CIVEO CORPORATION "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act that are based on management's current expectations, estimates and projections about our business operations. Please read "Cautionary Statement Regarding Forward Looking Statements." Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of numerous factors, including the known material factors set forth in Item 1A. "Risk Factors" of this annual report. You should read the following discussion and analysis together with our consolidated financial statements and the notes to those statements in Item 8 of this annual report. This section of this annual report generally discusses key operating and financial data as of and for the years ended 2020 and 2019 and provides year-over-year comparisons for such periods. For a similar discussion and year-over-year comparisons to our 2018 results, please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2019 , filed with theSEC onFebruary 27, 2020 .
Description of the Business
We provide hospitality services to the natural resources industry inCanada ,Australia and theU.S. We provide a full suite of hospitality services for our guests, including lodging, food service, housekeeping and maintenance at accommodation facilities that we or our customers own. In many cases, we provide services that support the day-to-day operations of accommodation facilities, such as laundry, facility management and maintenance, water and wastewater treatment, power generation, communication systems, security and logistics. We also offer development activities for workforce accommodation facilities, including site selection, permitting, engineering and design, manufacturing management and site construction, along with providing hospitality services once the facility is constructed. We primarily operate in some of the world's most active oil, metallurgical (met) coal, liquefied natural gas (LNG) and iron ore producing regions, and our customers include major and independent oil companies, mining companies, engineering companies and oilfield and mining service companies. We operate in three principal reporting business segments -Canada ,Australia and theU.S.
Reverse Share Split
OnNovember 19, 2020 , we effected a reverse share split where each twelve issued and outstanding common shares were converted into one common share (Reverse Share Split). Our common shares began trading on a reverse share split adjusted basis onNovember 19, 2020 . All common share and per common share data included in this annual report have been retroactively adjusted to reflect the Reverse Share Split.
See Note 1 - Description of Business and Basis of Presentation to the notes to the consolidated financial statements in Item 8 of this annual report for further discussion regarding the Reverse Share Split.
Basis of Presentation
Unless otherwise stated or the context otherwise indicates: (i) all references in these consolidated financial statements to "Civeo ," "us," "our" or "we" refer toCiveo Corporation and its consolidated subsidiaries; and (ii) all references in this annual report to "dollars" or "$" are toU.S. dollars.
Overview and Macroeconomic Environment
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. Historically, initial demand for our hospitality services has been driven by our customers' capital spending programs related to the construction and development of natural resource projects and associated infrastructure, as well as the exploration for oil and natural gas. Long-term demand for our services has been driven by natural resource production and operation of those facilities as well as expansion of those sites. In general, industry capital 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 oil, met coal, LNG and iron ore. Other factors that can affect our business and financial results include the general global economic environment and regulatory changes inCanada ,Australia , theU.S. and other markets, including governmental measures introduced to fight climate change or to help slow the spread or mitigate the impact of COVID-19. 44 -------------------------------------------------------------------------------- Our business is predominantly located in northernAlberta, Canada ;British Columbia, Canada ;Queensland, Australia ; andWestern Australia . We derive most of our business from natural resource companies who are developing and producing oil sands, met coal, LNG and iron ore resources and, to a lesser extent, other hydrocarbon and mineral resources. Approximately 66% of our revenue is generated by our lodges inCanada and our villages inAustralia . 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-person-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. Generally, our core Canadian oil sands and Australian mining customers are making significant capital investments to develop their prospects, which have estimated reserve lives ranging from ten years to in excess of 30 years. Consequently, these investments are primarily dependent on those customers' long-term views of commodity demand and prices. The spread of COVID-19 and the response thereto have negatively impacted the global economy. The actions taken to mitigate the spread of COVID-19 and the risk of infection have altered, and are expected to continue to alter, governmental and private-sector policies and behaviors in ways that have had a significant negative effect on oil consumption, such as government-imposed or voluntary social distancing and quarantining, reduced travel and remote work policies. Additionally, global oil prices dropped to historically low levels in March andApril 2020 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 asSaudi Arabia ,Russia and theU.S. Inmid-April 2020 , OPEC+ (the combination of historicalOPEC members and other significant oil producers, such asRussia ) announced production cuts of up to approximately 10 million barrels per day. However, oil prices remained at depressed levels throughout most of 2020, before modest improvement late in the year and into early 2021. Prices are expected to remain relatively volatile throughout 2021. The economic disruption caused by the spread of COVID-19 and decline in the price of and demand for oil have impacted the activity in the Canadian oil sands, and we have seen a decrease in demand for rooms by our oil sands customers. The reduction in the occupancy at our Canadian oil sands lodges negatively impacted our business in 2020 and could continue to negatively impact our business if oil prices continue to remain volatile. Due to lower oil prices in 2020 and the economic disruption caused by COVID-19, we implemented certain cost containment initiatives, including salary and total compensation reductions of 20% for the Board and Chief Executive Officer for 2020 from March levels, salary reductions for senior management inCanada and theU.S. , headcount reductions inNorth America of approximately 33% from March throughDecember 2020 , and decreases to 2020 capital spending by approximately 25%. Despite the aforementioned negative impact of COVID-19 on the global economy, the impact on the Australian mining industry in 2020 was relatively muted. Due to strong Chinese steel demand, supply disruptions in other countries and limited COVID-19 cases inAustralia , Australian met coal and iron ore activity was relatively buoyant in 2020. 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 of individuals that enter our facilities, social distancing practices, enhanced cleaning and deep sanitization, the suspension of nonessential employee travel and implementation of work-from-home policies, where applicable.Alberta Canada . InCanada , 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 theAlberta 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 capacity restrictions to move Canadian heavy oil production to refineries, primarily along theU.S. Gulf Coast . The WCS Differential has varied depending on the extent of transportation capacity availability. Certain expansionary oil pipeline projects have the potential to both drive incremental demand for mobile assets and to improve take-away capacity for Canadian oil sands producers over the longer term. While these pipeline projects, includingKinder Morgan's Trans Mountain Pipeline (TMX), have recently received incremental regulatory approvals, it is still not certain if any of the proposed pipeline projects will ultimately be completed. Certain segments of the TMX pipeline have begun construction; however, the construction timeline continues to be delayed due to the lack of agreement between the Canadian federal government, which supports the pipeline projects, and theBritish Columbia provincial government. The Canadian federal government acquired TMX pipeline in 2018, approved the expansion of the project and is currently working through the revised construction timeline. InApril 2020 , theAlberta provincial government announced its intent