You should read the following discussion and analysis together with our
consolidated financial statements and the notes to those statements included
elsewhere in this quarterly report on Form 10-Q.
Overview and Macroeconomic Environment
We provide hospitality services to the natural resources industry in Canada,
Australia and the U.S. Demand for our services can be attributed to two phases
of our customers' projects: (1) the development or construction phase; and (2)
the operations or production phase. The majority of the demand for our services
in our Canadian lodges and Australian villages is driven by on-going operations
and maintenance of oil sands and mining facilities. In general, industry
operating and maintenance spending programs are based on the outlook for
commodity prices, economic growth, global commodity supply/demand dynamics and
estimates of resource production. As a result, demand for our hospitality
services is largely sensitive to expected commodity prices, principally related
to crude oil, metallurgical (met) coal and iron ore. Other factors that can
affect our business and financial results include the general global economic
environment and regulatory changes in Canada, Australia, the U.S. and other
markets, including governmental measures introduced to help slow the spread or
mitigate the impact of COVID-19.
Our business is predominantly located in northern Alberta, Canada, British
Columbia, Canada and Queensland, Australia. We derive most of our business from
natural resource companies who are developing and producing oil sands and met
coal resources and, to a lesser extent, other hydrocarbon and mineral resources.
Approximately 75% of our revenue is generated by our lodges and villages. Where
traditional accommodations and infrastructure are insufficient, inaccessible or
cost ineffective, our lodge and village facilities provide comprehensive
hospitality services similar to those found in an urban hotel. We typically
contract our facilities to our customers on a fee-per-day basis that covers
lodging and meals and is based on the duration of customer needs, which can
range from several weeks to several years. The economic disruption caused by the
decline in the price of and demand for oil has impacted the activity in the
Canadian oil sands, and we have seen a decrease in occupancy by our oil sands
customers.
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As a result of our geographic concentration in this area, a reduction in the
occupancy at our Canadian oil sands lodges for any period of time would
materially impact our business.
Generally, our core oil sands and Australian mining customers are making
multi-billion dollar investments to develop their prospects, which have
estimated reserve lives ranging from ten years to in excess of 30 years.
Consequently, these investments are dependent on those customers' long-term
views of commodity demand and prices.
The spread of COVID-19 and the response thereto during the first quarter 2020
negatively impacted the global economy. The resulting unprecedented decline in
oil demand, coupled with disagreements between Saudi Arabia and Russia about
production limits, resulted in a collapse of global oil prices in March 2020.
Global oil prices have dropped to historically low levels due to severely
reduced global oil demand, high global crude inventory levels, uncertainty
around timing and slope of worldwide economic recovery after COVID-19 related
economic shut-downs and effectiveness of production cuts by major oil producing
countries, such as Saudi Arabia, Russia and the U.S. While in mid-April 2020,
OPEC+ (the combination of historical OPEC members and other significant oil
producers, such as Russia) announced potential production cuts of up to 10
million barrels per day, these cuts are not expected to be sufficient to avoid a
historic oil glut in the second and third quarters of 2020. As a result, oil
prices are expected to remain at low levels for the remainder of 2020.
Due to lower oil prices and the economic disruption caused by COVID-19, we have
implemented certain cost containment initiatives, including salary and total
compensation reductions of between 10% to 20% for the Board, executive
leadership team and other senior management, headcount reduction in North
America of 25% in March and April 2020, and cutting expected 2020 capital
spending by approximately 25%.
We continue to closely monitor the COVID-19 situation and have taken measures to
help ensure the health and well-being of our employees, guests and contractors,
including screening for individuals that enter our facilities, social distancing
practices, enhanced cleaning and deep sanitization, the suspension of
nonessential employee travel and work-from-home policies, where applicable.
Alberta, Canada. In Canada, Western Canadian Select (WCS) crude is the benchmark
price for our oil sands customers. Pricing for WCS is driven by several factors,
including the underlying price for West Texas Intermediate (WTI) crude, the
availability of transportation infrastructure (consisting of pipelines and crude
by railcar) and recent actions by the Alberta provincial government to limit oil
production from the province. Historically, WCS has traded at a discount to WTI,
creating a "WCS Differential," due to transportation costs and limited capacity
to move Canadian heavy oil production to refineries, primarily along the U.S.
Gulf Coast. The WCS Differential has varied depending on the extent of
transportation capacity availability.
Notwithstanding the current low WTI prices, recent regulatory approvals of
several major pipeline projects, including Kinder Morgan's Trans Mountain
Pipeline and the Keystone XL Pipeline (KXL), have the potential to both drive
incremental demand for mobile accommodations assets and to improve take-away
capacity for Canadian oil sands producers over the longer term. However, these
projects have been delayed due to the lack of agreement between the Canadian
federal government, which supports the pipeline projects, and the British
Columbia provincial government. The Canadian federal government recently
acquired Kinder Morgan's Trans Mountain Pipeline, approved the expansion of the
project and is currently working through the construction timeline. It was
recently announced that the Alberta provincial government will financially
support the construction of the KXL pipeline and construction of this pipeline
expansion could begin later in 2020.
While WCS prices in the first quarter of 2020 averaged $27.92 per barrel, by
March 31, 2020 the WCS price had decreased to $5.08 per barrel. The WCS
Differential decreased from $22.49 per barrel at the end of the fourth quarter
of 2019 to $15.40 per barrel at the end of the first quarter of 2020. As of
May 1, 2020, the WTI price was $19.78 and the WCS price was $13.99, resulting in
a WCS Differential of $5.79.
