Civeo Corp Q4 FY2020 Earnings Call

Good day, everyone, and welcome to the Civeo Corporation's Fourth Quarter 2020 Earnings Call. Today's call is being recorded. And at this time, I would like to turn the conference over to Regan Nielsen, Director, Corporate Development and Investor Relations. Please go ahead, sir.

Thank you, and welcome to Civeo's Fourth Quarter 2020 Earnings Conference Call. Today, our call will be led by Bradley Dodson, Civeo's President and Chief Executive Officer; and Carolyn Stone, Civeo's Senior Vice President, Chief Financial Officer and Treasurer. 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'll now turn the call over to Bradley.

Thank you, Regan, and thank you all for joining us today on our fourth quarter earnings call. We hope that you and your loved ones are staying safe and well. In addition, we're thinking of our employees, customers and stakeholders who are affected by the historic winter weather last week in Texas and the surrounding states. We hope you are all safe, warm and getting to recover. I'll begin, as I have on all the earnings calls since the pandemic started, by emphasizing that at Civeo, the safety and well-being of our employees, guests and contractors is always our top priority. For today's call, I'll start with the key takeaways and then give a brief summary of our fourth quarter and full year performance. Carolyn will then provide a financial and segment-level review, and I'll conclude with our initial full year 2021 guidance and regional underlying assumptions to that guidance, as well as some directional commentary as we prepare for our post COVID-19 world. And then we'll open up the call for questions. The key takeaways from our call today are: Civeo's business continues to generate cash, which is furthering our ongoing debt reduction efforts. For the full year 2020, Civeo generated $111 million of free cash flow, an increase of 119% year-over-year; and reduced our total debt during 2020 by $108 million to end the year at $251 million of total debt. This is really the key point from the press release and this earnings call. Our fourth quarter results were modestly better than we were expecting. In the fourth quarter, Civeo delivered $23.7 million of adjusted EBITDA and $33.2 million of free cash flow. We reduced our total debt by $21.5 million in the fourth quarter, bringing our leverage ratio down to 2.1x as of December 31, 2020. De-levering our balance sheet remains our top financial priority, and this quarter is the seventh straight quarter that the leverage ratio has come down. We also had another successful quarter in terms of new contract awards and extensions. Today, we announced three contract renewals in our Australian business, with the expected total revenues of AUD101 million over the two-year terms. Our Australian business had another good quarter, delivering adjusted EBITDA of $17.2 million, a 9% improvement year-over-year on robust room demand and our team's operational execution. Despite typical holiday downtime in the fourth quarter, our operations in Canada are showing early signs of normalization from the negative impacts of the lower oil prices. Our customers are gradually mobilizing employees and contractors as the worst of the impacts of the pandemic appear to be abating. In total, our team put together a solid fourth quarter despite the challenges of the pandemic and the weaker oil price environment in 2020. I'll now take a moment to provide a business update on our three segments. In Canada, our revenues and adjusted EBITDA softened both sequentially and year-over-year, given the lingering constraints on occupancy from the volatile oil prices, the pandemic and typical holiday downtime, and a strong unusually strong turnaround schedule in the fourth quarter last year. This segment's performance was consistent with our expectations. Our Australian results were in line with our expectations as our Bowen Basin occupancy was slightly better than expected but did reflect some typical holiday downtime, coupled with lower occupancy at our Carapa location as LNG-related occupancy declined. Adjusted EBITDA in the fourth quarter was up year-over-year as a result of stronger customer activity in the Bowen Basin and in our Western Australian Integrated Services business. In the U.S., conditions for our U.S. business continue to be extraordinarily challenging. We are not counting on a meaningful improvement in the business in the first half of 2021. Although we are encouraged by the recent improvement in drilling and completion activity, independent of disruptions from the recent arctic blast, activity remains subdued, and we expect E&P customers in the U.S. to continue to live well within their cash flows, constraining overall activity. Turning to the balance sheet, our leverage rate declined to 2.1x at year-end from 2.16x at the end of the third quarter, proactively dedicating cash flow to reducing debt remains our key financial priority. 2020 presented a series of unprecedented obstacles, and 2021 is often an similarly atypical start with the continued Chinese-Australian trade dispute, slow vaccine rollout in North America and the impacts of the recent arctic weather in the Southern U.S. At Civeo, we adhere to our battle-tested playbook when these unexpected crises present themselves. Keep our employees, guests and vendors safe and comfortable as possible, operate responsibly in our communities, continue to focus on what we control, and rely on the consistent strategic priorities to maximize free cash flow generation, reduce debt to enhance financial flexibility and contain costs without compromising service quality. And with that, I'll turn the call over to Carolyn.