to financially support the construction of the Keystone XL pipeline (KXL). The construction of this pipeline expansion was suspended due to theU.S. 45 --------------------------------------------------------------------------------Supreme Court refusing to renew a water permit for the KXL pipeline inJuly 2020 . AfterPresident Biden's inauguration inJanuary 2021 , he implemented an executive order to revoke a necessary cross-border permit, canceling the project. WCS prices in the fourth quarter of 2020 averaged$31.34 per barrel compared to a low of$19.73 in the second quarter of 2020 and a high of$49.93 in the second quarter of 2018. The WCS Differential decreased from$22.49 per barrel at the end of the fourth quarter of 2019 to$15.35 at the end of the fourth quarter 2020. In 2018, the Government ofAlberta announced it would mandate temporary curtailments of the province's oil production. However, monthly production limits were put on hold inDecember 2020 until further notice, allowing operators to produce freely at their discretion while the government monitors production. Should forecasts show storage inventories approaching maximum capacity, the government may reintroduce production limits. The curtailment initially resulted in a narrowing WCS Differential inDecember 2018 , which increased in 2019 before narrowing again in the first quarter of 2020. As ofFebruary 22, 2021 , the WTI price was$61.49 and the WCS price was$49.95 , resulting in a WCS Differential of$11.54 . The depressed price levels of both WTI and WCS materially impacted 2020 maintenance and production spending and activity by Canadian operators and, therefore, demand for our hospitality services. While some of our Canadian oil sands customers conducted maintenance projects in the third quarter 2020, activity was negatively impacted by the current environment. Customers began increasing production activity in the fourth quarter of 2020. Continued uncertainty, including about the impact of COVID-19, and commodity price volatility and regulatory complications could cause our Canadian oil sands and pipeline customers to reduce production, delay expansionary and maintenance spending and defer additional investments in their oil sands assets. Additionally, if oil prices do not improve or stabilize, the resulting impact could continue to negatively affect the value of our long-lived assets.British Columbia, Canada . OurSitka Lodge supports the LNG Canada project and related pipeline projects. From a macroeconomic standpoint, LNG demand continued to grow despite the COVID-19 pandemic, 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. Currently,Western Canada does not have any operational LNG export facilities. LNG Canada (LNGC), a joint venture amongShell Canada Energy , an affiliate of Royal Dutch Shell plc (40 percent), and affiliates ofPETRONAS , 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 inKitimat, British Columbia (Kitimat LNG Facility).British Columbia LNG activity and related pipeline projects are a material driver of activity for ourSitka Lodge , as well as for our mobile assets, which are contracted to serve several portions of the related pipeline construction activity. The actual timing of when revenue is realized from the Costal Gas Link pipeline andSitka 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 pipeline construction. In lateMarch 2020 , LNGC announced 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 ourSitka Lodge during the second quarter of 2020. Occupancy at theSitka Lodge returned to expected levels duringJuly 2020 and remained at expected levels thorough the end of 2020.Australia . InAustralia , 82% of our rooms are located in theBowen Basin ofQueensland, Australia and primarily serve met coal mines in that region. Met coal pricing and production growth in theBowen Basin region is predominantly influenced by the levels of global steel production, which decreased by 0.9% during 2020 compared to 2019. As ofFebruary 22, 2021 , met coal spot prices were$138.50 per metric tonne. Long-term demand for steel is expected to be driven by global infrastructure spending and increased steel consumption per capita in developing economies, such asChina andIndia , whose current consumption per capita is a fraction of developed countries. In 2020, the impact of the outbreak of COVID-19 led to a high level of uncertainty for demand of iron ore and met coal. 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. However, a new round of stimulus spending inChina and recovering steel production in other regions continues to support demand for raw materials, particularly iron ore. Currently,China andAustralia are in a trade dispute that has led toChina implementing an unofficial trade embargo on Australian coal.China has historically accounted for approximately 22% ofAustralia's met coal exports. The continuing uncertainty in the Chinese demand for Australian met coal led to a decrease in the met coal spot price toUS$103 per tonne atDecember 31, 2020 , though, as noted above, prices recovered somewhat to$138.50 per metric tonne atFebruary 22, 2021 . The softening of the met coal spot price has been exacerbated as Chinese mills and traders resell stranded Australian met coal at a discount. As a result, there is currently a shuffling of global export trade flows, coupled with growing demand for steel with an 46 -------------------------------------------------------------------------------- infrastructure led recovery which may lead to near term volatility in Australian met coal spot pricing. If this dispute continues, it could continue to negatively impact pricing and demand for Australian met coal. To date, we have not seen an overall material decline in occupancy at our Australian villages resulting from the COVID-19 pandemic or the Chinese trade dispute. Activity inWestern Australia is driven primarily by iron ore production, which is a key steel-making ingredient. As ofFebruary 22, 2021 , iron ore spot prices were$168.48 per metric tonne. OnJuly 1, 2019 , we acquired Action, a provider of integrated services to the mining industry inWestern Australia . Accordingly, we also have contracts in place to service customer-owned villages inWestern 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 ourAustralia villages and the customer locations that we manage under our integrated services business. 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.U.S. OurU.S. business supports oil shale drilling and completion activity and is primarily tied to WTI oil prices in theU.S. shale formations in thePermian Basin , the Mid-Continent, the Bakken and the Rockies. During 2019, theU.S. oil rig count and associated completion activity decreased due to the oil price decline in late 2018 and early 2019 coupled with other market dynamics negatively impacting exploration and production (E&P) spending, finishing the year at 677 rigs. In 2020, theU.S. oil rig count and associated completion activity further decreased due to the global oil price decline discussed above. Only 267 oil rigs were active at the end of 2020.The Permian Basin remains the most activeU.S. unconventional play, representing 66% of the oil rigs active in theU.S. at the end of 2020. The lowerU.S. rig count and decline in oil prices resulted in decreasedU.S. oil production from an average of 12.2 million barrels per day in 2019 to an average of 11.3 million barrels per day in 2020. As ofFebruary 19, 2021 , there were 305 active oil rigs in theU.S. (as measured by Bakerhughes.com). With the recent volatility in oil prices and a resulting reduction in spending by E&P companies, we have exited the Bakken and reduced our presence in the Rockies regions for ourU.S. mobile assets. Those assets have either been sold or transported to ourPermian Basin and Mid-Continent district locations. This process is underway and we expect it to be completed during the first half of 2021.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. In addition, consolidation among our E&P customer base in theU.S. has historically created short-term spending and activity dislocations. Should the current trend of industry consolidation continue, we may see activity, utilization and occupancy declines in the near term. 47 -------------------------------------------------------------------------------- Recent Commodity Prices. Recent WTI crude, WCS crude and met coal pricing trends are as follows: Average Price (1) Hard Quarter WTI Crude WCS Crude Coking Coal (Met Coal) ended (per bbl) (per bbl) (per tonne) First Quarter through 2/22/2021$ 54.77 $ 42.14 $ 133.18 12/31/2020 42.63 31.34 109.37 9/30/2020 40.90 31.15 113.30 6/30/2020 27.95 19.73 120.27 3/31/2020 45.38 27.92 156.17 12/31/2019 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
(1)Source: WTI crude prices are from
