Civeo (CVEO) Q4 2020 Earnings Call Transcript

Civeo (CVEO 0.97%)
Q4 2020 Earnings Call
Feb 26, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to the Civeo Corporation's fourth-quarter 2020 earnings call. Today's call is being recorded. And at this time, I would like to turn the conference over to Regan Nielsen, director, corporate development, and investor relations. Please go ahead, sir.

Regan Nielsen -- Director, Corporate Development, and Investor Relations

Thank you, and welcome to Civeo's fourth-quarter 2020 earnings conference call. Today, our call will be led by Bradley Dodson, Civeo's president and chief executive officer; and Carolyn Stone, Civeo's senior vice president, chief financial officer, and treasurer. Before we begin, we would like to caution listeners regarding forward-looking statements. To the extent that our remarks today contain information other than historical information, please note that we're relying on the safe harbor protections afforded by federal law.

Any such remarks should be read in the context of the many factors that affect our business, including risks disclosed in our Form 10-K, 10-Q and other SEC filings. I'll now turn the call over to Bradley.

Bradley Dodson -- President and Chief Executive Officer

Thank you, Regan, and thank you all for joining us today on our fourth-quarter earnings call. We hope that you and your loved ones are staying safe and well. In addition, we're thinking of our employees, customers and stakeholders who are affected by the historic winter weather last week in Texas and the surrounding states. We hope you are all safe, warm and getting to recover.

Again, as I have on all the earnings calls since the pandemic started by emphasizing that at Civeo, the safety and well-being of our employees, guests and contractors is always our top priority. For today's call, I'll start with the key takeaways and then give a brief summary of our fourth quarter and full-year performance. Carolyn will then provide a financial and segment-level review, and I'll conclude with our initial full-year 2021 guidance and regional underlying assumptions to that guidance, as well as some directional commentary as we prepare for our post COVID-19 world. And then we'll open up the call for questions.

The key takeaways from our call today are: Civeo's business continues to generate cash, which is furthering our ongoing debt reduction efforts. For the full-year 2020, Civeo generated $111 million of free cash flow, an increase of 119% year over year, and reduced our total debt during 2020 by $108 million to end the year at $251 million of total debt. This is really the key point from the press release and this earnings call. Our fourth-quarter results were modestly better than we were expecting.

In the fourth quarter, Civeo delivered $23.7 million of adjusted EBITDA and $33.2 million of free cash flow. We reduced our total debt by $21.5 million in the fourth quarter, bringing our leverage ratio down to 2.1 times as of December 31st, 2020. Delevering our balance sheet remains our top financial priority, and this quarter is the seventh straight quarter that the leverage ratio has come down. We also had another successful quarter in terms of new contract awards and extensions.

Today, we announced three contract renewals in our Australian business, with the expected total revenues of AUD 101 million over the two-year terms. Our Australian business had another good quarter, delivering adjusted EBITDA of $17.2 million, a 9% improvement year over year on robust room demand and our team's operational execution. Despite typical holiday downtime in the fourth quarter, our operations in Canada are showing early signs of normalization from the negative impacts of the lower oil prices. Our customers are gradually mobilizing employees and contractors as the worst of the impacts of the pandemic appear to be abating.

In total, our team put together a solid fourth quarter despite the challenges of the pandemic and the weaker oil price environment in 2020. I'll now take a moment to provide a business update on our three segments: In Canada, our revenues and adjusted EBITDA softened both sequentially and year over year, given the lingering constraints on occupancy from the volatile oil prices, pandemic, typical holiday downtime, and a strong -- unusually strong turnaround schedule in the fourth quarter last year, this segment's performance was consistent with our expectations. Our Australian results were in line with our expectations as our Bowen Basin occupancy was slightly better than expected, but did reflect some typical holiday downtime, coupled with lower occupancy at our Karratha location as LNG-related occupancy declined. Adjusted EBITDA in the fourth quarter was up year over year as a result of stronger customer activity in the Bowen Basin and in our Western Australian Integrated Services business.

