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CVEO - Civeo


dbuch
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Just thought this should have its own topic instead of being embedded in the OIS (Oil State International) string.

 

Civeo is a recent spin off of OIS that provides workforce accommodations for oil and mining workers mostly in Canadian Oil Sands and Australia's Bowen Basin. CVEO secures multi-year take or pay contracts usually 2-5 years with mining and oil companies to provide accommodations to their workers. Usually when a site is set up they enjoy a monopoly in the area as it takes a long lead time and fairly substantial CapEx to create a nearby facility which would have to compete on price.

 

Gross margins have averaged over 40% since 2007 and operating cash flow averages over $350MM. Free Cash flow appears depressed mostly due to heavy growth CapEx spending which has been used to expand. Maintenance CapEx runs $50-$60M making true free cash flow around $300M or $2.70/share.

 

Why are they cheap? - CVEO recently announced they would not be converting to a REIT and 2015 results would be depressed. I think the market overreacted and it looks like a few hedge funds think so too (Jana and Greenlight).

 

An 8k on Oct 23rd says the following:

 

Civeo today announced its commitment to emphasize yield as the core component of the Company’s value proposition, including a high payout ratio and return to shareholders of a substantial majority of the Company’s after-tax free cash flow (after maintenance capital expenditures). JANA has also agreed to support Civeo’s plan to redomicile in Canada through a “self-directed redomiciling” under U.S. tax laws to provide superior operational and financial flexibility coupled with a lower tax rate.

 

If you conservatively assume a $200M dividend and a 10% yield this is a $20-$25 stock or if you just assume it trades off FCF it's a $25-$30 stock. Either way this looks like an easy double.

 

 

 

 

 

 

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Just thought this should have its own topic instead of being embedded in the OIS (Oil State International) string.

 

Civeo is a recent spin off of OIS that provides workforce accommodations for oil and mining workers mostly in Canadian Oil Sands and Australia's Bowen Basin. CVEO secures multi-year take or pay contracts usually 2-5 years with mining and oil companies to provide accommodations to their workers. Usually when a site is set up they enjoy a monopoly in the area as it takes a long lead time and fairly substantial CapEx to create a nearby facility which would have to compete on price.

 

Gross margins have averaged over 40% since 2007 and operating cash flow averages over $350MM. Free Cash flow appears depressed mostly due to heavy growth CapEx spending which has been used to expand. Maintenance CapEx runs $50-$60M making true free cash flow around $300M or $2.70/share.

 

Why are they cheap? - CVEO recently announced they would not be converting to a REIT and 2015 results would be depressed. I think the market overreacted and it looks like a few hedge funds think so too (Jana and Greenlight).

 

An 8k on Oct 23rd says the following:

 

Civeo today announced its commitment to emphasize yield as the core component of the Company’s value proposition, including a high payout ratio and return to shareholders of a substantial majority of the Company’s after-tax free cash flow (after maintenance capital expenditures). JANA has also agreed to support Civeo’s plan to redomicile in Canada through a “self-directed redomiciling” under U.S. tax laws to provide superior operational and financial flexibility coupled with a lower tax rate.

 

If you conservatively assume a $200M dividend and a 10% yield this is a $20-$25 stock or if you just assume it trades off FCF it's a $25-$30 stock. Either way this looks like an easy double.

 

I've been looking at this name.  Still can't figure out their normalized cashflow going forward.

 

It seems that their business is facing a lot of headwinds as well as facing a lot of changes in the competitive landscape.

 

1) What happens to their lodging business as projects come to a close or ramp down? As oil prices drop (is this a temporary phenomenon?) 

2) They are facing new competition they formerly didn't have in Canada. In some cases customers no longer want to sign longer term contracts with guarantees. This is what I'm most concerned about.

3) They are facing currency headwinds (I'm least concerned with this one) -- interestingly they are forecasting a further 5% drop in both the Canadian $ as well as the Australian $ vs the USD.