Foreign Currency Exchange Rates. Exchange rates between theU.S. dollar and each of the Canadian dollar and the Australian dollar influence ourU.S. dollar reported financial results. Our business has historically derived the vast majority of its revenues and operating income (loss) inCanada andAustralia . These revenues and profits/losses are translated intoU.S. dollars forU.S. GAAP financial reporting purposes. The following tables summarize the fluctuations in the exchange rates between theU.S. dollar and each of the Canadian dollar and the Australian dollar: Year Ended December 31, 2020 2019 Change Percentage Average Canadian dollar toU.S. dollar$0.746 $0.754 (0.008) (1.1)% Average Australian dollar toU.S. dollar$0.691 $0.695 (0.004) (0.6)% As of December 31, 2020 2019 Change Percentage
Canadian dollar to U.S. dollar $0.785 $0.770 0.015 2.0%
Australian dollar to U.S. dollar $0.773 $0.700 0.073 10.4%
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 demand for crude oil, met coal, LNG and iron ore and the resultant impact on the capital spending plans of our customers in order to plan our business activities. We currently expect that our 2021 capital expenditures, exclusive of any business acquisitions, will total approximately$20.0 million to$25.0 million , compared to 2020 capital expenditures of$10.1 million . See "Liquidity and Capital Resources" below for further discussion of 2021 and 2020 capital expenditures. 48 --------------------------------------------------------------------------------
Results of Operations
Unless otherwise indicated, discussion of results for the year ended
Results of Operations - Year EndedDecember 31, 2020 Compared to Year EndedDecember 31, 2019 Year Ended December 31, 2020 2019 Change ($ in thousands) Revenues Canada$ 269,649 $ 325,651 $ (56,002) Australia 234,542 156,093 78,449 U.S. 25,538 45,811 (20,273) Total revenues 529,729 527,555 2,174 Costs and expenses Cost of sales and services Canada 209,283 239,624 (30,341) Australia 144,709 89,090 55,619 U.S. 28,096 38,100 (10,004) Total cost of sales and services 382,088 366,814 15,274 Selling, general and administrative expenses 53,656 59,586 (5,930) Depreciation and amortization expense 96,547 123,768 (27,221) Impairment expense 144,120 26,148 117,972 Other operating expense 506 290 216 Total costs and expenses 676,917 576,606 100,311 Operating loss (147,188) (49,051) (98,137) Interest expense and income, net (17,050) (27,305) 10,255 Other income 20,823 7,281 13,542 Loss before income taxes (143,415) (69,075) (74,340) Income tax benefit 10,635 10,741 (106) Net loss (132,780) (58,334) (74,446) Less: Net income attributable to noncontrolling interest 1,470 157 1,313 Net loss attributable to Civeo Corporation (134,250) (58,491) (75,759) Less: Dividends attributable to Class A preferred shares 1,887 1,849 38
Net loss attributable to
(60,340)
We reported net loss attributable toCiveo for 2020 of$136.1 million , or$9.64 per diluted share. As further discussed below, net loss included (i) a$93.6 million pre-tax loss ($93.6 million after-tax, or$6.63 per diluted share) resulting from the impairment of goodwill in ourCanada segment included in Impairment expense, (ii) a$38.1 million pre-tax loss ($38.1 million after-tax, or$2.69 per diluted share) resulting from the impairment of long-lived assets in ourCanada segment included in Impairment expense and (iii) a$12.4 million pre-tax loss ($12.4 million after-tax, or$0.88 per diluted share) resulting from the impairment of long-lived assets in ourU.S. segment included in Impairment expense. Net loss was partially offset by$4.7 million pre-tax income ($4.7 million after-tax, or$0.33 per diluted share) associated with the settlement of a representations and warranties claim related to theNoralta acquisition included in ourCanada segment in Other income. We reported net loss attributable toCiveo for 2019 of$60.3 million , or$4.33 per diluted share. As further discussed below, net loss included (i) a$19.9 million pre-tax loss ($19.9 million after-tax, or$1.43 per diluted share) resulting from the impairment of goodwill in ourCanada segment included in Impairment expense, (ii) a$6.2 million pre-tax loss ($6.1 million after-tax, or$0.44 per diluted share) resulting from the impairment of fixed assets included in Impairment expense, and (iii) a$0.2 million gain on sale of assets related to the sale of a village inAustralia and related$2.2 million release of an asset retirement obligation (ARO) liability assumed by the buyer. Revenues. Consolidated revenues increased$2.2 million , or 0%, in 2020 compared to 2019. This increase was primarily due to the full year impact in 2020 of ourAustralia integrated services business due to the Action acquisition completed inJuly 2019 , increased occupancy at ourBowen Basin villages inAustralia and increased mobile asset activity from our pipeline 49 -------------------------------------------------------------------------------- project inCanada . These items were partially offset by lower revenue from reduced occupancy at our lodges inCanada resulting from the COVID-19 pandemic, lower oil prices and the global oil market dislocation. Additionally, lower activity levels in certain markets in theU.S. and weaker Canadian dollars relative to theU.S. dollar in 2020 compared to 2019 also offset the increased revenues. See the discussion of segment results of operations below for further information. Cost of Sales and Services. Our consolidated cost of sales increased$15.3 million , or 4%, in 2020 compared to 2019. This increase was primarily due to increased activity at our Australian integrated services business due to the Action acquisition, increased occupancy at ourBowen Basin villages inAustralia and increased mobile asset activity from our pipeline project inCanada . These items were partially offset by decreased cost of sales and services due to reduced occupancy at our oil sands lodges inCanada resulting from the COVID-19 pandemic and lower oil prices. Additionally, lower activity levels in certain markets in theU.S. and weaker Canadian dollars relative to theU.S. dollar in 2020 compared to 2019 offset the increased 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$5.9 million , or 10%, in 2020 compared to 2019. This decrease was primarily due to lower share-based compensation expense, travel and entertainment expenses and compensation expense, partially offset by higher incentive compensation costs. The decrease in share-based compensation was due to a reduction in the amount of phantom share awards outstanding and the reduction in our average stock price during 2020 compared to 2019. The decrease in travel and entertainment expenses was largely a result of reduced travel due to COVID-19. Depreciation and Amortization Expense. Depreciation and amortization expense decreased$27.2 million , or 22%, in 2020 compared to 2019. The decrease was primarily due to (i) the impairment of certain long-lived assets inCanada and theU.S. during the first quarter of 2020, (ii) the extension of the remaining life of certain long-lived accommodation assets inCanada during the fourth quarter of 2019 and (iii) certain assets and intangibles becoming fully depreciated during 2019. These items were partially offset by additional depreciation and intangible amortization expense related to our Action acquisition in 2019.
Impairment Expense. Impairment expense of
•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 segment. •Pre-tax impairment expense of$12.4 million associated with long-lived assets in ourU.S. segment.
Impairment Expense. Impairment expense of
•Pre-tax impairment expense of$19.9 million related to the impairment of goodwill in our Canadian reporting unit. •Pre-tax impairment expense of$0.7 million associated with long-lived assets in our Canadian segment. •Pre-tax impairment expense of$5.5 million associated with long-lived assets in our Australian segment. This includes$1.0 million of impairment expense related to an error corrected in the second quarter 2019. We identified a liability related to an ARO at one of our villages inAustralia that should have been recorded in 2011. We determined that the error was not material to our previously issued financial statements included in our Annual Report on Form 10-K for the year endedDecember 31, 2018 , and therefore, corrected the error in the second quarter of 2019. Specifically, we recorded the following amounts in our second quarter 2019 unaudited consolidated statements of operations related to prior periods: (1) additional accretion expense related to the ARO of$0.9 million , (2) additional depreciation and amortization expense of$0.5 million related to amortization of the asset retirement cost and (3) additional impairment expense related to the impairment of the asset retirement cost of$1.0 million offset by recognition of an ARO liability totaling$2.3 million as ofJune 30, 2019 .
See Note 4 - Impairment Charges to the notes to the consolidated financial statements included in Item 8 of this annual report for further discussion.