In the U.S., conditions for our U.S. business continue to be extraordinarily challenging and we are not counting on a meaningful improvement in the business in the first half of 2021. Although we are encouraged by the recent improvement in drilling and completion activity, independent of disruptions from the recent arctic blast, activity remains subdued, and we expect E&P customers in the U.S. to continue to live well within their cash flows, constraining overall activity.

Turning to the balance sheet. Our leverage rate declined at 2.1 times at year-end from 2.16 times at the end of the third quarter. Proactively dedicating cash flow to reducing debt remains our key financial priority. 2020 presented a series of unprecedented obstacles, and 2021 is often a similarly atypical start with the continued Chinese-Australian trade dispute, slow vaccine rollout in North America and the impacts of the recent arctic weather in the Southern U.S.

At Civeo, we adhere to our battle-tested playbook, when these unexpected crises present themselves, keep our employees, guests and vendors safe and comfortable as possible, operate responsibly in our communities, continue to focus on what we control, and rely on the consistent strategic priorities to maximize free cash flow generation, reduce debt to enhance financial flexibility and contain costs without compromising service quality. And with that, I'll turn the call over to Carolyn.

Carolyn Stone -- Senior Vice President, Chief Financial Officer, and Treasurer

Thank you, Bradley, and thank you all for joining us this morning. Today, we reported total revenue in the fourth quarter of $133.4 million, with a GAAP net loss of $2.3 million or $0.16 per diluted share. During the fourth quarter, we generated adjusted EBITDA of $23.7 million, operating cash flow of $36.7 million and free cash flow of $33.2 million. The lower adjusted EBITDA we experienced in the fourth quarter of 2020 as compared to the same period in 2019 was largely due to lower billed rooms in our Canadian oil sands lodges and, to a lesser extent, lower occupancy due to decreased drilling and completion activity in the U.S.

These items were partially offset by CEWS proceeds, as well as by the continued favorable performance of our Australia business. For the full-year 2020, we reported revenue of $529.7 million and a net loss of $136.1 million or $9.64 per share. In 2020, we generated adjusted EBITDA of $108.1 million for the full year, which was consistent with our 2019 full-year adjusted EBITDA of $108.4 million. Weaker activity in Canada and the U.S.

related to the pandemic and lower oil prices was almost completely offset by stronger activity in Australia, as well as CEWS proceeds. Let's now turn to the fourth-quarter results for our three segments. I'll begin with a review of the Canadian segment performance compared to its performance a year ago in the fourth quarter of 2019. Revenue from our Canadian segment was $65.5 million as compared to revenue of $89.7 million in the fourth quarter of 2019.

Adjusted EBITDA in Canada was $13.8 million, a decrease from $20.9 million in the fourth quarter of 2019. The negative impact on revenue and adjusted EBITDA was largely caused by a meaningful reduction in billed rooms in 2020. Related to the protracted decline in oil prices, and the effects of the COVID-19 pandemic, especially in our oil sands lodges, coupled with unusually high fourth quarter turnaround activity in 2019. Adjusted EBITDA in the fourth quarter of 2020 for our Canadian segment included $3.3 million related to proceeds from the CEWS.

During the fourth quarter, billed rooms in our Canadian lodges totaled 469,000, which was down 44% year over year from 837,000 in the fourth quarter of 2019 due to the factors I just mentioned. Our daily run rate for the Canadian segment in U.S. dollars was $98, up slightly with a 7% year-over-year increase. Turning to Australia.

During the fourth quarter, we recorded revenue of $63.7 million, up from $48.9 million in the fourth quarter of 2019. Adjusted EBITDA was $17.2 million, up from $15.7 million during the same period in 2019. These results represent a 22% period-over-period top line increase on a constant currency basis and were driven by increased activity in our integrated services business, and our increased occupancy at Bowen Basin lodges. Our U.S.

dollar results further reflect the impact of the strengthened Australian dollar during -- relative to the U.S. dollar. Australian billed rooms in the quarter were 480,000, up from 463,000 in the fourth quarter of 2019, due again to the continued improvement in metallurgical coal activity across the Bowen Basin. The average daily rate for our Australian villages in U.S.

dollars was $77 in the fourth quarter, up from $72 year over year. As Bradley mentioned, we are very pleased to announce our new contract in Western Australia to provide hospitality services through our Integrated Services business, with estimated revenues of AUD 62 million over its two-year term. We also announced the renewal of two contracts to provide accommodations in hospitality services in our Bowen Basin villages with expected revenues under these contracts totaling AUD 39 million over approximately two-year terms. Moving to the U.S.

