Civeo Corp Q2 FY2022 Earnings Call

Greetings. Welcome to the Civeo Corporation Second Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. Please note the conference is being recorded. At this time, I’ll now turn the conference over to Regan Nielsen, Director of Corporate Development and Investor Relations. Regan, you may begin.

Thank you. And welcome to Civeo’s second quarter 2022 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 anything 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 and uncertainties disclosed in our Forms 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 second quarter earnings call. I’ll start with key takeaways for the second quarter and then give a brief summary of our second quarter of 2022 performance, after which Carolyn will provide a financial and segment-level review and I’ll conclude with our updated full-year 2022 guidance and the regional assumptions that underlie that guidance, then we’ll open up the call for questions. The key takeaways from our call today are, we had a strong second quarter, with year-over-year revenues up 20% and adjusted EBITDA 15%, primarily driven by an increase in Canadian lodge build rooms and an increase in Canadian mobile camp activity, as well as an increase in the Australian village builders segment, where performance coupled with improving customer demand drove our upward revision to our full-year guidance. We continue to be encouraged by customer conversations and increasing customer activity and a robust pipeline of construction work, particularly in Canada, and expect increased maintenance and turnaround spending for the remainder of the year. As a result, we are raising the upper end of our full-year 2022 adjusted EBITDA guidance, which I’ll detail later in the call. Our announcement earlier this month of a 12-year contract renewal for Wapasu Creek Lodge for our long-term partner Imperial Oil Resources Limited reinforces our investment thesis that our services are necessary to support the continued demand in the Canadian oil sands region for many years to come. This morning, we’re pleased to announce a five-year integrated services contract with a new customer in South Australia with expected revenues of AUD120 million. This contract is a testament to the growth and diversification potential of our integrated services business as it encompasses a new customer, a new state in Australia and a new commodity. From a capital perspective, we continue to deleverage our balance sheet in the second quarter with debt repayments of $80 million positioning Civeo to be opportunistic going forward regarding capital allocation. The contract renewals and awards granted in the second quarter are consistent with our strategy of collaborating with long-term partners to maximize value in the current operating environment in a mutually beneficial way. Overall, we’re pleased with our second quarter results compared to our expectations. Although we are encouraged by the current operating environment, we remain committed to capital discipline. Let me take a brief moment to provide a business update on the three segments. In Canada, our revenues and adjusted EBITDA were slightly above our expectations, increased year-over-year, driven by recovery and large build rooms and increased Canadian mobile camp activity. We also experienced a significant sequential increase in adjusted EBITDA due to an uptick in activity in the central oil sands area as a result of seasonal turnaround activity, as well as a rebound from a slower start to the year and improved weather conditions, which lowered our operating costs. For Australia, our revenues and adjusted EBITDA were in line with our expectations, increasing year-over-year and relatively flat sequentially. This was driven by increased year-over-year village occupancy in our Coppabella village due to recovery in demand with sequential improvement offset by a weakening Australian dollar relative to the U.S. dollar. Turning briefly to the U.S., revenues increased year-over-year due to increased drilling activity positively impacting our wellsite services business, partially offset by the sale of our West Permian lodge, which we did in the fourth quarter of 2021. Adjusted EBITDA decreased slightly year-over-year primarily due to the sale of West Permian lodge, largely offset by increased drilling activity, which again impacted the wellsite services business. With that, I’ll turn it over to Carolyn.

