVEO) Q4 2016 Earnings Conference Call February 23, 2017 11:00 AM ET
Regan Nielsen - Corporate Development Associate
Bradley Dodson - Chief Executive Officer and Director
Frank Steininger - Senior Vice President, Chief Financial Officer and Treasurer
Stephen Gengaro - Loop Capital Markets
Good day, and welcome to the Civeo Fourth Quarter Earnings Call. Today’s conference is being recorded.
At this time, I’d like to turn the conference over to Regan Nielsen, Corporate Development Associate at Civeo. Please go ahead.
Thank you, Evan. Welcome to Civeo’s fourth 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 supported 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, Regan. Good morning to all of you and thanks for joining us. I’d like to begin with a brief overview of our performance for the fourth quarter and full year 2016, before discussing the industry environment. Frank will walk you through our detailed results of the fourth quarter with a discussion of each segment’s results, and then I’ll wrap up with our near-term outlook before we take your questions.
2016 was very challenging. Yet, we were able to successfully complete several strategic objectives and continue to position Civeo for growth and the recovery in our end market. The first half of 2016 was marked by historically low oil and metallurgical coal prices as well as U.S. drilling and completion activity. These conditions attribute deep customer spending reduction across our key end-market, which resulted in a 23% year-over-year decline in our consolidated revenues for the year.
In response to historically difficult business environment, we continue to confront the downturn by optimizing costs, securing what new business was available and fortifying our balance sheet. For the full-year 2016, cost of sales and services, and G&A costs declined by 21% and 19% respectively. We also reduced our total debt by $44 million by virtue of our ability to generate free cash flow from operations through this difficult trough.
On an operational perspective, our employees responded admirably to double daunting situation. Perhaps most notably, the devastating Alberta forest fires over the spring and summer months. When confronted with an emergency, our teams sprang into action to accommodate approximately 6,000 displaced residents, workers, children and pet in the Fort McMurray area. We are incredibly proud our employees. And we thank them for their swift response to a crisis situation.
We also continued to position the company for the potential LNG project in British Columbia. In May, with our partner Bird Construction, we were rewarded the manufacturing contract to build 4,500 room facility for LNG Canada project. While, this project has been delayed, we continue to focus on our competitive positioning for this significant opportunity.
As 2016 concluded, resurgent commodity prices provided cause for optimism in both North America and Australia. Although we don’t anticipate an immediate spending revival in response to higher oil and metallurgical coal prices, our customers are setting their initial 2017 budget in a far more constructive environment than was the case this time last year.
When activity ultimately does recover, the actions Civeo has taken during the downturn will position us to succeed. Now looking at the fourth quarter, I’m pleased to report that we delivered revenues in EBITDA near the high-end of our guidance range. The fourth quarter of 2016 was punctuated by encouraging commodity price development and relative stability across our base business in both North America and Australia.
Although we expect activity levels to remain subdued across most of our core markets, at least with first half of 2017, leading indicators of a potential recovery are beginning to emerge.
In North America, market conditions have begun to bifurcate both by geography and application, as oil prices recover above $50 a barrel. Customers in Canada appear to be revisiting short cycle drilling and completion work as they establish their respective 2017 capital spending budget. However, we do not anticipate meaningful spending recoveries on major oil sands projects or greenfield infrastructure projects this year.
In the interim, recent regulatory approval of station pipeline projects has the potential to drive both incremental demand for our Canadian mobile camps asset, and bolster takeaway capacity for Canadian oil sands producers over the longer term.
In the U.S. market, activities beginning to accelerate from historically low levels, as operators redeploy capital in core areas of unconventional oil play such as the Permian Basin. Although the U.S. remains as strategically vital but a small piece of our overall business, we are encouraged by the continued year-over-year - our year-to-date surge in the active rig count as customer spending appears poised to revive meaningfully in 2017.
The met coal mining sector in Australia remains challenging, but the late 2016 recovery in spot prices and much stronger than anticipated Q1 contract price are potential harbingers of a gradual recovery. The recent contract settlement price for met coal of $285 per ton represents a dramatic improvement from the earlier 2016 contracted price of $81 per ton.