Operating Loss. Operating loss increased$98.1 million , or 200%, in 2020 compared to 2019 primarily due to impairments of goodwill and long-lived assets, partially offset by increased operating profit inAustralia , as well as lower depreciation and amortization expense. Interest Expense and Income, net. Net interest expense decreased$10.3 million , or 38%, in 2020 compared to 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. 50 -------------------------------------------------------------------------------- Other Income. Other income increased$13.5 million , or 186%, in 2020 compared to 2019, primarily due to$13.0 million of other income related to proceeds from theCanada Emergency Wage Subsidy (CEWS) and$4.7 million of other income associated with the settlement of a representations and warranties claim related to the Noralta Acquisition, partially offset by smaller gains on sale of assets in 2020 compared to 2019. Other income in 2019 also included$2.6 million of other income related to proceeds from an insurance claim associated with maintenance-related operational issues and a gain on sale of assets related to the sale of a village inAustralia and related$2.2 million release of an ARO liability assumed by the buyer. Income Tax Benefit. Our income tax benefit for 2020 totaled$10.6 million , or 7.4% of pretax loss, compared to a benefit of$10.7 million , or 15.5% of pretax loss for 2019. Our effective tax rate for 2020 was lower than the Canadian federal statutory rate of 15%, primarily due to a non-deductible Canadian goodwill impairment charge of$95.3 million , as well as the release of a valuation allowance of$9.1 million against the net deferred tax assets inAustralia . This was partially offset by a valuation allowance of$6.4 million established against net deferred tax assets in theU.S. andCanada . Our effective tax rate for 2019 was lower than the Canadian combined federal and provincial statutory rate of 26.5%, primarily due to a non-deductible Canadian goodwill impairment charge of$19.9 million and a release of a valuation allowance of$2.3 million against the net deferred tax assets inAustralia due to the Action acquisition. This was partially offset by pre-tax losses inAustralia and theU.S. for which no tax benefit was recorded. As a result, a valuation allowance of$3.2 million was established against net deferred tax assets in theU.S. andAustralia . Other Comprehensive Income (Loss). Other comprehensive income increased$6.2 million in 2020 compared to 2019 primarily as a result of foreign currency translation adjustments due to changes in the Canadian and Australian dollar exchange rates compared to theU.S. dollar. The Canadian dollar exchange rate compared to theU.S. dollar increased 2% in 2020 compared to a 5% increase in 2019. The Australian dollar exchange rate compared to theU.S. dollar increased 10.4% in 2020 compared to remaining flat in 2019. 51 --------------------------------------------------------------------------------
Segment Results of Operations - Canadian Segment
Year Ended
December 31,
2020 2019 Change
Revenues ($ in thousands)
Accommodation revenue (1) $ 202,534 $ 281,577 $ (79,043)
Mobile facility rental revenue (2) 33,192 9,575 23,617
Food service and other services revenue (3) 33,923 33,485 438 Manufacturing revenue (4) - 1,014 (1,014) Total revenues$ 269,649 $ 325,651 $ (56,002) Cost of sales and services ($ in thousands) Accommodation cost$ 143,213 $ 187,679 $ (44,466) Mobile facility rental cost 24,842 7,493
17,349
Food service and other services cost 30,616 30,595 21 Manufacturing cost 611 1,025 (414) Indirect other cost 10,001 12,832 (2,831) Total cost of sales and services$ 209,283 $ 239,624
Gross margin as a % of revenues 22.4 % 26.4
% (4.0) %
Average daily rate for lodges (5)$ 95 $ 91
Total billed rooms for lodges (6) 2,095,784 3,078,727
(982,943)
Average Canadian dollar to
(1)Includes revenues related to lodge rooms and hospitality services for owned rooms for the periods presented. (2)Includes revenues related to mobile assets for the periods presented. (3)Includes revenues related to food service, laundry and water and wastewater treatment services for the periods presented. (4)Includes revenues related to modular construction and manufacturing services for the periods presented. (5)Average daily rate is based on billed rooms and accommodation revenue. (6)Billed rooms represents total billed days for owned assets for the periods presented. Our Canadian segment reported revenues in 2020 that were$56.0 million , or 17%, lower than 2019. Excluding the impact of a weaker Canadian dollar exchange rate, the segment experienced a 16% decrease in revenues. This decrease was driven by reduced occupancy at our lodges related to lower oil prices and the COVID-19 pandemic. The weakening of the average exchange rate for the Canadian dollar relative to theU.S. dollar by 1% in 2020 compared to 2019 resulted in a$2.6 million period-over-period decrease in revenues. Partially offsetting these items, revenue was favorably impacted by increased mobile asset activity from a pipeline project. Our Canadian segment cost of sales and services decreased$30.3 million , or 13%, in 2020 compared to 2019. The weakening of the average exchange rate for the Canadian dollar relative to theU.S. dollar by 1% in 2020 compared to 2019 resulted in a$2.1 million period-over-period decrease in cost of sales and services. Excluding the impact of the weaker Canadian exchange rate, the decreased cost of sales and services was driven by reduced occupancy at our lodges in the oil sands region and reduced indirect other costs from a continued focus on cost containment and operational efficiencies. These decreases were partially offset by increased mobile asset activity from a pipeline project and increased costs related to the implementation of enhanced measures during the COVID-19 pandemic. Our Canadian segment gross margin as a percentage of revenues decreased from 26% in 2019 to 22% in 2020. This was primarily driven by increased costs related to the implementation of enhanced safety measures during the COVID-19 pandemic, as well as reduced operating efficiencies due to lower occupancy. 52 --------------------------------------------------------------------------------
Segment Results of Operations - Australian Segment
Year Ended
December 31,
2020 2019 Change
Revenues ($ in thousands)
Accommodation revenue (1) $ 144,070 $ 126,047 $ 18,023
Food service and other services revenue (2) 90,472 30,046 60,426
Total revenues$ 234,542 $ 156,093
Cost of sales ($ in thousands) Accommodation cost 63,504 60,045
3,459
Food service and other services cost 77,358 26,073
51,285
Indirect other cost 3,847 2,972
875
Total cost of sales and services$ 144,709 $ 89,090
Gross margin as a % of revenues 38.3 % 42.9
% (4.6) %
Average daily rate for villages (3)$ 73 $ 73
$ -
Total billed rooms for villages (4) 1,968,284 1,717,186
251,098
Australian dollar to U.S. dollar$ 0.691 $ 0.695
(1)Includes revenues related to village rooms and hospitality services for owned rooms for the periods presented. (2)Includes revenues related to food service 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 represents total billed days for owned assets for the periods presented. Our Australian segment reported revenues in 2020 that were$78.4 million , or 50%, higher than 2019. The increase in revenue was primarily due to our integrated services business, acquiredJuly 1, 2019 , which contributed$90.5 million in revenues in 2020 compared to the$30.0 million in 2019. The weakening of the average exchange rates for Australian dollars relative to theU.S. dollar by 1% in 2020 compared to 2019 resulted in a$0.9 million year-over-over decrease in revenues. In addition, the revenue increase was driven by increased occupancy at ourBowen Basin villages, which was partially offset by decreased occupancy at ourWestern Australia villages. Our Australian segment cost of sales increased$55.6 million , or 62%, in 2020 compared to 2019. The increase was primarily due to our integrated services business. Increases related to increased occupancy at ourBowen Basin villages were partially offset by decreased occupancy at ourWestern Australia villages and the weakening of the Australian dollar. Our Australian segment gross margin as a percentage of revenues decreased to 38% in 2020 from 43% in 2019. This was primarily driven by our integrated services business, which has a service-only business model and therefore generates a lower overall gross margin than the accommodation business, partially offset by improved margins at ourBowen Basin villages as a result of increased occupancy.
Segment Results of Operations -
Year Ended
December 31,
2020 2019 Change
Revenues ($ in thousands) $ 25,538 $ 45,811 $ (20,273) Cost of sales ($ in thousands)
Gross margin as a % of revenues (10.0) % 16.8 % (26.8) %
Our
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--------------------------------------------------------------------------------Rockies, Mid-Continent and West Permian markets affecting our wellsite business and reduced activity in our offshore rental business.
OurU.S. segment cost of sales decreased$10.0 million , or 26%, in 2020 compared to 2019. The decrease was driven by reduced occupancy at our West Permian andKilldeer lodges, reducedU.S. drilling activity in the Bakken, Rockies, Mid-Continent and West Permian markets affecting our wellsite business and reduced activity in our offshore rental business.