Thank you, Bradley, and thank you all for joining us this morning. Today we reported total revenues in the second quarter of $185 million, with GAAP net income of $9.1 million or $0.54 per diluted share. During the second quarter, we generated adjusted EBITDA of $37.1 million, operating cash flow of $21.7 million and free cash flow of $17.6 million. As Bradley mentioned earlier, the increased adjusted EBITDA we experienced in the second quarter of 2022 compared to the same period in 2021 was largely due to increased build rooms in our Canadian lodges and increased Canadian mobile camp activity, coupled with increased Australian village build rooms. The quarter-over-quarter increase in operating cash flow and free cash flow was primarily due to these same factors. Let’s now turn to the second quarter results for our three segments. I’ll begin with a review of the Canadian segment performance compared to its performance a year ago and the second quarter of 2021. Revenues from our Canadian segment were $109 million, as compared to revenues of $83.3 million in the second quarter of 2021. Adjusted EBITDA in Canada was $28.7 million, an increase from $22.6 million in the second quarter of 2021. Results for the second quarter of 2022 reflect the impact of a weakened Canadian dollar relative to the U.S. dollar, which decreased revenues and adjusted EBITDA by $4.4 million and $1.2 million, respectively. On a constant currency basis, the increase in both revenues and adjusted EBITDA was largely driven by a 7% year-over-year increase in build rooms related to the recovery of oil prices and the reduced effects of the COVID-19 pandemic, coupled with increased mobile camp activity. During the second quarter, build rooms in our Canadian lodges totaled 771,000, which was up 7% year-over-year from 723,000 in the second quarter of 2021 due to the factors just discussed. Our daily room rate for the Canadian segment in U.S. dollars was $103, a 7% year-over-year increase largely due to client mix. Turning to Australia, during the second quarter, we recorded revenues of $67.8 million, up from $64 million in the second quarter of 2021. Adjusted EBITDA was $15.5 million, in line with the same period of 2021. Results for the second quarter of 2022 reflect the impact of a weakened Australian dollar relative to the U.S. dollar, which decreased revenues and adjusted EBITDA by $5.3 million and $1.2 million, respectively. On a constant currency basis, the increased results were driven by both increased build rooms and daily room rates in our villages. Australian build rooms in the quarter were 505,000, up 8% from 466,000 in the second quarter of 2021 due, again, to some recovery of customer maintenance activity in our villages, resulting from a more muted impact of the China-Australia trade dispute. While the average daily rate for our Australian villages in U.S. dollars was $77 in the second quarter, down from $81 in the second quarter of 2021, the decrease was entirely driven by the weakening Australian dollar. Moving to the U.S., revenues for the second quarter were $8.1 million, as compared to $6.9 million in the second quarter of 2021. The U.S. segment adjusted EBITDA was $221,000 in the second quarter, down slightly from $290,000 during the same period last year. The decrease in adjusted EBITDA was primarily due to the fourth quarter 2021 sale of our West Permian lodge, largely offset by increased drilling activity, which positively impacted our wellsite services. On a consolidated basis, capital expenditures for the second quarter of 2022 were $5.1 million, compared to $3.2 million invested during the same period of 2021. Capital expenditures in both periods were predominantly related to maintenance spending on our lodges and villages. Our total debt outstanding at June 30, 2022, was $154.6 million, a $23.3 million decrease since March 31. The decrease consisted of $18 million in debt payments from cash flow generated by the business and favorable foreign currency translation of $5.3 million. As a result, our net leverage ratio for the quarter decreased to 1.18 times as of June 30 from 1.4 times as of March 31, 2022. As of June 30, we had total liquidity of approximately $95.3 million, which consisted of $90.5 million available under our revolving credit facilities and $4.8 million in cash on hand. Bradley will now discuss our updated guidance for the full year 2022.

Thank you, Carolyn. I want to discuss our updated full year 2022 guidance on a consolidated basis, including the underlying outlook for each of the regions, as well as the underlying assumptions related to our guidance. Based on our second quarter results and improving outlook for the remainder of the year, we’re raising our full year revenue and EBITDA guidance to $660 million to $675 million of revenues and $95 million to $105 million of adjusted EBITDA. As previously announced, we are raising our full year capital expenditure guidance to $24 million to $29 million, with the increase related to capital spending tied to the Wapasu Creek lodge contract renewal. Based on the increased EBITDA and CapEx guidance that I just outlined, expected interest expense of $10 million for full year 2022, minimal expected cash taxes, and our expected free cash flow forecast is in the range of $56 million to $71 million, modestly down from the previous free cash flow guidance of $60 million to $72 million. This free cash flow range assumes the first half of 2022’s working capital increases unwind in the second half of the year, consistent with prior working capital trends. The increase for our revenue and EBITDA guidance is primarily driven by recent customer conversations and contract awards and renewals related to maintenance and turnaround activity across our Canadian lodges and Australian villages. We are seeing our customers increase their maintenance plans for the year due to sustained commodity prices at very healthy levels. The single largest uncertainty for our 2022 guidance continues to be the timing and duration of our Canadian mobile camp activity related to pipeline projects in British Columbia. Regarding this matter, we have not changed our assumption related to the demobilization of the three Canadian mobile camps in the fourth quarter of 2022. Should these projects extend into 2023, we can see our 2022 adjusted EBITDA improve anywhere from $3 million to $10 million. I will now provide regional outlooks and corresponding underlying assumptions by region. In Canada, as we look at the remainder of 2022, we’re encouraged by our recent customer conversations surrounding increased demand for maintenance and turnaround related rooms for the summer and early fall. We continue to expect an increase in Canadian oil sands lodge build rooms from 2021 levels in the third quarter of this year. There is a risk that customer labor availability in the region could dampen our customer’s ability to execute these larger turnarounds and we have baked in a portion of that risk into our guidance. As I mentioned earlier, we are still forecasting the majority of our Canadian mobile camp activities to wind down by the end of the year and we’ve included the related demobilization of costs in our full year and fourth quarter guidance. Turning to Australia, we’ve also seen encouraging signs of improvement in customer demand, albeit not at the same levels as our Canadian business. Although, met coal prices remain at very healthy levels, and at historically high volatility in coal pricing, anemia weather and the lingering China-Australian trade dispute continue to impact customer spending. Iron ore prices remain at constructive levels and customer activity in Western Australia remains strong, while we are seeing gradual progress as it pertains to COVID-19 related labor issues that we experienced last year and into this year; it is a slow process and we expect labor shortages to remain a factor in our integrated services business for the remainder of the year. For our U.S. business, the oil and gas price environment is strong. We expect to continue to benefit from increased drilling and completion activity in the U.S. We expect our wellsite and offshore businesses to continue to improve throughout the rest of the year. I’ll conclude our prepared comments by underscoring the key elements of our strategy as we navigate this extraordinary market climate. We will continue to prioritize the well-being of our guests, employees, and communities, manage our cost structure in accordance with the occupancy outlook across each of the three regions. We will continue to enhance our best-in-class hospitality offerings and we will allocate capital prudently to maximize free cash flow, while we continue to reduce debt and return capital to shareholders through our share repurchase program. Lastly, we will seek opportunities to further our revenue diversification and free cash flow generation as organic and M&A opportunities. With that, we’re happy to take your questions.