The depressed price levels of both WTI and WCS are expected to materially impact
exploration, development, maintenance and production spending and activity by
Canadian operators and, therefore, demand for our hospitality services. For
example, on March 23, 2020, the Fort Hills Energy LP project announced a
reduction of activity from two trains to one train. Many of the publicly traded
oil and gas companies have announced significant reductions in their spending
forecasts for 2020, reductions in the range of 30-40%. Continued uncertainty,
including about the impact of COVID-19, and commodity price volatility and
regulatory complications are expected to cause our Canadian oil sands and
pipeline customers to delay expansionary and maintenance spending and defer
additional investments in their oil sands assets. Additionally, if oil prices do
not improve, the resulting impact could continue to negatively affect the value
of our long-lived assets.
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British Columbia, Canada. Our Sitka Lodge supports the British Columbia
liquefied natural gas (LNG) market and related pipeline projects. From a
macroeconomic standpoint, global LNG imports continued to significantly increase
in 2019, rising by 40 million tonnes and reinforcing the need for the global LNG
industry to expand access to natural gas. Evolving government energy policies
around the world have amplified support for cleaner energy supply, creating more
opportunities for natural gas and LNG. Accordingly, the current view is
additional investment in LNG supply will be needed to meet the expected
long-term LNG demand growth.
While Western Canada does not currently have any operational LNG export
facilities, LNG Canada (LNGC), a joint venture between Shell Canada Energy, an
affiliate of Royal Dutch Shell plc (40 percent), and affiliates of PETRONAS,
through its wholly-owned entity, North Montney LNG Limited Partnership (25
percent), PetroChina (15 percent), Mitsubishi Corporation (15 percent) and Korea
Gas Corporation (5 percent), is currently constructing a liquefaction and export
facility in Kitimat, British Columbia (Kitimat LNG Facility). As a result,
British Columbia LNG activity and related pipeline projects have become a
material driver of activity for our Sitka Lodge, as well as for our mobile fleet
assets, which are contracted to serve several portions of the related pipeline
construction activity. The actual timing of when revenue is realized from the
CGL pipeline and Sitka Lodge contracts could be impacted by any delays in the
construction of the Kitimat LNG Facility or the pipeline, including recent
blockades that aim to delay construction. In late March 2020, LNGC announced
that steps being taken to reduce the spread of COVID-19, including reduction of
the workforce at the project site to essential personnel only. This resulted in
a reduction in occupancy at our Sitka Lodge, which is expected to continue at
least through the end of the second quarter of 2020.
Australia. In Australia, approximately 80% of our rooms are located in the Bowen
Basin and primarily serve met coal mines in that region. Met coal pricing and
production growth in the Bowen Basin region is predominantly influenced by the
levels of global steel production, which decreased by 1.4% during the three
months ended March 31, 2020 compared to the three months ended March 31, 2019.
As of May 1, 2020, met coal spot prices were $110 per metric tonne. Long-term
demand for steel is expected to be driven by increased steel consumption per
capita in developing economies, such as China and India, whose current
consumption per capita is a fraction of developed countries. The outlook for
steel consumption is currently uncertain from both a supply and demand
perspective with some large iron ore and met coal producing jurisdictions
curtailing or ceasing production during the COVID-19 pandemic, affecting supply.
The impact on the demand for steel with the closure or curtailment of
manufacturing in economies affected by COVID-19, which will only return to
normal levels of consumption once jurisdictions lift quarantine requirements and
manufacturing facilities are reopened, is also uncertain. To date, we have not
seen a decline in occupancy at our Australian villages resulting from COVID-19.
Activity in Western Australia is driven primarily by iron ore production, which
is a key steel-making ingredient. As of May 1, 2020, iron ore spot prices were
$82.56 per metric tonne.
On July 1, 2019, we acquired Action Industrial Catering (Action), a provider of
catering and managed services to the mining industry in Western Australia.
Accordingly, we also have contracts in place for customer-owned villages in
Western Australia which service primarily iron ore mines in addition to gold,
lithium and nickel mines. We believe prices are currently at a level that may
contribute to increased activity over the long term if our customers view these
price levels as sustainable.
Met coal and iron ore prices to date have remained at levels that should support
the current levels of occupancy in our Australia villages and the customer
locations that we manage under Action. Accordingly, we plan to continue focusing
on enhancing the quality of our operations, maintaining financial discipline,
proactively managing our business as market conditions continue to evolve and
integrating Action into our business.
U.S. Our U.S. business supports oil shale drilling and completion activity and
is primarily tied to WTI oil prices in the U.S. shale formations in the Permian
Basin, the Mid-Continent, the Bakken and the Rockies. The U.S. oil rig count and
associated completion activity has been negatively impacted in the first quarter
of 2020 due to the global oil price decline discussed above. Currently, only 624
oil rigs were active at the end of the first quarter of 2020. The Permian Basin
remains the most active U.S. unconventional play, representing 61% of the oil
rigs in the U.S. market at the end of the first quarter of 2020. As of May 1,
2020, there were 325 active oil rigs in the U.S. (as measured by
Bakerhughes.com). With the recent reduction in oil prices and resulting
reduction in spending by exploration and production companies, we will be
exiting the Bakken and Rockies markets for our mobile well site units. Those
assets will either be sold or transported to our Texas and Oklahoma district
locations. U.S. oil shale drilling and completion activity will continue to be
dependent on sustained higher WTI oil prices, pipeline capacity and sufficient
capital to support E&P drilling and completion plans.