Our
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 and fund strategic business acquisitions. Historically, our primary sources of funds have been available cash, cash flow from operations, borrowings under our Amended 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
December 31,
2020 2019
Lender commitments (1) $ 167,300 $ 263,500
Reductions in availability (2) - (6,591)
Borrowings against revolving credit capacity (63,556) (134,117) Outstanding letters of credit
(4,487) (2,031)
Unused availability 99,257 120,761
Cash and cash equivalents 6,155 3,331
Total available liquidity $ 105,412 $ 124,092
(1)As of December 31, 2020 , we had two bank guarantee facilities totaling $3.0
million which mature on March 31, 2021 . As of December 31, 2019 , we had one bank
guarantee totaling $2.0 million . We had bank guarantees of A$0.8 million and
A$0.7 million under these facilities outstanding as of December 31, 2020 and
2019, respectively.
(2)As of December 31, 2020 , there were no reductions in our availability under
the Amended 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 $117.4 million was provided by operations during 2020 compared to
$74.5 million provided by operations during 2019. The increase in operating cash
flow in 2020 compared to 2019 was primarily due to higher cash provided by
working capital, increased earnings from our Australian operations and proceeds
from the CEWS. Net cash provided by working capital was $19.9 million during
2020 compared to net cash used by working capital of $14.3 million during 2019.
The increase in cash provided by working capital in 2020 compared to 2019 is
largely due to decreased accounts receivable balances in Canada .
Cash was used in investing activities during 2020 and 2019 in the amounts of
$1.8 million and $38.6 million , respectively. The decrease in cash used in
investing activities in 2020 compared to 2019 was primarily due to lower capital
expenditures and $4.7 million of other income associated with the settlement of
a representations and warranties claim in 2020 related to the Noralta
Acquisition. This compares to $16.9 million to fund the Action acquisition in
2019. Capital expenditures totaled $10.1 million and $29.8 million during 2020
and 2019, respectively. The decrease in capital expenditures in 2020 was related
primarily to the completion of the Sitka Lodge expansion, which occurred during
2018 and 2019. In addition, we received proceeds from the sale of property,
plant and equipment of $3.7 million and $5.9 million during 2020 and 2019,
respectively.
We expect our capital expenditures for 2021, exclusive of any business
acquisitions or any growth capital expenditures, to be in the range of $20.0
million to $25.0 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 2021 depends on industry
conditions, project approvals and schedules, customer room commitments and
project and construction timing. We
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expect to fund these capital expenditures with available cash, cash flow from
operations and revolving credit borrowings under our Amended Credit Agreement.
The foregoing capital expenditure forecast does not include any funds for
strategic acquisitions, which we could pursue should the economic environment in
our industry improve and the transaction economics are 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.
The table below delineates historical capital expenditures split between
expansionary and maintenance spending on our lodges and villages, mobile asset
spending and other capital expenditures. We classify capital expenditures for
the development of rooms and central facilities at our lodges and villages as
expansion capital expenditures. Other capital expenditures in the table below
relate to routine capital spending for support equipment, upgrades to
infrastructure at our lodge and village properties and spending related to our
manufacturing facilities, among other items.
Based on management's judgment of capital spending classifications, we believe
the following table represents the components of capital expenditures for the
years ended December 31, 2020 and 2019 (in millions):
Year Ended December 31,
2020 2019
Expansion Maint Total Expansion Maint Total
Lodge/village $ 1.5 $ 5.9 $ 7.4 $ 17.6 $ 5.1 $ 22.7
Mobile assets 0.7 - 0.7 1.4 0.5 1.9
Other 0.9 1.1 2.0 1.9 3.3 5.2
Total $ 3.1 $ 7.0 $ 10.1 $ 20.9 $ 8.9 $ 29.8
Expansion lodge and village spending in 2020 was primarily related to the
purchase of previously rented rooms for a lodge in the U.S segment. Expansion
lodge and village spending in 2019 was primarily related to the expansion of our
Sitka lodge in British Columbia .
Maintenance lodge and village spending in 2020 and 2019 was primarily related to routine maintenance projects at our major properties.
Other maintenance spending in 2020 and 2019 was primarily related to miscellaneous equipment and supplies to support the day-to-day operations at our accommodation facilities. Other expansion spending in 2020 and 2019 was primarily related to information technology infrastructure to support our business.
Net cash of$114.2 million was used in financing activities during 2020 primarily due to net repayments under our revolving credit facilities of$70.3 million , repayments of term loan borrowings of$39.9 million ,$1.5 million used to settle tax obligations on vested shares under our share-based compensation plans and debt issuance costs of$2.6 million related to our Amended Credit Agreement. Net cash of$44.6 million was used in financing activities during 2019 primarily due to net repayments under our revolving credit facilities of$3.5 million , repayments of term loan borrowings of$34.9 million ,$4.3 million used to settle tax obligations on vested shares under our share-based compensation plans and debt issuance costs of$2.0 million related to our Credit Agreement. The following table summarizes the changes in debt outstanding during 2020 (in thousands): Canada Australia U.S. Total Balance at December 31, 2019$ 359,080 $ - $ -$ 359,080 Borrowings under revolving credit facilities 347,520 30,084 - 377,604 Repayments of borrowings under revolving credit facilities (434,155) (13,759) - (447,914) Repayments of term loans (39,855) - - (39,855) Translation 729 1,442 - 2,171 Balance at December 31, 2020$ 233,319 $
17,767 $ -
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. If our plans or
assumptions change, including as a result of the impact of COVID-19 or the
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
long-term business
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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.
Amended Credit Agreement
As ofDecember 31, 2019 , our Credit Agreement provided for: (i) a$263.5 million revolving credit facility scheduled to mature onNovember 30, 2021 for certain lenders, allocated as follows: (A) a$20.0 million senior secured revolving credit facility in favor of certain of ourU.S. subsidiaries, as borrowers; (B) a$183.5 million senior secured revolving credit facility in favor ofCiveo 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 onNovember 30, 2021 for certain lenders in favor ofCiveo .
In
As ofDecember 31, 2020 , our Credit Agreement, (as so amended, the Amended Credit Agreement) provided for: (i) a$167.3 million revolving credit facility scheduled to mature onMay 30, 2023 , allocated as follows: (A) a$10.0 million senior secured revolving credit facility in favor of certain of ourU.S. subsidiaries, as borrowers; (B) a$122.3 million senior secured revolving credit facility in favor ofCiveo and certain of our Canadian subsidiaries, as borrowers; and (C) a $35.0 million senior secured revolving credit facility in favor of one of our Australian subsidiaries, as borrower; and (ii) a$194.8 million term loan facility scheduled to mature onMay 30, 2023 for certain lenders in favor ofCiveo. U.S . dollar amounts outstanding under the facilities provided by the Amended Credit Agreement bear interest at a variable rate equal to the London Inter-Bank Offered Rate (LIBOR) plus a margin of 3.50% to 4.50% or a base rate plus 2.50% to 3.50%, in each case based on a ratio of our total debt to consolidated EBITDA (as defined in the Amended Credit Agreement). Canadian dollar amounts outstanding bear interest at a variable rate equal to a B/A Discount Rate (as defined in the Amended Credit Agreement) based on the Canadian Dollar Offered Rate (CDOR) plus a margin of 3.50% to 4.50%, or a Canadian Prime rate plus a margin of 2.50% to 3.50%, in each case based on a ratio of our total debt to consolidated EBITDA. Australian dollar amounts outstanding under the Amended Credit Agreement bear interest at a variable rate equal to the Bank Bill Swap Bid Rate plus a margin of 3.50% to 4.50%, 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 Amended 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 inthe 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 Amended 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 3.00 to 1.00 and a maximum leverage ratio, defined as the ratio of total debt to consolidated EBITDA, of no greater than 3.50 to 1.00. Following a qualified offering of indebtedness with gross proceeds in excess of$150.0 million , we will be required to maintain a maximum leverage ratio of no greater than 4.00 to 1.00 and a maximum senior secured ratio less than 2.50 to 1.00. Each of the factors considered in the calculations of these ratios are defined in the Amended 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 ofDecember 31, 2020 . Borrowings under the Amended Credit Agreement are secured by a pledge of substantially all of our assets and the assets of our subsidiaries. The obligations under the Amended Credit Agreement are guaranteed by our significant subsidiaries. As ofDecember 31, 2020 , we had eight lenders that were parties to the Amended Credit Agreement, with total commitments (including both revolving commitments and term commitments) ranging from$22.4 million to$71.1 million . As of 56 --------------------------------------------------------------------------------December 31, 2020 , we had outstanding letters of credit of$1.2 million under theU.S facility,$0.6 million under the Australian facility and$2.7 million under the Canadian facility.