Thank you. Please note the instructions. Thank you. And our first question is from the line of Stephen Gengaro with Stifel. Please proceed with your questions.

Thanks and good morning.

Good morning, Stephen.

So a couple of things, one of the things I was struggling with is sort of squaring what I think about the third quarter should be a fairly solid quarter relative to where the second quarter flushed out and the full year guidance. And I think it’s probably related to the mobile camp demobilization. Can you talk a little bit about what the severity of that you’ve baked into your guidance?

Guidance in terms of the demobilization costs assumes $10 million of demobilization costs in the fourth quarter this year.

And Bradley, does that impact the mobile camp revenue line as well? So it’s both costs and revenue coming down?

Yes. When we demobilize, we lose the risk revenues? Yes.

Okay, great. Now, that's very helpful. What I was trying to get to is the stability of your Canadian operations going forward. The recent 12-year contract you announced a couple of weeks ago emphasizes that. Can you discuss the Canadian lodge and village aspect and the visibility you have for a significant portion of our business moving forward? This is something we get asked about frequently, and it appears to be more stable than people think considering the reserve life for the oil sands.

Right. So the cost to the Wapasu contract locks up that asset that was rolling from a 10-year contract now into a 12-year contract. So that’s got some good visibility to it with take-or-pay minimums. The McClelland Lodge is one that has been going year-to-year. So we’re working with the client on a longer-term option there. We have the core region. We’ve got two primary customers Syncrude and Suncor. We have an exclusivity agreement with Suncor, which runs through 2027. Then, with Syncrude, we’re currently working on an extension of that five-year contract that’s ending this year. We’re working with the clients to negotiate a longer-term solution there. If we get all of that done, then really the variability will be customers using rooms above their take-or-pay minimums and turnaround work during the second and third quarters. But it will be very firm. Now that the contract camp work, we have nothing from the clients to indicate an extension into 2023, but I think that’s more likely than not. So, there’s an upward bias to move those demobilization costs into 2023 as it’s been well documented. Those pipeline projects are running along.

Thank you. One last question from me regarding the new contract in South Australia. Is that associated with the Action business you acquired, and is it a five-year contract? When can we expect to see the revenue impact from that award?

In the third quarter, and yes, it is the Action business.

The next question is from the line of Steve Ferezani with Sidoti & Company. Please proceed with your question.

Good morning, everyone. Appreciate all the color on the call. Just want to ask about what you’re seeing both on labor availability both in Canada and in Australia. In terms of Canada, certainly, it seems like we’re heading into a much healthier turnaround season this year, CapEx indicated it, yet the concern was whether there were, and you talked a little bit about this, the labor availability to get the workers up there. How would you characterize turnaround activity this season versus pre-COVID levels and do you think it’s still being impacted by labor availability?