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Recent Commodity Prices. Recent WTI crude, WCS crude and met coal pricing trends
are as follows:
Average Price (1)
Hard
WTI WCS Coking Coal
Quarter Crude Crude (Met Coal)
ended (per bbl) (per bbl) (per tonne)
Second Quarter through 5/1/2020 $ 16.67 $ 7.48 $ 133.42
3/31/2020 45.38 27.92 156.17
12/30/2019 56.85 37.94 141.39
9/30/2019 56.40 43.88 160.25
6/30/2019 59.89 47.39 204.78
3/31/2019 54.87 44.49 203.30
12/31/2018 59.32 25.66 223.02
9/30/2018 69.61 41.58 188.46
6/30/2018 67.97 49.93 189.41
3/31/2018 62.89 37.09 228.82
12/31/2017 55.28 38.65 202.33
9/30/2017 48.16 37.72 187.89
6/30/2017 48.11 38.20 193.27
3/31/2017 51.70 38.09 171.66
(1) Source: WTI crude prices are from U.S. Energy Information Administration
(EIA), WCS crude prices are from Bloomberg and hard coking coal prices are
from IHS Markit.
Foreign Currency Exchange Rates. Exchange rates between the U.S. dollar and each
of the Canadian dollar and the Australian dollar influence our U.S. dollar
reported financial results. Our business has historically derived the vast
majority of its revenues and operating income in Canada and Australia. These
revenues and profits/losses are translated into U.S. dollars for U.S. GAAP
financial reporting purposes. The following tables summarize the fluctuations in
the exchange rates between the U.S. dollar and each of the Canadian dollar and
the Australian dollar:
Three Months Ended
March 31,
2020 2019 Change Percentage
Average Canadian dollar to U.S. dollar $0.74 $0.75 (0.01) (1.0)%
Average Australian dollar to U.S. dollar $0.66 $0.71 (0.05) (7.6)%
As of
March 31, 2020 December 31, 2019 Change Percentage
Canadian dollar to U.S. dollar $0.70 $0.77 (0.07) (9.1)%
Australian dollar to U.S. dollar $0.61 $0.70 (0.09) (12.9)%
These fluctuations of the Canadian and Australian dollars have had and will
continue to have an impact on the translation of earnings generated from our
Canadian and Australian subsidiaries and, therefore, our financial results.
Capital Expenditures. We continue to monitor the COVID-19 global pandemic and
the responses thereto, the global economy, the price of and demand for crude
oil, met coal and iron ore and the resultant impact on the capital spending
plans of our customers in order to plan our business activities. In April 2020,
we revised downward our capital expenditure plans and we currently expect that
our 2020 capital expenditures, exclusive of any expansionary spending, will
total approximately $15 million, compared to 2019 capital expenditures of $29.8
million. We may adjust our capital expenditure plans in the future as we
continue to monitor the impact of COVID-19. See "Liquidity and Capital
Resources" below for further discussion of 2020 capital expenditures.
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Results of Operations
Unless otherwise indicated, discussion of results for the three months ended
March 31, 2020, is based on a comparison to the corresponding period of 2019.
Results of Operations - Three Months Ended March 31, 2020 Compared to Three
Months Ended March 31, 2019
Three Months Ended
March 31,
2020 2019 Change
($ in thousands)
Revenues
Canada $ 79,348 $ 66,770 $ 12,578
Australia 49,113 28,421 20,692
U.S. and other 10,331 13,359 (3,028 )
Total revenues 138,792 108,550 30,242
Costs and expenses
Cost of sales and services
Canada 64,272 54,647 9,625
Australia 29,553 14,999 14,554
U.S. and other 9,488 9,984 (496 )
Total cost of sales and services 103,313 79,630 23,683
Selling, general and administrative
expenses 13,937 16,096 (2,159 )
Depreciation and amortization expense 25,502 30,782 (5,280 )
Impairment expense 144,120 - 144,120
Other operating expense (income) 989 (65 ) 1,054
Total costs and expenses 287,861 126,443 161,418
Operating loss (149,069 ) (17,893 ) (131,176 )
Interest expense and income, net (5,579 ) (6,608 ) 1,029
Other income 25 2,978 (2,953 )
Loss before income taxes (154,623 ) (21,523 ) (133,100 )
Income tax benefit 8,811 4,484 4,327
Net loss (145,812 ) (17,039 ) (128,773 )
Less: Net income attributable to
noncontrolling interest 258 - 258
Net loss attributable to Civeo
Corporation (146,070 ) (17,039 ) (129,031 )
Dividends attributable to preferred
shares 468 459 9
Net loss attributable to Civeo common
shareholders $ (146,538 ) $ (17,498 ) $ (129,040 )
We reported net loss attributable to Civeo for the quarter ended March 31, 2020
of $146.5 million, or $0.87 per diluted share. As further discussed below, net
loss included (i) a $93.6 million pre-tax loss ($93.6 million after-tax, or
$0.56 per diluted share) resulting from the impairment of goodwill in our
Canadian reporting unit included in Impairment expense, (ii) a $38.1 million
pre-tax loss ($38.1 million after-tax, or $0.23 per diluted share) resulting
from the impairment of long-lived assets in our Canadian reporting unit included
in Impairment expense and (iii) a $12.4 million pre-tax loss ($12.4 million
after-tax, or $0.07 per diluted share) resulting from the impairment of
long-lived assets in our U.S. reporting unit included in Impairment expense.