In addition to the Amended Credit Agreement, we have two bank guarantee
facilities totaling
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 Amended 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 have been paid in-kind for each quarterly period beginningJune 30, 2018 throughDecember 31, 2020 , thereby increasing the liquidation preference to$10,563 per share as ofDecember 31, 2020 . We currently expect to pay dividends on the preferred shares for the foreseeable future through an increase in liquidation preference rather than cash. For further information, see Note 19 - Preferred Shares to the notes to the consolidated financial statements included in Item 8 of this annual report for further information.
Effects of Inflation
Our revenues and results of operations have not been materially impacted by inflation in the past three years.
Off-Balance Sheet Arrangements
As of
Contractual Obligations
The following summarizes our contractual obligations atDecember 31, 2020 , and the effect such obligations are expected to have on our liquidity and cash flow over the next five years (in thousands): More Less Than 1 Than 5 Total Year 1 - 3 Years 3 - 5 Years Years Total debt$ 251,086 $ 35,052 $ 216,034 $ - $ - Interest payments(1) 21,267 9,428 11,839 - - Purchase obligations 9,286 9,286 - - - Non-cancelable operating lease obligations 28,344 5,682 9,745 7,106 5,811 Asset retirement obligations - expected cash payments 79,844 1,322 530 2,989 75,003
Total contractual cash obligations
(1)Interest payments due under the Amended Credit Agreement, which matures onMay 30, 2023 ; based on a weighted average interest rate of 4.0% for Canadian term loan, 4.1% for Canadian revolver borrowings and 3.6% for Australian revolver borrowings for the twelve month period endedDecember 31, 2020 . Our debt obligations atDecember 31, 2020 are reflected in our consolidated balance sheet, which is a part of our consolidated financial statements in Item 8 of this annual report. We have not entered into any material leases subsequent toDecember 31, 2020 . 57 --------------------------------------------------------------------------------
Critical Accounting Policies
Our consolidated financial statements in Item 8 of this annual report have been prepared in accordance withU.S. GAAP, which require that management make numerous estimates and assumptions. Actual results could differ from those estimates and assumptions, thus impacting our reported results of operations and financial position. The critical accounting policies and estimates described in this section are those that are most important to the depiction of our financial condition and results of operations and the application of which requires management's most subjective judgments in making estimates about the effect of matters that are inherently uncertain. We describe our significant accounting policies more fully in Note 2 - Summary of Significant Accounting Policies to the notes to consolidated financial statements in Item 8 of this annual report.
Accounting for Contingencies
We have contingent liabilities and future claims for which we have made estimates of the amount of the eventual cost to liquidate these liabilities or claims. We make an assessment of our exposure and record a provision in our accounts to cover an expected loss when we believe a loss is probable and the amount of the loss can be reasonably estimated. These liabilities and claims sometimes involve threatened or actual litigation where damages have been quantified. Other claims or liabilities have been estimated based on their fair value or our experience in these matters and, when appropriate, the advice of outside counsel or other outside experts. Upon the ultimate resolution of these uncertainties, our future reported financial results will be impacted by the difference between our estimates and the actual amounts paid to settle a liability. Examples of areas where we have made important estimates of future liabilities include litigation, taxes, interest, insurance claims, warranty claims, contract claims and obligations.
Impairment of Tangible and Intangible Assets, including
Goodwill .Goodwill represents the excess of the purchase price paid for acquired businesses over the allocated fair value of the related net assets after impairments, if applicable. We evaluate goodwill for impairment, at the reporting unit level, annually and when an event occurs or circumstances change to suggest that the carrying amount may not be recoverable. A reporting unit is the operating segment, or a business one level below that operating segment (the "component" level) if discrete financial information is prepared and regularly reviewed by management at the component level. Each segment of our business represents a separate reporting unit, and all three of our reporting units have or previously had goodwill. In connection with the preparation of our financial statements for the three months endedMarch 31, 2020 , we performed a quantitative goodwill impairment test as ofMarch 31, 2020 , and we reduced the value of our goodwill in our Canadian reporting unit to zero. Please see Note 4 - Impairment Charges to the notes to consolidated financial statements in Item 8 of this annual report for further discussion of goodwill impairments recorded in the years endedDecember 31, 2020 and 2019. We conduct our annual impairment test as ofNovember 30 of each year. We compare each reporting unit's carrying amount, including goodwill, to the fair value of the reporting unit. If the carrying amount of the reporting unit exceeds its fair value, goodwill is impaired. We are given the option to test for impairment of our goodwill by first performing a qualitative assessment to determine whether it is more likely than not (that is, likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill. If it is determined that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then performing the currently prescribed quantitative impairment test is unnecessary. In developing a qualitative assessment to meet the "more-likely-than-not" threshold, each reporting unit with goodwill is assessed separately and different relevant events and circumstances are evaluated for each unit. We have the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the quantitative goodwill impairment test. When performing our annual assessment onNovember 30, 2020 , we performed the qualitative assessment related to ourAustralia reporting unit. All of our goodwill resides in ourAustralia reporting unit as ofNovember 30, 2020 . Qualitative factors that we considered as part of our assessment include industry and market conditions, macroeconomic conditions and financial performance of our business. After assessing these events and circumstances, we determined that it was more likely than not that the fair value of theAustralia reporting unit was greater than its carrying value. Based on the interim quantitative testing performed as ofMarch 31, 2020 , the fair value of theAustralia reporting unit exceeded its carrying value by 127%. In performing the quantitative goodwill impairment test, we compare each reporting unit's carrying amount, including goodwill, to the fair value of the reporting unit. Because none of our reporting units has a publicly quoted market price, we 58 -------------------------------------------------------------------------------- must determine the value that willing buyers and sellers would place on the reporting unit through a routine sale process (a Level 3 fair value measurement). In our analysis, we target a fair value that represents the value that would be placed on the reporting unit by market participants, and value the reporting unit based on historical and projected results throughout a cycle, not the value of the reporting unit based on trough or peak earnings. The fair value of the reporting unit is estimated using a combination of (i) an analysis of trading multiples of comparable companies (Market Approach) and (ii) discounted projected cash flows (Income Approach). We also use acquisition multiples analyses in certain circumstances. The relative weighting of each approach reflects current industry and market conditions. Market Approach - This valuation approach utilizes publicly traded comparable companies' enterprise values, as compared to their recent and forecasted earnings before interest, taxes and depreciation (EBITDA) information. We use EBITDA because it is a widely used (1) key indicator of the cash generating capacity and (2) valuation metric of companies in our industry. Income Approach - This valuation approach derives a present value of the reporting unit's projected future annual cash flows over the next five years with a terminal value assumption. We use a variety of underlying assumptions to estimate these future cash flows, including assumptions relating to future economic market conditions, rates, occupancy levels, costs and expenses and capital expenditures. These assumptions can vary by each reporting unit depending on market conditions. In addition, a terminal value is estimated, using a Gordon Growth methodology with a long-term growth rate of 2%. We discount our projected cash flows using a long-term weighted average cost of capital