Revenue for the fourth quarter was $4.2 million as compared to $10 million in the fourth quarter of 2019. The U.S. segment saw a negative adjusted EBITDA of $1.4 million in the fourth quarter, a reduction from negative adjusted EBITDA of $0.2 million during the same period of 2019. These year-over-year declines were primarily related to broadly lower drilling and completion activity, largely due to lower oil prices, as well as the impact of the COVID-19 pandemic.

On a consolidated basis, our capital expenditures for the full-year 2020 were $10.1 million, down from $29.8 million during 2019. This decrease is primarily due to the completion of the Sitka lodge expansion in 2019, as well as capital discipline employed during 2020 due to the pandemic and resulting global economic environment. Our total debt outstanding on December 31st was $251.1 million, which was a $21.5 million decrease since September 30th. The decrease consisted of $34.6 million in payments during the quarter from free cash flow generated by the business, and was partially offset by an unfavorable foreign currency translation impact of $13.1 million.

Our leverage ratio for the quarter decreased to 2.11 times as of December 31st, 2020, from 2.16 times as of September 30. And finally, as of December 31st, we had total liquidity of approximately $105.4 million, which consisted of $99.3 million available under our revolving credit facilities, and $6.2 million of cash on hand. Bradley will now discuss our outlook for the full-year 2021. Bradley?

Bradley Dodson -- President and Chief Executive Officer

Thank you, Carolyn. I'd like to provide you with our full-year 2021 guidance on a consolidated basis, then provide you with the underlying outlooks for each of the regions, as well as the underlying assumptions to our guidance. Following the successful end to 2020 in light of the economic conditions, we are initiating full-year 2021 guidance of revenues of 555 to 565 million and EBITDA of 90 to 95 million. Our initial full-year 2021 capital expenditures forecast is 20 to $25 million.

Capital expenditures are expected to be higher year over year in 2021 as we return maintenance capital expenditures to more normalized levels, and we make investments tied to customer contracts supporting Canadian LNG and Australian iron ore projects. Again, our primary financial objective is free cash flow generation. So based on the EBITDA and capex guidance just outlined, expected interest expense of $15 million for 2021, no expected material cash taxes or working capital investment, we expect 2021 free cash flow for the full year to range between 50 and $60 million. To bridge our 2021 guidance to our 2020 actuals, we need to take out some of the one-time items in 2020.

Our 2020 adjusted EBITDA included $15 million of nonoperating items, comprised of $13 million from the CEWS program and $2 million in gains on sale of assets. Excluding those from the 2020 results, our 2020 adjusted EBITDA would have been $93 million, in line with our 2021 EBITDA guidance of 90 to $95 million. Now I'll provide the regional outlooks and the corresponding underlying assumptions by region. In Canada, from a macroeconomic perspective, the recent improvement in global oil and gas prices is an encouraging sign for our Canadian segment as we start 2021.

And although the bulk of our business is tied to existing oil sands production and committed LNG development, a more accommodated commodity price backdrop congratulating subsiding constraints from the pandemic, shape our view that our Canadian performance should improve year over year throughout 2021. We expect our oil sands occupancy to improve sequentially as customers gradually mobilize additional personnel with COVID-19 concerns beginning to abate. This is offset by the negative impact of the British Columbian provincial health order limiting headcount at all large industrial projects across the province, including the LNGC and CGL projects. We do expect modestly improved year-over-year turnaround activity in the second and third quarters of 2021, as well as modestly improved year over year mobile camp activity tied to the CGL and TMX pipelines.

Our Canadian guidance primarily depends on the following four assumptions: One, COVID-19 infections and hospitalization rates do not impact industrial activity more than currently expected. As you may have seen, the province of British Columbia has put a head count limitations on industrial projects. This is currently negatively impacting our occupancy at our Sitka location and our pipeline camps that are supporting the construction of the CGL pipeline. Should the pandemic worsen, this could negatively impact our outlook in our occupancy in Canada.

