Description

CIVEO Corp. CVEO

Gold Pans, Pick Axes and Blue Jeans

The California Gold Rush of 1848-1855 was characterized by lawlessness, violence and profits for a few. The profits mostly went to suppliers of mining related supplies and not the actual gold miners. Levi Strauss, a Bavarian immigrant journeyed to San Francisco in 1853 and opened a thriving dry goods business supplying gold miners.

Civeo provides permanent and temporary workforce accommodations for energy and mining workers in remote areas of Canada (66% of 2015 revenues), Australia (26%) and the US (7%). The company develops, owns and operates housing facilities providing the associated catering, facilities management, and logistics services. Many of their facilities are quite luxurious with restaurants, lounges and gyms. The company was a spin-off from Oil States International (OIS) as the result of pressure from JANA partners in May of 2014. Greenlight was a large initial shareholder when the stock was in the 20’s but bailed out a long time ago. See the VIC write-up by hawaii21 on June 30, 2014 for more details. The stock was trading at $26.01. Now it is trading at $1.30.

Civeo’s March 2016 investor presentation provides an excellent overview and can be found here: http://files.shareholder.com/downloads/AMDA-2SLCEP/1640521062x0x879699/6612377E-4542-476B-9115-8FF6AAD11E33/CVEO_IR_Pres_March_2016_Final.pdf

With the precipitous decline in natural resource prices, coal and energy companies have cut their capex budgets massively and drilling/mining activity has shrunk. CVEO owns housing facilities with fairly high fixed costs and with the drop in volume, there is a risk that at some point, the business will fail and the equity will be wiped out. This is an idea with 10x upside but the downside is you could also lose all of your capital, so it should be sized accordingly. Market cap is $134mm however the stock is relatively liquid, with average daily trading volume of 944,755 shares. I think we are at the point in the cycle where a small portion of your portfolio should be dedicated to cheap options, and CVEO fits the bill.

The Question: Will CVEO survive until energy and natural resource prices recover?

With reduced occupancy, the company revenues and earnings have been in a freefall. Interest expense for the TTM was $22.6mm and 2015 capex was $62.5mm so the company is close to breakeven cash flow for 2016 and 2017 assuming the same numbers. I am guessing capex will be much lower but don’t know for sure. Civeo’s Debt is below:

Civeo signed a new credit agreement in March 2016 and there is $700mm of capacity with $318mm unused as of 12/31/15. The company has done a good job of “hunkering down” paying off debt and conserving liquidity. The problems will be in May of 2019 when all of their debt is due. Oil and coal prices need to recover enough for exploration and development activity to resume at a higher level than today over the next 3 years or our equity could be worthless. Think 3 year call option on oil and coal prices. If occupancy ever approaches 2012 levels, CVEO is a very strong cash generator with significant upside.

New Business Prospects

Civeo competes primarily with Black Diamond Group (BDI CN) for new business and is about twice the size of Black Diamond.

• In January, CVEO landed a $41mm contract for Canadian Oil Sands Accommodations for 2016 and 2017 and an extension of a catering and operations services contract in Alberta

• There are two major LNG liquefaction projects led by Shell oil in British Columbia that they are pursuing now.

• LNG Facility: 3-5 year timeframe with 3,500-7,500 rooms needed

• Pipeline Construction: 2-3 year timeframe with >8,000 rooms needed

• CVEO’s Canadian business represents 66% of 2015 revenue and has total capacity of 15,300 rooms. The potential contracts are material in size and CVEO is the logical supplier since they are the largest provider by far.

Summary

There are a number of ways to play the potential rebound in natural resource and energy prices. CVEO gives you a 3+ year cheap option. If prices do not recover, or decline more, then CVEO will probably not be a profitable investment. If prices do recover however, CVEO has the potential to trade at a price in excess of 10x the current price. When CVEO was spun-off from Oil States in 2014, the stock traded as high as $28/share. They are not saddled with high cost debt and cash flow is projected to be close to breakeven over the next couple of years. In addition, CVEO has already renewed their credit facility for 2016 and there is unused capacity of $318mm. Outstanding debt is $402mm currently so there is the potential for a scenario where Civeo’s business doesn’t improve a significant amount and the shareholders retain some value past 2019.

Risks

• Oil and coal prices do not improve or decline from here

• Canadian oil sands tend to produce at higher costs so you would need a larger price recovery to stimulate new production.

Catalyst

Oil and coal prices recover reaulting in increased exploration and development activity

Civeo lands a significant chunk of the LNG liquefaction projects planned in British Columbia