With spot met coal prices still below $200 a ton, we continue to closely monitor macroeconomic development in Australia, while we deliver excellent service to our customers in 2017. Our focus on cost efficiency and operational execution enable us to deliver fourth quarter revenue and EBITDA near the high-end of our guidance.
In Canada, revenues and EBITDA declined on sequential basis due to reduced temporary occupancy related to the Alberta forest fires. Australian segment EBITDA was essentially flat with Q3 as customers continue to operate under budgetary constraints and commodity price uncertainty.
We believe that 2017 will be an important year of transition for Civeo, as customer demand stabilizes in response to a more favorable commodity price environment. As we navigate this transitional period ahead of a prospective recovery, we will adhere to the strategy that will lead us through the downturn.
We will continue to maximize free cash flow, judiciously manage costs, reduce leverage while pursuing organic growth opportunity. During the fourth quarter, we generated free cash flow of $10 million and reduced debt by $12.5 million.
We remain confident in our ability to generate free cash flow in 2017 as business conditions [indiscernible]. Further to this strategy, we completed a public offering earlier this month of 23 million common shares, raising net proceeds of $64.9 million to repay outstanding amounts under our revolving credit facilities and for general corporate purposes.
Earlier this week, we announced the completion of our third amendment to our credit facility in February to further enhance our financial and strategic flexibility.
Now, I’d like to turn it over to Frank to take you through the details of our consolidated and segment results and our financial position. Frank?
Thank you, Bradley, and good morning. Before I get into my discussion about the financial results for the quarter, a reminder on the impact of foreign exchange, the average exchange rates for the Canadian dollar relative to the U.S. dollar had a small impact on the company’s result in the fourth quarter of 2016 compared to the fourth quarter of 2015.
A stronger average exchange rate between the Australian dollar relative to the U.S. dollar in the fourth quarter of 2016 compared to the fourth quarter of 2015 positively impacted revenue by $1.1 million and EBITDA by just over $400,000.
This morning, we reported a GAAP - a net loss on a GAAP basis of $15.9 million or $0.15 per diluted share on revenues of $90.9 million. During the fourth quarter, adjusted EBITDA was positive $17.7 million, cash flow from operations was $13.3 million, a free cash flow of $10.1 million as a result of our continued cost containment initiatives.
I’ll begin with our Canadian segment, and I will be comparing our sequential performance, that is fourth quarter 2016 with third quarter 2016. Revenues from our Canadian segment were $62.3 million, which is down 15% in the third quarter. Adjusted EBITDA decreased by 28% sequentially to $14.1 million due to temporary occupancy related to turnaround work, winding down and fourth quarter seasonality.
The decline is fire-related to core occupancy was partially offset by improving room demand for shorter-term customers, and our continuous focus on cost containment and operational efficiency. Average occupancy in our Canadian lodges was 65% for the quarter versus 64% in prior quarter.
Although the number of our rentable rooms decreased to approximately 9,300 rooms from approximately 10,600 rooms in the prior quarter due to our temporary closing a wing at Wapasu. Our average daily rates was US$99 per day versus US$100 per day in the third quarter.
The adjusted EBITDA margin on our Canadian operations was 23% in the Q4 versus 27% in the third quarter. And this primarily reflects the reduction in those [ph] rooms with a lower turnaround work and fourth quarter seasonality, thus resulting in [stay margin decline] [ph].
Moving next to our Australian segment, in Australia, our revenues of $26.1 million declined approximately 6% relatively to the third quarter due to a reduction in occupancy related to seasonality. Adjusted EBITDA of $10.4 million also declined by approximately 6% sequentially. The average daily room rate for the Australian villages decreased modestly to US$80 per day in the fourth quarter versus US$81 in Q3 of this year, while village occupancy declined sequentially by two percentage points to 41%. Adjusted EBITDA margins in Australia were flat sequentially at 40%.
In the U.S., the land rig count continued to surge higher in the fourth quarter, driving modestly higher drilling and completion activity, nonetheless pricing remains competitive due to lingering overcapacity. U.S. revenues for the quarter declined to $2.5 million versus $3 million in the third quarter of 2016.