Thank you, Bradley, and thank you all for joining us this morning. Today, we reported total revenue in the fourth quarter of $133.4 million, with a GAAP net loss of $2.3 million or $0.16 per diluted share. During the fourth quarter, we generated adjusted EBITDA of $23.7 million, operating cash flow of $36.7 million and free cash flow of $33.2 million. The lower adjusted EBITDA we experienced in the fourth quarter of 2020 compared to the same period in 2019 was largely due to lower build rooms in our Canadian oil sands lodges and, to a lesser extent, lower occupancy due to decreased drilling and completion activity in the U.S. These items were partially offset by CEWS proceeds as well as by the continued favorable performance of our Australian business. For the full year 2020, we reported revenue of $529.7 million and a net loss of $136.1 million or $9.64 per share. In 2020, we generated adjusted EBITDA of $108.1 million for the full year, which was consistent with our 2019 full year adjusted EBITDA of $108.4 million. Weaker activity in Canada and the U.S. related to the pandemic and lower oil prices was almost completely offset by stronger activity in Australia as well as CEWS proceeds. Let's now turn to the fourth quarter results for our three segments. I'll begin with a review of the Canadian segment performance compared to its performance a year ago in the fourth quarter of 2019. Revenue from our Canadian segment was $65.5 million as compared to revenue of $89.7 million in the fourth quarter of 2019. Adjusted EBITDA in Canada was $13.8 million, a decrease from $20.9 million in the fourth quarter of 2019. The negative impact on revenue and adjusted EBITDA was largely caused by a meaningful reduction in build rooms in 2020 related to the protracted decline in oil prices, and the effects of the COVID-19 pandemic, especially in our oil sands lodges, coupled with unusually high fourth quarter turnaround activity in 2019. Adjusted EBITDA in the fourth quarter of 2020 for our Canadian segment included $3.3 million related to proceeds from the CEWS. During the fourth quarter, build rooms in our Canadian lodges totaled 469,000, which was down 44% year-over-year from 837,000 in the fourth quarter of 2019 due to the factors I just mentioned. Our daily run rate for the Canadian segment in U.S. dollars was $98, up slightly with a 7% year-over-year increase. Turning to Australia, during the fourth quarter, we recorded revenue of $63.7 million, up from the fourth quarter of 2019. Adjusted EBITDA was $17.2 million, up from $15.7 million during the same period in 2019. These results represent a 22% period-over-period top line increase on a constant currency basis and were driven by increased activity in our integrated services business, and our increased occupancy of Bowen Basin lodges. Our U.S. dollar results further reflect the impact of the strengthened Australian dollar. Australian build runs in the quarter were $480,000, up from $463,000 in the fourth quarter of 2019, due again to the continued improvement in metallurgical coal activity across the Bowen Basin. The average daily rate for our Australian villages in U.S. dollars was $77 in the fourth quarter, up from $72 year-over-year. As Bradley mentioned, we are very pleased to announce our new contract in Western Australia to provide hospitality services through our Integrated Services business, with estimated revenues of AUD62 million over its two-year term. We also announced the renewal of two contracts to provide accommodations in hospitality services in our Bowen Basin villages with expected revenues under these contracts totaling AUD39 million over currently two-year terms. Moving to the U.S., revenue for the fourth quarter was $4.2 million compared to $10 million in the fourth quarter of 2019. The U.S. segment saw a negative adjusted EBITDA of $1.4 million in the fourth quarter, a reduction from negative adjusted EBITDA of $0.2 million during the same period of 2019. These year-over-year declines were primarily related to broadly lower drilling and completion activity, largely due to lower oil prices as well as the impact of the COVID-19 pandemic. On a consolidated basis, our capital expenditures for the full year 2020 were $10.1 million, down from $29.8 million during 2019. This decrease is primarily due to the completion of the Sitka Lodge expansion in 2019 as well as capital discipline employed during 2020 due to the pandemic and resulting global economic environment. Our total debt outstanding on December 31 was $251.1 million, which was a $21.5 million decrease since September 30. The decrease consisted of $34.6 million in payments during the quarter from free cash flow generated by the business and was partially offset by an unfavorable foreign currency translation impact of $13.1 million. Our leverage ratio for the quarter decreased to 2.11x as of December 31, 2020, from 2.16x as of September 30. And finally, as of December 31, we had total liquidity of approximately $105.4 million, which consisted of $99.3 million available under our revolving credit facilities and $6.2 million of cash on hand. Bradley will now discuss our outlook for the full year 2021.