based on our estimate of investment returns that would be required by a market participant. The discount rates used to value our reporting units for theMarch 31, 2020 interim goodwill impairment test ranged between 10.5% and 14.0%. The fair value of our reporting units is affected by future oil, coal and natural gas prices, anticipated spending by our customers and the cost of capital. Our estimate of fair value requires us to use significant unobservable inputs, representative of Level 3 fair value measurements, including numerous assumptions with respect to future circumstances, such as industry and/or local market conditions that might directly impact each reporting unit's operations in the future. We selected these valuation approaches because we believe the combination of these approaches and our best judgment regarding underlying assumptions and estimates provides us with the best estimate of fair value for each of our reporting units. We believe these valuation approaches are proven valuation techniques and methodologies for our industry and widely accepted by investors. The fair value of each reporting unit would change if our assumptions under these valuation approaches, or relative weighting of the valuation approaches, were materially modified. The following assumptions are significant to our evaluation process: Business Projections - We make assumptions about the level of revenues, gross profit, operating expenses, as well as capital expenditures and net working capital requirements. These assumptions drive our planning assumptions and represent key inputs for developing our cash flow projections. These projections are developed using our internal business plans over a five-year planning period that are updated at least annually; Long-term Growth Rates - We also utilize an assumed long-term growth rate representing the expected rate at which our cash flow stream is projected to grow. These rates are used to calculate the terminal value and are added to the cash flows projected during our planning period; and Discount Rates - The estimated future cash flows are then discounted at a rate that is consistent with a weighted-average cost of capital that is likely to be expected by market participants. The weighted-average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt holders of a business enterprise. Definite-Lived Tangible and Intangible Assets. The recoverability of the carrying values of tangible and intangible assets is assessed at an asset group level which represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Whenever, in management's judgment, we review our assets for impairment in step one when events or changes in circumstances indicate that the carrying value of such asset groups may not be recoverable based on estimated future cash flows, an asset impairment evaluation is performed. Indicators of impairment might include persistent and sustained negative economic trends affecting the markets we serve, recurring cash flow losses or significantly lowered expectations of future cash flows expected to be generated by our assets. As part of the initial step, we also reevaluate the remaining useful lives and salvage values of our assets when indicators of impairment exist.
Identification of Asset Groups - The following summarizes the asset groups that we have identified in each of our reporting segments.
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Our Canada segment consists of numerous lodges, as well as our mobile assets and
our manufacturing facility. These properties are grouped in the following asset
groups:
•Core Region
•Fort McMurray Village - North Athabasca
•Beaver River Lodge - North Athabasca
•Athabasca Lodge - North Athabasca
•Hudson and Borealis Lodges - North Athabasca
•McClelland Lake Lodge - North Athabasca
•Wapasu Creek Lodge - North Athabasca
•Grey Wolf Lodge - North Athabasca
•Conklin Lodge - South Athabasca
•Anzac Lodge - South Athabasca
•Red Earth Lodge - South Athabasca
•Wabasca Lodge - South Athabasca
•Sitka Lodge - Kitimat, British Columbia
•Geetla camp - British Columbia
•Boundary camp - Saskatchewan
•Antler River camp - Manitoba
•Red Earth camp - Alberta
•Christina Lake camp - Alberta
•Mobile assets
•Noble manufacturing facility
•Various land holdings in British Columbia purchased in anticipation of
potential LNG related projects
In general, the lodges are operated on a lodge by lodge basis. However, for one
set of lodges (the Core Region , including Beaver River , Athabasca , Hudson and
Borealis Lodges and Fort McMurray Village ), there are no identifiable cash flows
largely independent of the cash flows of other assets and liabilities for such
lodges, and therefore, such lodges are combined into a single asset group.
Factors such as proximity to each other, commonality of customers, common
monitoring by management and operating decisions being made to optimize these
lodges as a group result in these lodges being treated as a single asset group
for the purposes of our impairment assessments.
Our Australia segment consists of nine villages in several regions within the
country, as well as our integrated services assets and land banked assets. These
properties are grouped in the following asset groups:
•Karratha - Pilbara Region , Western Australia
•Integrated services - Assets held on client owned sites in Western Australia
•Kambalda - Kambalda, Western Australia
•Gunnedah Basin
•Narrabri - Gunnedah Basin , New South Wales
•Boggabri - Gunnedah Basin , New South Wales
•Bowen Basin
•Moranbah - Bowen Basin , Queensland
•Dysart - Bowen Basin , Queensland
•Nebo - Bowen Basin , Queensland
•Coppabella - Bowen Basin , Queensland
•Middlemount - Bowen Basin , Queensland
•Various non-operational sites acquired as part of Civeo's land-banking strategy
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In general, the villages are operated on a village by village basis, except for
the villages located in the Bowen Basin (Moranbah, Dysart , Nebo, Coppabella and
Middlemount) and the Gunnedah Basin (Narrabri and Boggabri). The villages in the
Bowen and Gunnedah Basins contain significant levels of interdependency that
allow these assets to be combined into cash generating units (asset
groups). Factors such as commonality of customers, location, resource basins
served and common monitoring by management result in the Bowen and Gunnedah
Basins to be treated as single asset groups for the purposes of our impairment
assessments. Integrated services assets provide catering and managed services to
the mining industry in Western Australia .
Our U.S. segment consists of lodges in three geographical areas, mobile assets
in various geographical areas, and a wastewater treatment plant (WWTP). These
properties are grouped in the following asset groups:
•West Permian Lodge - Texas
• Killdeer Lodge - North Dakota
•Acadian Acres Lodge - Louisiana
•Offshore - this asset group includes mobile assets which are utilized in the
Gulf of Mexico
•Wellsites - this asset group includes mobile assets, primarily in the Permian
Basin region, the Mid-Continent and the Rocky mountain corridor
•Killdeer WWTP - this asset group represents a WWTP in Killdeer, North Dakota ,
which was constructed in early 2014
Recoverability Assessment - In performing an impairment analysis, the second
step is to compare each asset group's carrying value to estimates of
undiscounted future direct cash flows associated with the asset group over the
remaining useful life of the asset group's primary asset. We use a variety of
underlying assumptions to estimate these future cash flows, including
assumptions relating to future economic market conditions, rates, occupancy
levels, costs and expenses and capital expenditures. The estimates are
consistent with those used for purposes of our goodwill impairment test, as
further discussed in Goodwill , above.
Fair Value Determination - If, based on the assessment, the carrying values of
any of our asset groups are determined to not be recoverable as a result of the
undiscounted future cash flows not exceeding the net book value of the asset
group, we proceed to the third step. In this step, we compare the fair value of
the respective asset group to its carrying value. Our estimate of the fair value
requires us to use significant unobservable inputs, representative of Level 3
fair value measurements, including numerous assumptions with respect to future
circumstances, such as industry and/or local market conditions that might
directly impact each of the asset groups' operations in the future, and are
therefore uncertain.
Our industry is cyclical and our estimates of the period over which future cash
flows will be generated, as well as the predictability of these cash flows and
our determination of whether a decline in value of our investment has occurred,
can have a significant impact on the carrying value of these assets and, in
periods of prolonged down cycles, may result in impairment losses. If this
assessment indicates that the carrying values will not be recoverable, an
impairment loss is recognized equal to the excess of the carrying value over the
fair value of the asset group. The fair value of the asset group is based on
prices of similar assets, if available, or discounted cash flows.
