Description

Since the last VIC write-up over three years ago, Civeo has cleaned up
its capital structure, moderately improved the business mix and
significantly transformed the balance sheet.

Business:  Civeo provides workforce accommodations and hospitality
services with a near 50/50 revenue split between Canada and Australia.
Revenues are roughly 50% steel related (met coal and iron ore) and 50%
oil, LNG, gold and copper.

In Canada, the business skews towards owned sites with oil sands
producers as the primary customers.  The business is stable - without
significant organic growth opportunities - but should be long-lived.
The biggest acquisition in this unit was the cash and stock purchase
of Noralta in 2018.  The seller took back common and preferred shares
that made the cap table a bit messy and caused some turmoil in the
shares when he liquidated, but that is in the past.

The Australian unit has been the growth driver for Civeo.  The company
entered the Australian market in 2010, and in 2019 bought Action – a
provider of catering and managed services, which is now a business
unit broken out in company financials under Integrated Services.  The
Australian customer base is more steel focused - mining of met coal
and iron ore.  The Australian market is more fragmented with many
smaller competitors when compared to the Canadian market.  Civeo is
the third largest player and offers more services than
smaller players to win new business.  This has really begun to show up
in contract wins and extensions in the past year.

The customer base consists mostly of large oil and mining companies
including ConocoPhillips, Suncor, Fortescue and Anglo Coal.

There has been a trend in the past decade of larger customers
outsourcing more of their lodging and hospitality to third parties
like Civeo as it is not a core competency of the miners.  The trend
should continue and provide a moderate tailwind to Civeo moving
forward.

Civeo was spun-off from Oil States International (OIS) in 2014 and has
been run by Bradley Dodson ever since.  A new CFO was appointed
yesterday – he has also been with the company since the spin.

Civeo has spent much of the recent past in a highly levered situation
with a challenged balance sheet.  Operations and capital allocation
have been strong, and the business is now in a position to go on the
offensive for the first time in years.

While waiting for M&A opportunities the company initiated a dividend
last September - $1 annual dividend good for a nearly 4% yield; they
have also bought back roughly 15% shares outstanding in the past 3
years.

Moving forward growth will come from M&A – the company has plenty of
firepower with a target 1-1.25x leverage ratio and many opportunities
to roll-up smaller players in Australia.

Significant organic growth opportunities include:
Repositioning of Canadian assets that are in the process or have
recently wound down.

From the 1Q call:
“we recognize that our modular assets, both permanent and mobile,
there are a lot of industrial and mining projects that need assets
that are remote. A lot of them are driven by power transmission and
effectively, resources that are used in EV batteries. So, we’re
working very diligently to expand the Canadian business into other
geographies, specifically east of Alberta and down into the US.”

Opportunities could include bromine projects in Arkansas, carbon
capture, some potential opportunities in a Trump presidency, etc.

Australia Integrated Services
The company has put out a goal revenue of $500 million AUD (roughly
$325 million at current exchange rates) by 2027 – roughly a doubling
from 2023 levels.

Unburdened by the large debt load of the past, management has a lot of
financial flexibility moving forward.  The company should be close to
a net cash position by year-end and targets a leverage ratio in the
1-1.25x range through the cycle.  With cash generation of ~$55
million this year and increasing next year, there is a lot of
firepower.

Given the importance of capital allocation to the thesis, the
appointment of a new CFO yesterday might be looked at as
disconcerting, but he has been with the company since the spin and has
prior IR and capital markets experience.

“Mr. Gerry has held several executive positions with Civeo since May
2014, including serving as Senior Vice President of Canadian
Operations since May 2020, and Vice President of Corporate and
Business Development from September 2016 to May 2020. Prior to joining
Civeo, Mr. Gerry served as Senior Vice President within the equity
research department of Raymond James, with a specific focus on energy
markets and the oilfield services industry including Civeo’s prior
parent, Oil States International. Mr. Gerry holds a Bachelor of
Business Administration degree from The University of Texas at
Austin.”

We’re expecting Civeo to step up its M&A in the near future as debt is
paid down, a dividend has been initiated, buying back significantly
more stock is challenging for a variety of reasons and the
compensation policy incentivizes it.  Moving forward management is
compensated on a 30% TSR / 70% 3 year growth in EBITDA formula.  The
CEO owns a decent chunk of stock and any large transactions investors
don’t like will ding the TSR, so alignment here is reasonable.  He’s
also on the young side for a CEO a decade into the job, so he could
use this as a roll-up vehicle or look to exit for a second act
elsewhere.

Looking ahead, we expect Canada revenues to be flat, Australia lodging
up slightly and continued growth in the integrated service business.

Something in the vicinity of $100 million EBITDA, $4.25 / share FCF
based upon 5% share count shrink seems reasonable for 2025.  There
could be some upside if management is able to sign contracts for
equipment that wrapped up service in Canada this year, and at the very
least termination expenses should be complete by year-end.

With a 4% yield, no debt, and a shrinking share count while growing
topline low to mid-single digits and a slightly positive mix
change, we think shares should trade around 10x cash flow / 6x EBITDA
which leads to significant upside.

Risks:

There are a number of risks outside of management’s control:

Recession / decline in commodity prices

Weather events – wildfires in Canada, floods, etc.

ESG movement makes life harder for customers and the company

Within management’s control the biggest risk is poor capital allocation

Management has steadily paid down debt but will be close to a net cash
position by year-end, with significant annual cash flows as a
percentage of enterprise value decisions made by management re.
buybacks, dividends (recurring and 1x) and M&A will have a significant
impact on future returns

The other main risk is contracts can be cancelled by customers for
performance issues.  Recent contract wins and expansions are positive
signs, but Civeo will need to deliver to continue to maintain and gain
market share.

Catalyst

Improved capital structure and balance sheet with capital returns to shareholders

Stronger business mix