We reported net loss attributable to Civeo for the quarter ended March 31, 2019
of $17.5 million, or $0.11 per diluted share.
Revenues. Consolidated revenues increased $30.2 million, or 28%, in the first
quarter of 2020 compared to the first quarter of 2019. This increase was
primarily due to higher revenues in Australia due to the Action acquisition
completed on July 1, 2019 and higher activity levels at our Bowen Basin
villages. Increased revenues in Canada were due to higher room demand at both
our Sitka Lodge related to an LNG project and at our core oil sands lodges. In
addition, revenue in Canada was favorable impacted by increased food services
and other services revenue and increased mobile facility activity. These items
were partially offset by lower activity levels in certain markets in the U.S.
Additionally, weaker Canadian and Australian dollars relative to the U.S. dollar
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in the first quarter of 2020 compared to the first quarter of 2019 contributed
to decreased revenues. Please see the discussion of segment results of
operations below for further information.
Cost of Sales and Services. Our consolidated cost of sales and services
increased $23.7 million, or 30%, in the first quarter of 2020 compared to the
first quarter of 2019, primarily due to the Action acquisition and higher
activity levels at our Bowen Basin villages in Australia. In addition, increased
cost of sales and services in Canada was driven by greater activity at both our
Sitka Lodge and our core oil sands lodges, increased food services activity and
increased mobile facility activity. This was partially offset by lower activity
levels in certain U.S. markets. Additionally, weaker Canadian and Australian
dollars relative to the U.S. dollar in the first quarter of 2020 compared to the
first quarter of 2019 contributed to decreased cost of sales and services. See
the discussion of segment results of operations below for further information.
Selling, General and Administrative Expenses. SG&A expense decreased $2.2
million, or 13%, in the first quarter of 2020 compared to the first quarter of
2019. This decrease was primarily due to lower share-based compensation expense,
partially offset by higher professional fees. The decrease in share-based
compensation was due to a reduction in the amount of phantom share awards
outstanding and the reduction in our stock price during the first quarter of
2020 compared to the first quarter of 2019.
Depreciation and Amortization Expense. Depreciation and amortization expense
decreased $5.3 million, or 17%, in the first quarter of 2020 compared to the
first quarter of 2019. The decrease was primarily due to (1) certain assets and
intangibles becoming fully depreciated during 2019, (2) the extension of the
remaining life of certain long-lived accommodation assets in Canada during the
fourth quarter of 2019 and (3) weaker Canadian and Australian dollars relative
to the U.S. dollar in the first quarter of 2020 compared to the first quarter of
2019. These items were partially offset by additional depreciation and
intangible amortization expense related to our acquisition in 2019.
Impairment Expense. Impairment expense of $144.1 million in the first quarter of
2020 included the following items:
•Pre-tax impairment expense of $93.6 million related to the impairment of
goodwill in our Canadian reporting unit.
•Pre-tax impairment expense of $38.1 million associated with long-lived assets
in our Canadian reporting unit.
•Pre-tax impairment expense of $12.4 million associated with long-lived assets
in our U.S. reporting unit.
Please see Note 6 - Impairment Charges to the notes to the unaudited
consolidated financial statements included in Item 1 of this quarterly report
for further discussion.
Operating Income (Loss). Consolidated operating loss increased $131.2 million,
or 733%, in the first quarter of 2020 compared to the first quarter of 2019,
primarily due to impairments of goodwill and long-lived assets, partially offset
by increased activity levels in Canada and Australia as well as lower SG&A and
depreciation and amortization expense.
Interest Expense and Income, net. Net interest expense decreased by $1.0
million, or 16%, in the first quarter of 2020 compared to the first quarter of
2019, primarily related to lower average debt levels and lower interest rates on
term loan and revolving credit facility borrowings during 2020 compared to 2019.
Other Income. Consolidated other income decreased $3.0 million, or 99%, in the
first quarter of 2020 compared to the first quarter of 2019, primarily due to
$1.5 million of other income related to proceeds received in the first quarter
of 2019 from an insurance claim associated with to the closure of a lodge in
2018 for maintenance-related operational issues and a higher gain on sale of
assets in the first quarter of 2019 compared to the first quarter of 2020.
Income Tax Benefit. Our income tax benefit for the three months ended March 31,
2020 totaled $8.8 million, or 5.7% of pretax loss, compared to a benefit of $4.5
million, or 20.8% of pretax loss, for the three months ended March 31, 2019. Our
effective tax rate for the three months ended March 31, 2020 was impacted by a
deferred tax benefit of $12.4 million offset by an increase of $3.4 million in
the valuation allowance in Canada. For the three months ended March 31, 2020,
Canada and the U.S. were considered loss jurisdictions for tax accounting
purposes and were removed from the annual effective tax rate computation for
purposes of computing the interim tax provision. For the three months ended
March 31, 2019, Australia was considered a loss jurisdiction for tax accounting
purposes and was removed from the annual effective tax rate computation for
purposes of computing the interim tax provision.
Other Comprehensive Income (Loss). Other comprehensive income decreased $53.9
million in the first quarter of 2020 compared to the first quarter of 2019,
primarily as a result of foreign currency translation adjustments due to changes
in the
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Canadian and Australian dollar exchange rates compared to the U.S. dollar. The
Canadian dollar exchange rate compared to the U.S. dollar decreased 9% in the
first quarter of 2020 compared to a 2% increase in the first quarter of 2019.