We are expecting an improved year-over-year turnaround activity in the oil sands region as many of the major oil sands operators are making up for delayed turnarounds in 2020. This activity could be deferred or cut back but we expect to have a clear picture of turnaround season by the time of our next earnings call. We do expect to be busy supporting pipeline construction projects in 2021. If these projects are delayed, this could push this activity from 2021 to 2022.

Lastly, the availability of skilled labor could become an issue, limiting ours and our customers' ability to increase staffing to the levels required to support construction and turnaround plans, ultimately negatively impacting our outlook for occupancy. Turning to Australia. The bulk commodity price environment should continue to underpin healthy fundamentals for our Australian business in 2021. Iron ore prices remain near multiyear highs as supply outages continue and steel demand and industrial automations gradually improves.

Metallurgical coal prices were weak in the fourth quarter of 2020 as the China-Australia trade tensions flare. But Australia has found new markets for its coal exports and prices have recovered early here in 2021. China's restrictions are expected to be lower in the first half of the year, which should continue to support solid activity for our business. We expect our Australian occupancy to be up slightly year over year; however, this assumes that China-Australia trade dispute does not negatively impact our customers' production or maintenance plans for 2021.

Our guidance also assumes that the current tight labor supply in Australia, particularly in Western Australia, does not worsen further. And that the recent reinstatement of the interstate travel in Australia will help abate some of the labor tightness as we move through 2021. For our U.S. business, the oil and gas price environment has improved modestly in recent months, but we're not forecasting a meaningful improvement in our U.S.

business for the first half of 2021. E&P customers and the major light -- tight oil players have been issued a clear mandate to live within operating cash flows. So we expect a gradual and modest improvement in U.S. activity, largely in the second half of the year.

I will conclude by underscoring the key elements of our strategy as we navigate this extraordinary marketing climate. Our mandates are as follows: we will prioritize the safety and well-being of our guests, employees and vendors. We'll manage our cost structure in accordance with the occupancy outlook across all three regions. We will continue to enhance our best-in-class hospitality offerings and we'll allocate capital prudently to maximize free cash flow generation while we continue to reduce debt.

Before we proceed to the questions section of the call, I'd like to thank our incredible employees around the world for their dedication, selflessness and professionalism that they bring to work every day. 2020 presented our team with unprecedented challenges and we predictably rose to the occasion at every turn. On behalf of the Civeo management team and board of directors, thank you again for making us so proud to work with you. With that, we'll take questions.

Questions & Answers:

Operator

[Operator instructions] We do have a question from Stephen Gengaro with Stifel. Please go ahead.

Stephen Gengaro -- Stifel Financial Corp -- Analyst

Thanks. Good morning everybody. I hope everybody is doing well and recovering from the weather. So a couple of things I wanted to hit on, but I just want to start off, you gave a lot of detail on 2021 guidance, but a couple of things I want to ask about.

The first is just seasonality, and I think most of the time you'll see kind of a normal drop-off in 1Q and then a ramp. How should we think about the seasonal patterns in '21 given your guidance?

Bradley Dodson -- President and Chief Executive Officer

Yes. We will see -- it's been a slower start to the year, really, both in Canada and Australia. In Canada, the limitations on headcount at industrial projects is negatively impacting our activity in British Columbia, and so that's negatively impacting things. And it's been a little bit of a slow start in the oil sands region.

We do, as you mentioned, see, particularly -- well, both in Canada and Australia, the maintenance season is typically Q2 and Q3. And so if you think about our $90 million to $95 million EBITDA guidance, about 65% of that happens in the middle of the year. So two thirds of the earnings are in the middle half of the year, and then we'll have a slower start. And then, the fourth quarter, at least at this point, looks to be fairly normal, fairly consistent with the fourth quarter of this year.

So that's what we're seeing thus far, Stephen.

Stephen Gengaro -- Stifel Financial Corp -- Analyst

And it sounds like you adjusted -- you look at 2020 with 13 million of benefit from the CEWS program. I'm assuming your guidance doesn't have anything in it for '21? And I also think, does that suggest 1Q EBITDA is down year over year before growing and rising year over year going forward?