Negative adjusted EBITDA of $1.5 million declined from negative adjusted EBITDA of $1.3 million sequentially due to seasonality. On a consolidated basis, we spent $4.5 million of CapEx in the fourth quarter, primarily [for each units] [ph]. We are guiding to capital investments of $15 million to $18 million for the full-year 2017, with the expectation of coming in towards the bottom end of this range.
However, if growth opportunities materialize or our amended credit facilities and the funds from the recent stock offers, provide us with the additional flexibility to finance growth.
We made $12.5 million in debt reduction payment during the fourth quarter and $56 million of debt reduction payments during 2016, reducing total debt outstanding by $44 million, net of $12 million foreign exchange adjustment.
As of December 31, we have total liquidity of $166.3 million consisting of $164.5 million of available capacity on our revolving credit facility and $1.8 million of cash on hand. In February, we were able to further reduce our debt balance as a result of the equity offering and we expect to continue to reduced our debt balance as we move through 2017.
As Bradley mentioned, earlier this week we announced third amendment to our credit facility. This amendment, among other objectives, relaxes certain of the covenants to provide greater flexibility including to enhance Civeo’s ability to make acquisitions and to reduce the borrowing availability to a level more consistent with currently expected lease [ph], which will then in turn reduce undrawn commitment.
Now I’ll turn the call back over to Bradley, who will provide an overview on earnings for the first quarter and full-year of 2017, and an update on our strategic initiatives. Bradley?
Thank you, Frank. Looking at our expectations for the first quarter and full-year of 2017, in Canada, we are assuming a Canadian dollar exchange rate of US$0.77, and we are guiding to segment revenue of $56 million to $59 million, and adjusted EBITDA of $14 million to $16 million for the first quarter of 2017.
Our expectations are based on 9,600 rentable rooms. And we expect large occupancy to be between 52% and 64% [ph] with a room rate of approximately CAD126 to CAD128 per night in Canadian dollars.
For the full year in Canada assuming a Canadian dollar exchange rate of US$0.76 to the U.S. dollar, we are guiding revenue of US$216 million to US$225 million. Approximately 58% of this revenue is contract.
We are in the middle of negotiating the McClelland Lake contract renewal for Fort Hills and if renewed our contract revenue will be over 70%. We expect full year adjusted EBITDA from Canada to be in the range of $45 million to $49 million. This assumes 9,600 rentable rooms with lodge occupancy of 56% to 58%, and a room rate of approximately a CAD122 per night in Canadian dollars for the full year of 2017.
In Canada, we are assuming an exchange rate of US$0.76 to the U.S. dollar in the first quarter of 2017. We expect $25 million to $27 million of revenues, and adjusted EBITDA of $10 million to $11 million from our Australian segment. This is based on 8,800 rentable rooms and village occupancy of 40% to 42% with average daily rates of approximately AUD106 per night in Australian dollars.
For the full year of 2017, assuming an exchange rate of AUD0.74 to the U.S. dollar, we expect $99 million to $103 million of revenues, approximately 61% of this revenue is contracted. We expect full year adjusted EBITDA of $36 million to $38 million. This is based on approximately 8,800 rentable rooms and village occupancy of 41% to 43% with average daily rates of approximately AUD100 per night in Australian dollars for the full year of 2017.
So on a consolidated basis for the first quarter, we expect revenues to be in the range of $85 million to $90 million, and adjusted EBITDA in the range of $16 million to $19 million. For the full year, we continue to expect revenues to be in the range of $337 million to $353 million, and adjusted EBITDA guidance for the full year of 2017 of $50 million to $55 million.
As we begin to expect a year of transition in 2017, we are heartened by favorable recent commodity price movement and positive underlying momentum in our Canadian, Australian and U.S. divisions. As with this point of the cycle in mind, that we have maintained our strict financial discipline and commitment to outstanding service quality.
As business conditions eventually improve across our core markets, capturing market share and generating healthy economic returns will be our top strategic priorities for Civeo. In the interim, we will continue to drive free cash flow and reduce leverage and position the company for a broader recovery.