The Australian dollar exchange rate compared to the U.S. dollar decreased 13% in
the first quarter of 2020 compared to a 1% increase in the first quarter of
2019.
Segment Results of Operations - Canadian Segment
Three Months Ended
March 31,
2020 2019 Change
Revenues ($ in thousands)
Accommodation revenue (1) $ 66,066 $ 57,652 $ 8,414
Mobile facility rental revenue (2) 2,508 781 1,727
Food service and other services revenue (3) 10,774 8,337 2,437
Total revenues
$ 79,348 $ 66,770 $ 12,578
Cost of sales and services ($ in thousands)
Accommodation cost $ 48,055 $ 42,217 $ 5,838
Mobile facility rental cost 3,257 649 2,608
Food service and other services cost 10,015 8,236 1,779
Indirect other costs
2,945 3,545 (600 )
Total cost of sales and services $ 64,272 $ 54,647 $ 9,625
Gross margin as a % of revenues 19.0 % 18.2 % 0.8 %
Average daily rate for lodges (4) $ 92 $ 92 $ -
Total billed rooms for lodges (5) 708,323 625,992 82,331
Average Canadian dollar to U.S. dollar $ 0.74 $ 0.75 $ (0.01 )
(1) Includes revenues related to lodge rooms and hospitality services for owned
rooms for the periods presented.
(2) Includes revenues related to mobile camps for the periods presented.
(3) Includes revenues related to food services, laundry and water and wastewater
treatment services for the periods presented.
(4) Average daily rate is based on billed rooms and accommodation revenue.
(5) Billed rooms represent total billed days for the periods presented.
Our Canadian segment reported revenues in the first quarter of 2020 that were
$12.6 million, or 19%, higher than the first quarter of 2019. The weakening of
the average exchange rates for the Canadian dollar relative to the U.S. dollar
by 1% in the first quarter of 2020 compared to the first quarter of 2019
resulted in a $0.8 million period-over-period decrease in revenues. Excluding
the impact of the weaker Canadian exchange rates, the segment experienced a 20%
increase in revenues. This increase was driven by higher demand at both our
Sitka Lodge related to an LNG project and at our core oil sands lodges related
to large client projects. Additionally, revenue was favorably impacted by
increased food services activity related to an LNG project and increased mobile
facility activity from a pipeline project.
Our Canadian segment cost of sales and services increased $9.6 million, or 18%,
in the first quarter of 2020 compared to the first quarter of 2019. The
weakening of the average exchange rates for the Canadian dollar relative to the
U.S. dollar by 1% in the first quarter of 2020 compared to the first quarter of
2019 resulted in a $0.7 million period-over-period decrease in cost of sales and
services. Excluding the impact of the weaker Canadian exchange rates, the
increased cost of sales and services was driven by greater activity at our Sitka
Lodge and our core oil sands lodges, increased food services activity and
increased mobile facility activity, partially offset by reduced indirect other
costs from a continued focus on cost containment and operational efficiencies.
Our Canadian segment gross margin as a percentage of revenues increased from 18%
in the first quarter of 2019 to 19% in the first quarter of 2020. This was
primarily driven by increased operating efficiencies due to higher occupancy
percentages.
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Segment Results of Operations - Australian Segment
Three Months Ended
March 31,
2020 2019 Change
Revenues ($ in thousands)
Accommodation revenue (1) $ 32,585 $ 28,421 $ 4,164
Food service and other services revenue (2) 16,528 $ - $ 16,528
Total revenues
$ 49,113 $ 28,421 $ 20,692
Cost of sales ($ in thousands)
Accommodation cost $ 14,995 $ 14,397 $ 598
Food service and other services cost 13,707 - 13,707
Indirect other cost 851 602 249
Total cost of sales and services $ 29,553 $ 14,999 $ 14,554
Gross margin as a % of revenues 39.8 % 47.2 % (7.4 )%
Average daily rate for villages (3) $ 69 $ 74 $ (5 )
Total billed rooms for villages (4) 471,840 382,581 89,259
Australian dollar to U.S. dollar $ 0.66 $ 0.71 $ (0.05 )
(1) Includes revenues related to village rooms and hospitality services for owned
rooms for the periods presented.
(2) Includes revenues related to food services and other services, including
facilities management for the periods presented.
(3) Average daily rate is based on billed rooms and accommodation revenue.
(4) Billed rooms represent total billed days for the periods presented.
Our Australian segment reported revenues in the first quarter of 2020 that were
$20.7 million, or 73%, higher than the first quarter of 2019. Action contributed
$16.5 million in revenues in the first quarter of 2020. The weakening of the
average exchange rates for Australian dollars relative to the U.S. dollar by 8%
in the first quarter of 2020 compared to the first quarter of 2019 resulted in a
$2.7 million period-over-period decrease in revenues and a $6 reduction in the
average daily rate. Excluding the impact of the weaker Australian exchange
rates, the Australian segment experienced an 87% increase in revenues due to the
Action acquisition and increased activity of our Bowen Basin villages, partially
offset by decreased activity at our Western Australia villages.
Our Australian segment cost of sales increased $14.6 million, or 97%, in the
first quarter of 2020 compared to the first quarter of 2019. The increase was
primarily driven by the Action acquisition and increased activity at our Bowen
Basin villages, partially offset by the weakening of the Australian dollar.