Thank you, Carolyn. I'd like to provide you with our full year 2021 guidance on a consolidated basis, then provide you with the underlying outlook for each of the regions as well as the underlying assumptions to our guidance. Following the successful end to 2020 in light of the economic conditions, we are initiating full year 2021 guidance of revenues of $555 million to $565 million and EBITDA of $90 million to $95 million. Our initial full year 2021 capital expenditures forecast is $20 million to $25 million. Capital expenditures are expected to be higher year-over-year in 2021 as we return maintenance capital expenditures to more normalized levels, and we make investments tied to customer contracts supporting Canadian LNG and Australian iron ore projects. Again, our primary financial objective is free cash flow generation. So based on the EBITDA and CapEx guidance just outlined, expected interest expense of $15 million for 2021, no expected material cash taxes or working capital investment, we expect 2021 free cash flow for the full year to range between $50 million and $60 million. To bridge our 2021 guidance to our 2020 actuals, we need to take out some of the one-time items in 2020. Our 2020 adjusted EBITDA included $15 million of non-operating items, comprised of $13 million from the CEWS program and $2 million in gains on the sale of assets. Excluding those from the 2020 results, our 2020 adjusted EBITDA would have been $93 million, in line with our 2021 EBITDA guidance of $99.5 million. Now I'll provide the regional outlooks and the corresponding underlying assumptions by region. In Canada, from a macroeconomic perspective, the recent improvement in global oil and gas prices is an encouraging sign for our Canadian segment as we start 2021. Although the bulk of our business is tied to existing oil sands production and committed LNG development, a more accommodated commodity price backdrop, alongside subsiding constraints from the pandemic shape our view that our Canadian performance should improve year-over-year throughout 2021. We expect our oil sands occupancy to improve sequentially as customers gradually mobilize additional personnel with COVID-19 concerns beginning to abate. This is offset by the negative impact of the British Columbian provincial health order limiting headcount at all large industrial projects across the province, including the LNGC and CGL projects. We do expect modestly improved year-over-year turnaround activity in the second and third quarters of 2021 as well as modestly improved year-over-year mobile camp activity tied to the CGL and TMX pipelines. Our Canadian guidance primarily depends on the following four assumptions: one, COVID-19 infections and hospitalization rates do not impact industrial activity more than currently expected. As you may have seen, the province of British Columbia has put headcount limitations on industrial projects. This is currently negatively impacting our occupancy at our Sitka and our pipeline camps that are supporting the construction of the CGL pipeline. Should the pandemic worsen, this could negatively impact our outlook and our occupancy in Canada. We are expecting an improved year-over-year turnaround activity in the oil sands region as many of the major oil sands operators are making up for delayed turnarounds in 2020. This activity could be deferred or cut back, but we expect to have a clear picture of turnaround season by the time of our next earnings call. We do expect to be busy supporting pipeline construction projects in 2021. If these projects are delayed, this could push this activity from 2021 to 2022. Lastly, the availability of skilled labor could become an issue, limiting ours and our customers' ability to increase staffing to the levels required to support construction and turnaround plans, ultimately negatively impacting our outlook for occupancy. Turning to Australia, the bulk commodity price environment should continue to underpin healthy fundamentals for our Australian business in 2021. Iron ore prices remain near multi-year highs as supply outages continue and steel demand in industrial nations gradually improves. Metallurgical coal prices were weak in the fourth quarter of 2020 as the China-Australia trade tensions flared. However, Australia has found new markets for its coal exports and prices have recovered early here in 2021. China's restrictions are expected to be lower in the first half of the year, which should continue to support solid activity for our business. We expect our Australian occupancy to be up slightly year-over-year; however, this assumes that the China-Australia trade dispute does not negatively impact our customers' production or maintenance plans for 2021. Our guidance also assumes that the current tight labor supply in Australia, particularly in Western Australia, does not worsen further, and that the recent reinstatement of interstate travel in Australia will help abate some of the labor tightness as we move through 2021. For our U.S. business, the oil and gas price environment has improved modestly in recent months, but we're not forecasting a meaningful improvement in our U.S. business for the first half of 2021. E&P customers in the major tight oil plays have been issued a clear mandate to live within operating cash flows, so we expect a gradual and modest improvement in U.S. activity, largely in the second half of the year. I will conclude by underscoring the key elements of our strategy as we navigate this extraordinary market climate. Our mandates are as follows: we will prioritize the safety and well-being of our guests, employees, and vendors. We'll manage our cost structure in accordance with the occupancy outlook across all three regions. We will continue to enhance our best-in-class hospitality offerings, and we'll allocate capital prudently to maximize free cash flow generation while we continue to reduce debt. Before we proceed to the questions section of the call, I'd like to thank our incredible employees around the world for their dedication, selflessness and professionalism that they bring to work every day. 2020 presented our team with unprecedented challenges, and we predictably rose to the occasion at every turn. On behalf of the Civeo management team and Board of Directors, thank you again for making us so proud to work with you. With that, we'll take questions.