In estimating future cash flows, we make numerous assumptions with respect to
future circumstances that might directly impact each of the asset groups'
operations in the future and are therefore uncertain. These assumptions with
respect to future circumstances include future oil and coal prices, anticipated
customer spending, and industry and/or local market conditions. These
assumptions represent our best judgment based on the current facts and
circumstances. However, different assumptions could result in a determination
that the carrying values of additional asset groups are no longer recoverable
based on estimated future cash flows. Our estimate of fair value is primarily
calculated using the Income Approach, which derives a present value of the asset
group based on the asset groups' estimated future cash flows. We discounted our
estimated future cash flows using a long-term weighted average cost of capital
based on our estimate of investment returns required by a market participant.
The discount rates used during the 2020 Canadian and U.S. segments long-lived
asset impairment analysis ranged between 10.5% and 14.0%.
Please see Note 4 - Impairment Charges to the notes to consolidated financial
statements in Item 8 of this annual report for further discussion of impairments
of definite-lived tangible and intangible assets recorded in the years ended
December 31, 2020 , 2019 and 2018.
61
--------------------------------------------------------------------------------Revenue and Cost Recognition
We generally recognize accommodation, mobile facility rental, food service and other services revenues over time as our customers simultaneously receive and consume benefits as we serve our customers because of continuous transfer of control to the customer. Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. We transfer control and recognize a sale based on a periodic (usually daily) room rate each night a customer stays in our rooms or when the services are rendered. In some contracts, rates may vary over the contract term. In these cases, revenue may be deferred and recognized on a straight-line basis over the contract term. A limited portion of our revenue is recognized at a point in time when control transfers to the customer related to small modular construction and manufacturing contracts, minor food service arrangements and optional purchases our customers make for incidental services offered at our accommodation and mobile facilities. For significant projects, manufacturing revenues are recognized over time with progress towards completion measured using the cost based input method as the basis to recognize revenue and an estimated profit. Billings on such contracts in excess of costs incurred and estimated profits are classified as deferred revenue. Costs incurred and estimated profits in excess of billings on these contracts are recognized as unbilled receivables. Management believes this input method is the most appropriate measure of progress to the satisfaction of a performance obligation on larger modular construction and manufacturing contracts. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, estimated profitability and final contract settlements may result in revisions to projected costs and revenue and are recognized in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated. Factors that may affect future project costs and margins include weather, production efficiencies, availability and costs of labor, materials and subcomponents. These factors can significantly impact the accuracy of our estimates and materially impact our future reported earnings. Because of control transferring over time, the majority of our revenue is recognized based on the extent of progress towards completion of the performance obligation. At contract inception, we assess the goods and services promised in our contracts with customers and identify a performance obligation for each promise to transfer our customers a good or service (or bundle of goods or services) that is distinct. Our customers typically contract for hospitality services under take-or-pay contracts with terms that most often range from several months to three years. Our contract terms generally provide for a rental rate for a reserved room and an occupied room rate that compensates us for services provided. We typically contract our facilities to our customers on a fee per day basis where the goods and services promised include lodging and meals. To identify the performance obligations, we consider all of the goods and services promised in the context of the contract and the pattern of transfer to our customers.
Revenues exclude taxes assessed based on revenues such as sales or value added taxes.
Cost of services includes labor, food, utility costs, cleaning supplies, and other costs of operating our accommodations facilities. Cost of goods sold includes all direct material and labor costs and those costs related to contract performance, such as indirect labor, supplies, tools and repairs. Selling, general and administrative costs are charged to expense as incurred.
Estimation of Useful Lives
The selection of the useful lives of many of our assets requires the judgments of our operating personnel as to the length of these useful lives. Our judgment in this area is influenced by our historical experience in operating our assets, technological developments and expectations of future demand for the assets. Should our estimates be too long or short, we might eventually report a disproportionate number of losses or gains upon disposition or retirement of our long-lived assets. We reevaluate the remaining useful lives and salvage values of our assets when certain events occur that directly impact the useful lives and salvage values, including changes in operating condition, functional capability, impairment assessment and market and economic factors. We believe our estimates of useful lives are appropriate.
Share-Based Compensation
Our historic share-based compensation is based on participating inCiveo's 2014 Equity Participation Plan (the Plan). Our disclosures reflect only our employees' participation in the Plans. We are required to estimate the fair value of share compensation made pursuant to awards under the Plans. An initial estimate of the fair value of each option award, restricted share award or deferred share award determines the amount of share compensation expense we will recognize in the future. For stock option awards, which were all granted prior to ourMay 30, 2014 spin-off from Oil States, to estimate the value of the awards under the Plan, Oil States selected a fair value calculation model. Oil States chose the Black-Scholes option pricing model to value stock options awarded under the Plan. Oil States chose this model because option awards were made under 62 -------------------------------------------------------------------------------- straightforward vesting terms, option prices and option lives. Utilizing the Black-Scholes option pricing model required Oil States to estimate the length of time options will remain outstanding, a risk free interest rate for the estimated period options are assumed to be outstanding, forfeiture rates, future dividends and the volatility of its common stock. All of these assumptions affect the amount and timing of future share-based compensation expense recognition. We have not made any option awards subsequent toMay 30, 2014 , but, in the event that we make future awards, we expect to utilize a similar valuation methodology. We will continually monitor our actual experience and change assumptions for future awards as we consider appropriate. We also grant performance share awards under the Plan. Awards are earned in amounts between 0% and 200% of the participant's target performance share award, based on the payout percentage associated withCiveo's relative total shareholder return rank among a peer group of companies. The fair value of the awards was estimated using a Monte Carlo simulation pricing model. We chose this model because the performance awards contain complex vesting terms. Utilizing the Monte Carlo simulation pricing model required us to estimate the risk-free interest rate and the expected market price volatility of our common shares as well as the peer group of companies over a time period equal to the expected term of the award. The resulting cost is recognized over the period during which an employee is required to provide service in exchange for the awards, usually the vesting period. For additional details, see Note 18 - Share-Based Compensation to the notes to the consolidated financial statements included in Item 8 of this annual report.
Income Taxes
We follow the liability method of accounting for income taxes in accordance with current accounting standards regarding the accounting for income taxes. Under this method, deferred income taxes are recorded based upon the differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws in effect at the time the underlying assets or liabilities are recovered or settled. When our earnings from foreign subsidiaries are considered to be indefinitely reinvested, no provision for Canadian income taxes is made for these earnings. If any of the subsidiaries have a distribution of earnings in the form of dividends or otherwise, we would be subject to both Canadian income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to various foreign countries. We do not expect to provide Canadian income taxes on future foreign earnings. We record a valuation allowance in each reporting period when our management believes that it is more likely than not that any recorded deferred tax asset will not be realized. Our management will continue to evaluate the appropriateness of the valuation allowance in the future, based upon our operating results. Please see Note 15 - Income Taxes to the notes to consolidated financial statements in Item 8 of this annual report for further discussion. In accounting for income taxes, we are required to estimate a liability for future income taxes for any uncertainty for potential income tax exposures. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for anticipated tax audit issues in theU.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. If we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We record an additional charge in our provision for taxes in the period in which we determine that the recorded tax liability is less than we expect the ultimate assessment to be.
Recent Accounting Pronouncements
Please see Note 2 - Summary of Significant Accounting Policies - Recent Accounting Pronouncements to the notes to consolidated financial statements in Item 8 of this annual report for further discussion.
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