Our Australian segment gross margin as a percentage of revenues decreased to 40%
in the first quarter of 2020 from 47% in the first quarter of 2019. This was
primarily driven by Action, which has a service-only business model and
therefore results in lower overall gross margins than the accommodation
business, partially offset by improved margins at our Bowen Basin villages as a
result of increased occupancy.
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Segment Results of Operations - U.S. Segment
Three Months Ended
March 31,
2020 2019 Change
Revenues ($ in thousands) $ 10,331 $ 13,359 $ (3,028 )Cost of sales ($ in thousands) $ 9,488 $ 9,984 $ (496 )
Gross margin as a % of revenues 8.2 % 25.3 % (17.1 )%
Our U.S. segment reported revenues in the first quarter of 2020 that were $3.0
million, or 23%, lower than the first quarter of 2019. This was primarily due
to reduced activity at our West Permian, Killdeer and Acadian Acres lodges,
partially offset by increased activity in our offshore fabrication business as a
project was completed in the first quarter 2020.
Our U.S. segment cost of sales decreased $0.5 million, or 5%, in the first
quarter of 2020 compared to the first quarter of 2019. The decrease was driven
by reduced activity at our West Permian and Killdeer lodges, reduced U.S.
drilling and completion activity in the Bakken, Rockies and the Mid-Continent
markets affecting our wellsite business, partially offset by increased activity
in our offshore fabrication business.
Our U.S. segment gross margin as a percentage of revenues decreased from 25% in
the first quarter of 2019 to 8% in the first quarter of 2020 primarily due to
reduced activity at our lodges, partially offset by increased activity in our
offshore fabrication business.
Liquidity and Capital Resources
Our primary liquidity needs are to fund capital expenditures, which in the past
have included expanding and improving our hospitality services, developing new
lodges and villages, purchasing or leasing land, and for general working capital
needs. In addition, capital has been used to repay debt, fund strategic business
acquisitions and pay dividends. Historically, our primary sources of funds have
been available cash, cash flow from operations, borrowings under our Credit
Agreement and proceeds from equity issuances. In the future, we may seek to
access the debt and equity capital markets from time to time to raise additional
capital, increase liquidity, fund acquisitions, refinance debt or retire
preferred shares.
The following table summarizes our consolidated liquidity position as of
March 31, 2020 and December 31, 2019 (in thousands):
March 31, 2020 December 31, 2019
Lender commitments (1) $ 263,500 $ 263,500
Reductions in availability (2) - (6,591 )
Borrowings against revolving credit capacity (117,013 ) (134,117 )
Outstanding letters of credit (2,495 ) (2,031 )
Unused availability 143,992 120,761
Cash and cash equivalents 5,558 3,331
Total available liquidity $ 149,550 $ 124,092
(1) We also have a A$2.0 million bank guarantee facility. We had bank guarantees
of A$0.7 million under this facility outstanding as of both March 31, 2020
and December 31, 2019, respectively.
(2) As of March 31, 2020, there were no reductions in our availability under the
Credit Agreement. As of December 31, 2019, $6.6 million of our borrowing
capacity under the Credit Agreement could not be utilized in order to
maintain compliance with the maximum leverage ratio financial covenant in the
Credit Agreement.
Cash totaling $20.8 million was provided by operations during the three months
ended March 31, 2020, compared to $6.3 million provided by operations during the
three months ended March 31, 2019. During the three months ended March 31, 2020
and 2019, $3.0 million was provided by working capital and $3.3 million was used
in working capital, respectively. The increase in cash provided by working
capital in 2020 compared to 2019 is largely due to increased accounts payable
balances in Canada.
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Cash was used in investing activities during the three months ended March 31,
2020 in the amount of $2.6 million, compared to cash used in investing
activities during the three months ended March 31, 2019 in the amount of $3.7
million. The decrease in cash used in investing activities was primarily due to
lower capital expenditures in the first three months of 2020, partially offset
by higher proceeds from the disposition of property, plant and equipment in the
first three months of 2019. Capital expenditures totaled $2.7 million and $9.7
million during the three months ended March 31, 2020 and 2019, respectively.
The decrease in capital expenditures from 2019 to 2020 was related primarily to
the expansion of the Sitka Lodge, which occurred during 2019.
We expect our capital expenditures for 2020, exclusive of any expansionary
spending, to be approximately $15 million, which excludes any unannounced and
uncommitted projects, the spending for which is contingent on obtaining customer
contracts. Whether planned expenditures will actually be spent in 2020 depends
on industry conditions, project approvals and schedules, customer room
commitments and project and construction timing. We expect to fund these capital
expenditures with available cash, cash flow from operations and revolving credit
borrowings under our Credit Agreement. The foregoing capital expenditure
forecast does not include any funds for strategic acquisitions, which we could
pursue depending on the economic environment in our industry and the
availability of transactions at prices deemed to be attractive to us. We
continue to monitor the COVID-19 global pandemic and the responses thereto, the
global economy, the prices of and demand for crude oil, met coal and iron ore
and the resultant impact on the capital spending plans of our customers in order
to plan our business activities, and we may adjust our capital expenditure plans
in the future as we continue to monitor the impact of COVID-19.