We do have a question from Stephen Gengaro with Stifel. Please go ahead.

I hope everybody is doing well and recovering from the weather. So a couple of things I wanted to hit on, but I just want to start off. You gave a lot of detail on 2021 guidance, but a couple of things I want to ask about. The first is just seasonality. And I think most of the time you'll see kind of a normal drop-off in 1Q and then a ramp. How should we think about the seasonal patterns in '21 given your guidance?

Yes. It's been a slower start to the year in both Canada and Australia. In Canada, restrictions on headcount and industrial projects are negatively affecting our activities in British Columbia, leading to a slower beginning in the oil sands region as well. Typically, the maintenance season in Canada and Australia occurs in the second and third quarters. If we consider our EBITDA guidance of $90 to $95 million, about 65% of that is expected to occur in the middle of the year, which means two-thirds of our earnings are concentrated in that period. We anticipate a slower start, but the fourth quarter appears to be on track to be fairly normal and consistent with this year's fourth quarter. That's the current situation, Stephen.

It appears that you made adjustments based on the $13 million benefit from the CEWS program in 2020. I assume your guidance does not include anything for 2021. Does this imply that the EBITDA for the first quarter is expected to be lower year-over-year before increasing in subsequent quarters?

That is correct. We do not have any CEWS proceeds in the guidance we just gave, and we do expect EBITDA to be down year-over-year in the first quarter.

Okay. Two other things, if you don't mind. The first is...

So, Stephen to add one additional point to that, it's a difficult comp year-over-year because January and February of 2020 were actually pretty good months and did not have a COVID impact. And so that's a tough comp, given that we're not out of the pandemic yet.

Yes. No, if I recall, 1Q '20 was actually very strong even relative to expectations.

Yes.

You mentioned a cautious shorter-term outlook in the U.S. business. If we start to see an increase in activity, is that a business you would consider divesting over time?

We have reduced a significant amount of costs in our business. Last year, we focused our activities in the more active basins, ensuring that all our district offices are now contributing positively. I believe we have effectively adjusted the size of our business, so we anticipate improvement year-over-year. If we experience an increase in activity and can reach a profitable level, we will be practical with everything in our portfolio. The way business cycles have operated over the past 5 to 10 years, the U.S. accommodations sector has never been in a position suitable for consolidation. It requires consolidation but hasn't had a long enough period where it was realistically possible. However, if we reach a stage where it is profitable and an appealing offer arises, we would certainly consider it.

Great. Just one final question for me: when you discussed the guidance and outlined some of the expectations, what do you see as potential drivers of upside? I know you mentioned some risks to the guidance, but what factors could contribute positively and influence the outcome in that direction?

Certainly, the first factor would be the resolution of the trade dispute between China and Australia. If that situation improves, it could lead to positive developments in Australia. Additionally, enhanced labor availability in Australia, influenced by social safety net programs in both Canada and Australia, may reduce the incentive for people to work in remote locations since they can remain home and receive support. If those programs are gradually reduced, it may alleviate labor challenges, particularly in Australia, though Canada is also experiencing similar issues. This could lead to improved margins. Another aspect to consider is the potential increase in turnaround activity in Canada; we are hopeful that it could exceed our initial forecasts. Lastly, there may be opportunities for expansion in our pipeline accommodations, especially concerning our camps along the CGL pipeline, which could present additional upside potential. Carolyn, do you have anything to add?

No. That was a good list.

All right. And there are no further questions in the queue. I would like to turn the call back over to Bradley Dodson for any additional or closing remarks.

Well, thank you all for listening to our call today. Thank you for your interest in the Civeo stock. We hope you're all doing well and staying safe, and we look forward to speaking to you on the first quarter earnings call. Take care.

That does conclude today's presentation. Thank you for your participation. You may now disconnect.