Thank you for the question. Definitely, labor availability continues to be an issue. We had one customer in particular that was not able to source labor. But others are having success. Some of that appears to be labor rates. So others are really raising labor rates and they’re getting labor and others are trying to hold fast, and it’s proving to be more difficult. For us, we continue to struggle with getting labor. We’re short-staffed both in Canada and Australia. The team is working very hard to maintain service levels when we don’t have a full complement of employees.

How is the situation in Australia regarding margin pressure this year, particularly in relation to filling positions with the current visa restrictions? Have conditions improved enough for margins to return to previous levels, and how does this impact your ability to increase staffing for the new contract?

Well, it’s been a challenge on the later question. But we should be able to mobilize and staff that up. I would say on our integrated services business, which is for that contract, we’ve had net additions to employment for the last five months in a row. We still have a lot of turnover. But we’re starting to make headway. Kudos to our HR and ops teams down there for achieving that, and we’re still fighting that battle. It’s moving in the right direction. We’re starting to get some foreign workers on visas to be able to come into the country, so we’re making progress. It’s just not resolved.

Yeah. Yeah.

So margins are moving in the right direction in Australia and in the integrated services business, but they’re not to where we want them ultimately. Margins in our villages in Australia have been relatively consistent. We’ve probably lost 100 basis points from what we were hoping or maybe 150 basis points on margins year-to-date, but I think given the environment that’s a pretty good outcome.

Regarding capital allocation, you have some additional capital expenditures now due to the long-term contract, but they remain quite low. How are you considering the limited use of share repurchase and other opportunities?

Sure. So we are set to dry powder on the share repurchase program for potentially using or being able to execute on the right of first refusal to buy the shares from our shareholder. That didn’t occur in the quarter, so we didn’t get as much done in the second quarter as we had hoped, and we’ll have to step it up in the third quarter, while still remaining ready to execute on the ROFR should it come available. We have every expectation that we’ll continue to execute on the program, and we just run into some bumps along the way year-to-date, but we’ll get it back up in the third quarter.

Fair enough. Thanks so much for the commentary. Thanks.

Thank you. The next question is a follow-up from the line of Stephen Gengaro with Stifel. Please proceed with your questions.

Thanks. I have two more if you don’t mind. The first is regarding your leverage ratio, which has dropped significantly over the past year. At what point do you decide to stop buying back shares? Also, what other options might you consider besides continuing with the share repurchase program?

We’ve reached a point with our debt where if we keep paying it down, it’s due to a lack of other options for capital allocation. We’ll continue this approach, reserving our available capital for the right of first refusal as our priority use beyond debt repayment. We're comfortable with increasing leverage for capital returns, so if a suitable opportunity arises, we’ll be ready to act. Currently, our discretionary capital expenditures are focused on supporting contracts, such as the Wapasu contract which requires some investment for a new project in South Australia. If we continue to secure more work in our integrated services business there, these contracts usually need a modest amount of capital. We are also refurbishing some of our Bowen Basin rooms in Australia. At Coppabella, we've been almost at full capacity, leading us to rotate rooms out of service while bringing previously mothballed rooms back in use. We anticipate spending around $5 million to $6 million on refreshing these rooms and getting them operational again. This initiative is partly driven by demand and partly because we've been careful with capital over the past three years to manage our debt, which necessitates further investment in our facilities. I expect our capital spending to be around $25 million moving forward, with a more robust refurbishment program established.

Great. Thank you. And then just one final one, obviously with inflationary pressures out there, are you seeing much on the pricing side, and you’ve clearly done a good job offsetting inflation and delivering margin performance. Can you talk a little bit about those dynamics?

We have some contractual protection in our multiyear contracts around inflation. This is obviously a very extreme situation to which we work with the client. First, we work on scope. If there are items that are concrete, above scope, we bring those back in to reduce our costs. We work with the client on scope and see if there are ways that we can adjust the scope to reduce our costs and not have to pass that through to them. Generally speaking, there’s an upward bias on pricing in both of our major regions.

Great. Thank you.

Thank you. At this time, we’ve reached the end of the question-and-answer session. I’ll turn the call back to Bradley Dodson for closing remarks.

Thank you, Rob. Thank you everyone for joining the call. Thank you, Stephen and Steve for the questions, and we appreciate your interest in Civeo. We look forward to speaking with you in the third quarter earnings call in about three months. I hope everyone has a good weekend. Take care.

Thank you. This will conclude today’s conference. You may disconnect your lines at this time. Thank you for your participation.