In Canada, we will prudently manage operations and pursue opportunities related to short cycle production, seasonal work and infrastructure development while vigilantly monitoring costs and longer-term prospects for oil sands and LNG projects.
In Australia, the recent met coal price movement above $153 per ton is a sign that the worst of the downturn is likely behind us. Although, we do not anticipate a dramatic spending recovery in 2017, our customers are setting their initial 2017 budget in a far more favorable pricing environment than a year ago.
The U.S. drilling market is exhibiting signs of robust upturn in drilling and completion activity and customers are once again poised to pursue growth. Although pricing for accommodation services remains competitive, we anticipate improving market conditions as 2017 progresses.
Having completed the secondary offerings of public shares and our third amendment to the credit facility already in 2017, Civeo is positioned to successfully navigate a transition from stabilization to eventual recovery. As opportunities to pursue market share continue to emerge, we will pivot decisively towards growth with our commitment to financial discipline and outstanding service quality in front of mind.
We are prepared for an eventual recovery and we intend to respond to improving market fundamentals as conclusively as we’ve confronted the obstacles during the downturn.
Before we get to questions, I want to recognize and thank Doug Swanson our retiring Chairman of the Board of Directors for his unparalleled leadership and mentorship. I have had the distinct pleasure and honor of working for Doug since he began leading Oil States International in 1999, and took it public in 2001. Through the last 17 years Doug has led with integrity and a work ethic that will leave a lasting legacy on the company and the culture of Civeo.
Doug, we extend our heartfelt thanks for all that you’ve done to steward Civeo through this difficult market. You’ll be greatly missed and we wish you the very best in your retirement.
That completes our prepared comments. We are ready for questions.
[Operator Instructions] Our first question comes from Stephen Gengaro of Loop Capital Markets. Please go ahead.
Thank you. Good morning, guys. I guess, two things, one just start with simply the - on EBITDA front, you are seeing improvements in the U.S. business. It seems like you’re expecting EBITDA on the U.S. business to kind of be around flat or around zero in 2017. Is that reasonable and what might drive upside to that?
Implied in the guidance is that we will have a continued EBITDA loss in the U.S. of about $1.5 million for the first quarter. If rig count improvements and activity improvements continue we should get closer towards breakeven by the end of the year. I don’t expect in the full year we’ll reach that level though, but we should have an exit rate that is closer to a breakeven level. And certainly, the team has done a good job on cost control. If you look year-over-year on the U.S. with that guidance, that will be a significant improvement year-over-year, but we are hoping, it will be closer to breakeven and positive by the end of the year.
Okay. Thank you. And then when you - you mentioned McClelland Lake is - can you give any further color on kind of - I think it ends at the end of the first quarter if I remember correctly. I mean, have you - I imagine you’re in somewhat advanced discussions of getting that thing done, is that reasonable to assume?
Yes. The current contract ends at the end of the first quarter of this year, 2017. As we have alluded on previous earnings conference calls, we had expected that there will be a reduction in pricing that has been baked into our guidance that volumes will be consistent with 2016. And the current discussions with the customer are consistent with that. And so, we’re hopeful we’ll see the signing of that renewal here in a very short-term.
Thank you. And then just one final, on the Canadian front specifically, are you seeing any increase in customer interest for shorter-term work or more maintenance type work in the mid part of the year or have you not seen those discussions start to gain momentum yet?
Well, we have one turnaround job. It is already booked for the second quarter. That will give very nice occupancy to Beaver River and Athabasca, that’s baked into our guidance. There are a couple of more turnaround projects that we’re pursuing right now. We would still need to win that work, [that would help fill in] [ph] the third quarter and fourth quarter for those two locations. So there is prospect there. We’re just - we’ve been doing the work.
Okay. Thank you.
[Operator Instructions] And there appear to be no other questions at this time.
Okay. I know it’s a very busy earning schedule today. We appreciate everyone’s interest in Civeo. And that concludes our comments.
And this does conclude today’s presentation. Thank you for your participation. You may disconnect.
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