Net cash of $15.6 million was used in financing activities during the three
months ended March 31, 2020 primarily due to net repayments under our revolving
credit facilities of $6.1 million, repayments of term loan borrowings of $8.1
million and $1.4 million used to settle tax obligations on vested shares under
our share based compensation plans. Net cash of $7.5 million was used in
financing activities during the three months ended March 31, 2019 primarily due
to repayments of term loan borrowings of $8.6 million and $4.3 million used to
settle tax obligations on vested shares under our share-based compensation
plans, partially offset by net borrowings under our revolving credit facilities
of $5.4 million.
The following table summarizes the changes in debt outstanding during the three
months ended March 31, 2020 (in thousands):
Balance at December 31, 2019 $ 359,080
Borrowings under revolving credit facilities 74,287
Repayments of borrowings under revolving credit facilities (80,367 )
Repayments of term loans (8,109 )
Translation (30,016 )
Balance at March 31, 2020 $ 314,875
We believe that cash on hand and cash flow from operations will be sufficient to
meet our anticipated liquidity needs in the coming 12 months. However, it is
likely that we will not remain in compliance with our leverage ratio,
particularly beginning with the period ending December 31, 2020. See "Credit
Agreement" below for further discussion. If our plans or assumptions change,
including as a result of the impact of COVID-19 or the historic decline in the
price of and demand for oil, or are inaccurate, or if we make acquisitions, we
may need to raise additional capital. Acquisitions have been, and our management
believes acquisitions will continue to be, an element of our business strategy.
The timing, size or success of any acquisition effort and the associated
potential capital commitments are unpredictable and uncertain. We may seek to
fund all or part of any such efforts with proceeds from debt and/or equity
issuances or may issue equity directly to the sellers. Our ability to obtain
capital for additional projects to implement our growth strategy over the longer
term will depend on our future operating performance, financial condition and,
more broadly, on the availability of equity and debt financing. Capital
availability will be affected by prevailing conditions in our industry, the
global economy, the global financial markets and other factors, many of which
are beyond our control. In addition, any additional debt service requirements we
take on could be based on higher interest rates and shorter maturities and could
impose a significant burden on our results of operations and financial
condition, and the issuance of additional equity securities could result in
significant dilution to shareholders.
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Credit Agreement
As of March 31, 2020, our Credit Agreement (as then amended to date, the Credit
Agreement), provided for: (i) a $263.5 million revolving credit facility
scheduled to mature on November 30, 2021 for certain lenders, allocated as
follows: (A) a $20.0 million senior secured revolving credit facility in favor
of certain of our U.S. subsidiaries, as borrowers; (B) a $183.5 million senior
secured revolving credit facility in favor of Civeo and certain of our Canadian
subsidiaries, as borrowers; and (C) a $60.0 million senior secured revolving
credit facility in favor of one of our Australian subsidiaries, as borrower; and
(ii) a $285.4 million term loan facility scheduled to mature on November 30,
2021 for certain lenders in favor of Civeo. As of March 31, 2020, one lender had
an outstanding Canadian term loan of $6.0 million and an outstanding Canadian
revolver loan of $10.0 million that matures on November 30, 2020. One other
lender had an outstanding Canadian revolver loan of $14.3 million that matures
on November 30, 2020. Maturities in 2020 are not classified as current as of
March 31, 2020 and December 31, 2019, since we are able and have the intent to
repay the outstanding 2020 maturities by borrowing amounts equal to such
maturities under our existing revolving credit facility, which matures on
November 30, 2021.
We are required to maintain, if a qualified offering of indebtedness with gross
proceeds in excess of $150 million has been consummated, a maximum leverage
ratio of 4.00 to 1.00 and, if such qualified offering has not been consummated,
a maximum leverage ratio not to exceed the ratios set forth in the following
table:
Period Ended Maximum Leverage Ratio
March 31, 2020, June 30, 2020 & September 30, 2020 3:75 : 1:00
December 31, 2020 & thereafter
3.50 : 1:00
U.S. dollar amounts outstanding under the facilities provided by the Credit
Agreement bear interest at a variable rate equal to the London Inter-Bank
Offered Rate (LIBOR) plus a margin of 2.25% to 4.00%, or a base rate plus 1.25%
to 3.00%, in each case based on a ratio of our total debt to consolidated EBITDA
(as defined in the Credit Agreement). Canadian dollar amounts outstanding bear
interest at a variable rate equal to a B/A Discount Rate based on the Canadian
Dollar Offered Rate (CDOR) plus a margin of 2.25% to 4.00%, or a Canadian Prime
rate plus a margin of 1.25% to 3.00%, in each case based on a ratio of our total
debt to consolidated EBITDA. Australian dollar amounts outstanding under the
Credit Agreement bear interest at a variable rate equal to the Bank Bill Swap
Bid Rate plus a margin of 2.25% to 4.00%, based on a ratio of our total debt to
consolidated EBITDA. The future transitions from LIBOR and CDOR as interest rate
benchmarks is addressed in the Credit Agreement and at such time the transition
from LIBOR or CDOR takes place, we will endeavor with the administrative agent
to establish an alternate rate of interest to LIBOR or CDOR that gives due
consideration to (1) the then prevailing market convention for determining a
rate of interest for syndicated loans in the United States at such time for the
replacement of LIBOR and (2) any evolving or then existing convention for
similar Canadian Dollar denominated syndicated credit facilities for the
replacement of CDOR.
