Civeo: Some Nice Progress But It’s A Long Road – Seeking Alpha

As of the time of this writing, one of my holdings happens to be Civeo Corp. (CVEO). As a niche accommodation business servicing the commodities industry (oil sands in Canada, coal and other products in Australia, and some oil and gas in the US), the company is well-diversified, flexible, and a nice fit, in my opinion, for my energy-centric portfolio. Given that it has been nearly three months since my last piece on the company and given that its share price has fallen a hefty 30.6% since the publication of said piece, I figured it would be interesting to look back at the business and give an update on my thoughts.

I approach investing from a long-term perspective. This means I look for a return thats in excess of the market over a period of 5 to 10 years (depending on the opportunity). As such, it doesnt matter too much to me if a holding is down for 4 of the 5-year minimum that I look at. Even so, seeing shares drop so much, such as Civeos 7.3% decline on July 28th, is never easy and makes me wonder if Im right in my evaluation of the firm. To see if this is the case, I dug into some of the data recently provided.

One thing I noticed about Civeo is that management has turned a bit more bullish as of late. Previously, the firm had expected revenue for this year to come out to between $337 million and $353 million. However, after landing four different accommodation contracts for Canadian pipelines, valued at 20 million Canadian dollars, this sales figure for 2017 was raised to be between $354 million and $363 million. Not only does this increase revenue as a whole, it also decreases the range from $16 million down to $9 million for the year. Thats quite a nice move.

Despite the increase in revenue expectations, EBITDA expectations havent moved that much. Truth be told, I really dislike EBITDA, but thats all management gives so thats what I need to deal with. If current forecasts are accurate, the business should generate EBITDA this year of between $61 million and $66 million, an increase for the floor and ceiling of just $1 million compared to prior forecasts.

Its hard to say precisely what cash flow will be based on this. During the first two quarters, the company reported total operating cash flow of just over $14 million. With sales more than halfway done for the year, you would expect operating cash flow for this year to be around $28 million, give or take a bit. However, if you annualize interest expense from the first half of this year and dont consider taxes since the company is likely to report a net loss because of its high depreciation and amortization expense for this year, youre looking at operating cash flow of around $43 million for the year at the mid-point. With capex of $12 million to $15 million thrown in, free cash flow would be $29.5 million. This means that either the rest of this year will be more cash accretive or investors should expect some downward revisions.

The last thing I noticed is a mix of good and bad relating to the company. Right now, its debt, according to management, stands at $320.2 million, which is a decrease of $3.7 million from the prior quarter. This is great to see and is great compared to the $353.3 million in debt seen at the end of last year. However, currency fluctuations have been moving against the business. During the last quarter, an uptick in the Canadian dollar relative to the US dollar hurt the firms debt repayment of $4 million. This is something that needs to be watched. On the other hand, due to a share issuance earlier this year, the company does have a nice $27.3 million in cash on hand and still has $117.5 million in borrowing capacity under its revolving credit facility. That provides it some nice flexibility so long as things dont materially worsen from where they are today.

Although many in the energy space are bearish about the future, it appears as though Civeos management team believes that better days are around the corner. For instance, if you look at the table below, you will see that, over the past three years, the company has continued to add available rooms to its physical footprint (this excludes other aspects of their business). Between 2014 and 2016, room count rose by 2,160 rooms, which is an increase of 9.9%. So far this year, the room count between Canada and Australia has grown by 118 rooms to 24,106 rooms. This is despite cash flow at the firm suffering during this energy downturn as demand for its services have plummeted.

*Created by Author

One thing I noticed is that, on the plus side, at least in Canada, the surge in the oil and gas rig count for the nation has been beneficial for Civeos occupancy rates there. Today, the rig count in Canada is estimated at 220 units, up from 118 the same time last year. As a result, the occupancy rate for Civeos Canadian operations during its latest quarter came in at 81% compared to last years 62%. While this is great news, there were some caveats here, such as the percent of available rooms that were rentable. Adjusting for this actually saw a small reduction in overall rooms occupied. Whats more, the companys average rate per room decreased from 108 Canadian dollars to 89 Canadian dollars. As you can see in the image below, occupancy rates for Australia remained flat, but it managed to see a very modest increase in how much it can charge.

*Taken from Civeo

This data appears to be rather mixed and highlights continued risk in its existing markets. While management has continued adding rooms to its set of operations, business remains weak. On the other hand, the companys strengthened balance sheet and revised estimates for this year is a positive that suggests the market may be getting better for the firm. The reason why I bought into Civeo is because I like its operations and cash flow potential, but it has always been among my smallest holdings (its my second smallest stock) because I know that while the firm does have impressive flexibility, it benefits, if my theory is correct, from more intensive commodity investments.

What do I mean by this? Well, the entire purpose of Civeo is to set up accommodation facilities in areas where alternatives are either too costly or simply dont exist. This means that many of its operations are set in regions that may not have the same kind of clustering ability that others might have for the businesss customers. As such, you would imagine that the real win for the business is when commodity prices are high enough that their customers can afford to spend more on projects that might otherwise be suboptimal. Because of this, my plan for Civeo has been to have a small stake to benefit from the run-up in energy and other commodity prices, but the real payday is like when oil prices hit around $70 per barrel.

Based on the data provided, I must say that recent developments involving Civeo are mostly encouraging. The firm does still have some trouble with its occupancy rates and the amount that it charges its customers, but the overall financial picture, because of the firms flexibility, appears fine for now. Eventually, to get a nice payday, we will need commodity prices to rise further, but I believe that in the next year or two, theres a pretty good chance of that taking place. Until then, I am likely to hold my stake, unless I find some other prospect that makes more sense for me.

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.

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Civeo: Some Nice Progress But It's A Long Road - Seeking Alpha