Bradley Dodson -- President and Chief Executive Officer

That is correct. We do not have any CEWS proceeds in the guidance we just gave, and we do expect EBITDA to be down year over year in the first quarter.

Stephen Gengaro -- Stifel Financial Corp -- Analyst

OK. Two other things, if you don't mind. The first is --

Bradley Dodson -- President and Chief Executive Officer

Stephen, one additional point to that. It's a difficult comp year over year because January and February of 2020 were actually pretty good months and did not have a COVID impact. And so that's a tough comp, given that we're not out of the pandemic yet.

Stephen Gengaro -- Stifel Financial Corp -- Analyst

Yes. No, if I recall, 1Q '20 was actually very strong even relative to expectations.

Bradley Dodson -- President and Chief Executive Officer

Yes.

Stephen Gengaro -- Stifel Financial Corp -- Analyst

The -- you mentioned kind of a cautious shorter-term outlook in the U.S. business. If we start to see a ramp there and activity starts moving higher, is that a business you would think about divesting over time?

Bradley Dodson -- President and Chief Executive Officer

Well, we're not -- we took a lot of costs out of the business, last year. We consolidated our activity into the more active basins. We've got it so that our district offices are now each on a contribution basis, positive. So I feel like we've really rightsized the business, so it shouldn't -- we expect it to improve year over year.

If we see a ramp-up in activity and can get it to where it's making money, which certainly, I think you know us well, would be pragmatic with anything in our portfolio. It's a business that with the way the cycles have worked over the last five to 10 years, it's never been -- U.S. business for accommodations has never been in a position where someone could consolidate it. It does need consolidation, but it's never gotten a long enough runway, if you will, where consolidation was feasible.

But if we were to get to a point where it was worth making money and there was an attractive offer, we'd certainly take a look at it.

Stephen Gengaro -- Stifel Financial Corp -- Analyst

Great. And then just one final one for me. And that is when you walked through the guidance, and you laid out, I think, some of the parameters around your expectations, when I think about it, what are the -- what could be drivers of upside? Because I think you talked about some of the risks to the guidance. But as you think about the potential upside, what could move the needle in that direction?

Bradley Dodson -- President and Chief Executive Officer

Well, certainly, if we can get, I think, No. 1, would be the Chinese-Australian labor -- I'm sorry, trade dispute. If that starts to abate then I think there's upside to Australia. We are -- if we can start getting better availability of labor in Australia, with some of the social safety net programs, both in Canada and Australia, there is less of an incentive for people who want to work in remote environments because they can stay at home and receive the safety net checks.

If those programs start to phase out, then that might help with the labor situation and primarily in Australia, but we're also feeling it in Canada as well. So that would be upside on the margin side. And then the third one would be turnaround activity. In Canada, I think we've -- it is -- we are planning for it to be up but I think there's hopefully an opportunity for that to be higher than our initial expectations, our current expectation.

And then the last one would be scope and breadth of pipeline accommodations. If we -- those -- if our camps in our section of -- the section that we're supporting of particularly the CGL pipeline, if we see our scope to expand there, that could be an opportunity for upside. Carolyn, is there anything else to it?

Carolyn Stone -- Senior Vice President, Chief Financial Officer, and Treasurer

No. That was a good list.

Stephen Gengaro -- Stifel Financial Corp -- Analyst

OK, great. Thank you.

Operator

[Operator instructions] All right. And there are no further questions in the queue. I would like to turn the call back over to Bradley Dodson for any additional or closing remarks.

Bradley Dodson -- President and Chief Executive Officer

Well, thank you all for listening to our call today. Thank you for your interest in the Civeo stock. We hope you're all doing well and staying safe, and we look forward to speaking to you on the first-quarter earnings call. Take care.

Operator

[Operator signoff]

Duration: 32 minutes

Call participants:

Regan Nielsen -- Director, Corporate Development, and Investor Relations

Bradley Dodson -- President and Chief Executive Officer

Carolyn Stone -- Senior Vice President, Chief Financial Officer, and Treasurer

Stephen Gengaro -- Stifel Financial Corp -- Analyst

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