The Credit Agreement contains customary affirmative and negative covenants that,
among other things, limit or restrict: (i) indebtedness, liens and fundamental
changes; (ii) asset sales; (iii) acquisitions of margin stock; (iv) specified
acquisitions; (v) certain restrictive agreements; (vi) transactions with
affiliates; and (vii) investments and other restricted payments, including
dividends and other distributions. In addition, we must maintain an interest
coverage ratio, defined as the ratio of consolidated EBITDA to consolidated
interest expense, of at least 3.0 to 1.0 and our maximum leverage ratio, defined
as the ratio of total debt to consolidated EBITDA, of no greater than 3.75 to
1.0 (as of March 31, 2020). As noted above, the permitted maximum leverage
ratio changes over time. Following a qualified offering of indebtedness with
gross proceeds in excess of $150 million, we will be required to maintain a
maximum senior secured ratio less than 2.50 to 1.0. Each of the factors
considered in the calculations of these ratios are defined in the Credit
Agreement. EBITDA and consolidated interest, as defined, exclude goodwill and
asset impairments, debt discount amortization, amortization of intangibles and
other non-cash charges. We were in compliance with our covenants as of
March 31, 2020.
As a result of the spread of COVID-19 and the resulting unprecedented decline in
oil demand, coupled with disagreements between Saudi Arabia and Russia about
production limits, global oil prices have dropped to historically low levels and
oil prices are expected to remain at low levels for the remainder of 2020. As a
result, it is likely that we will not remain in compliance with our leverage
ratio, particularly beginning with the period ending December 31, 2020, when our
maximum leverage ratio reduces to 3.5 to 1.0. In order to avoid a default under
our Credit Agreement, we must either (i) meet the leverage ratio, (ii) obtain a
waiver of compliance for the period or periods in question, (iii) amend our
Credit Agreement to allow for a higher leverage ratio or (iv) obtain replacement
financing. A failure by us to avoid a default would eliminate our access to
incremental borrowings and give
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our lenders the right to declare our debt obligations under our Credit Agreement
to become immediately due and payable. If we are unable to cure any such
default, or obtain a waiver or a replacement financing, and our lenders
accelerate the payment of such indebtedness, we would be unable to repay those
amounts, and our lenders under our Credit Agreement would be entitled to
foreclose on, and acquire control of substantially all of our assets, which
would have a material adverse impact on our financial condition, results of
operations and cash flows. We believe that it is probable that we will be able
to obtain an amendment, waiver or replacement financing to our Credit Agreement
that will enable us to meet any debt covenants for the twelve-month period
following the issuance of our financial statements included in this report;
however, we can give no assurance that we will be able to obtain such amendment,
waiver or replacement financing on favorable terms or at all.
Borrowings under the Credit Agreement are secured by a pledge of substantially
all of our assets and the assets of our subsidiaries. The obligations under the
Credit Agreement are guaranteed by our significant subsidiaries. As of March 31,
2020, we had ten lenders that were parties to the Credit Agreement, with total
commitments (including both revolving commitments and term commitments) ranging
from $24.9 million to $85.4 million. As of March 31, 2020, we had outstanding
letters of credit of $0.3 million under the U.S. facility, $0.4 million under
the Australian facility and $1.8 million under the Canadian facility.
Dividends
The declaration and amount of all potential future dividends will be at the
discretion of our Board of Directors and will depend upon many factors,
including our financial condition, results of operations, cash flows, prospects,
industry conditions, capital requirements of our business, covenants associated
with certain debt obligations, legal requirements, regulatory constraints,
industry practice and other factors the Board of Directors deems relevant. In
addition, our ability to pay cash dividends on common or preferred shares is
limited by covenants in the Credit Agreement. Future agreements may also limit
our ability to pay dividends, and we may incur incremental taxes if we are
required to repatriate foreign earnings to pay such dividends. If we elect to
pay dividends in the future, the amount per share of our dividend payments may
be changed, or dividends may be suspended, without advance notice. The
likelihood that dividends will be reduced or suspended is increased during
periods of market weakness. There can be no assurance that we will pay a
dividend in the future.
The preferred shares we issued in the Noralta acquisition are entitled to
receive a 2% annual dividend on the liquidation preference (initially $10,000
per share), paid quarterly in cash or, at our option, by increasing the
preferred shares' liquidation preference, or any combination thereof. Quarterly
dividends were paid in-kind on March 31, 2020, thereby increasing the
liquidation preference to $10,407 per share as of March 31, 2020. We currently
expect to pay dividends on the preferred shares for the foreseeable future
through an increase in liquidation preference rather than cash.
Off-Balance Sheet Arrangements
As of March 31, 2020, we had no off-balance sheet arrangements as defined in
Item 303(a)(4)(ii) of Regulation S-K.
Contractual Obligations
For additional information about our contractual obligations, refer to
"Liquidity and Capital Resources-Contractual Obligations" in our Annual Report
on Form 10-K for the year ended December 31, 2019. As of March 31, 2020, except
for net repayments under our revolving credit facilities, there were no material
changes to the disclosure regarding our contractual obligations made in our
Annual Report on Form 10-K for the year ended December 31, 2019.
Critical Accounting Policies
For a discussion of the critical accounting policies and estimates that we use
in the preparation of our consolidated financial statements, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in our
Annual Report on Form 10-K for the year ended December 31, 2019. These estimates
require significant judgments, assumptions and estimates. We have discussed the
development, selection and disclosure of these critical accounting policies and
estimates with the audit committee of our Board of Directors. There have been no
material changes to the judgments, assumptions and estimates upon which our
critical accounting estimates are based.
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