 

The market clearly does not believe that the current margins/cashflows are sustainable. I'd love to hear why you believe that they can overcome their challenges over the longer term. 

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1) I think many of these projects have very long expected lives. Many of their customers are working on resource assets with 30-40 year production lives and CVEO places their accomodations near these long-lived assets. Obviously the price of oil and met coal are a factor in utilitization as companies may slow production or delay construction when commodity prices fall but I think most of their customers have a long term outlook on commodity prices and economic growth.

 

2) I agree this is probably the biggest concern but I think the mobile/open camps are more at risk of increased competition which make up 23% of 2013 revenue. My understanding is these are more easy to rapidly redeploy to another region if competition increases. The permanent structures likely have little competition as building a nearby structure would be uneconomical due to the scale needed and likely price competition that would follow. There are few integrated providers with 50% of rooms owned by their customers which are increasingly outsourcing and then a few notable competitors include Horizon North (HNL CN), Black Diamond Group (BDI CN), Fleetwood Corp (FWD AU) which I don't believe have the scale Civeo has. On a side note these look to trade around 8x EV/EBITDA vs CVEO at 4x.

 

3) Currency is a risk but I'm not that concerned about it. If the strength of the dollar looked like it would increase dramatically vs CAN and AUS then they could hedge

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1) I think many of these projects have very long expected lives. Many of their customers are working on resource assets with 30-40 year production lives and CVEO places their accomodations near these long-lived assets. Obviously the price of oil and met coal are a factor in utilitization as companies may slow production or delay construction when commodity prices fall but I think most of their customers have a long term outlook on commodity prices and economic growth.

 

2) I agree this is probably the biggest concern but I think the mobile/open camps are more at risk of increased competition which make up 23% of 2013 revenue. My understanding is these are more easy to rapidly redeploy to another region if competition increases. The permanent structures likely have little competition as building a nearby structure would be uneconomical due to the scale needed and likely price competition that would follow. There are few integrated providers with 50% of rooms owned by their customers which are increasingly outsourcing and then a few notable competitors include Horizon North (HNL CN), Black Diamond Group (BDI CN), Fleetwood Corp (FWD AU) which I don't believe have the scale Civeo has. On a side note these look to trade around 8x EV/EBITDA vs CVEO at 4x.

 

3) Currency is a risk but I'm not that concerned about it. If the strength of the dollar looked like it would increase dramatically vs CAN and AUS then they could hedge

 

Do you know how the accommodations demand differs as an E&P is beginning a project as opposed to the accommodation needs during steady state operations?

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Do you know how the accommodations demand differs as an E&P is beginning a project as opposed to the accommodation needs during steady state operations?

 

 

Good question, I don't know if they break that out anywhere but Mobile & Open camps (23% of revenue) are designed to follow customers and can be deployed rapidly and contracted on a short term basis so I think you can assume this is the piece of the business that is tied to drilling exploratory wells and probably has more competition. 77% of revenues are Lodges & Villages which are permanent structures supported by multi-year contracts which are designed for development and operational phases but again I don't think they break out development from operational/steady state.

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  • 1 month later...

This seems crazy cheap to me. Their competitor Horizon North (HNL CN) is also looking quite cheap at these levels unless you think the Oil Sands is going to shut down which doesn't seem likely. Civeo has maintained 23-32% operating margins since 2005 and had 13-18% operating margins from 2003-2005 when oil was $20-$40.

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Here is a link I found for employment statistics I found for Oil Sands. It looks like about 36% of the current workforce is operations while 64% is construction related. I wouldn't expect all projects to stop in their tracks but even if you assume they lay off 50% of construction workers you would have a 30% reduction in workforce. You can take a 30% haircut to CVEO revenue and see what you come up with for a bearish view.

 

http://work.alberta.ca/documents/oil-sands-construction-maintenance-and-operations-labour-demand-outlook.pdf

oil_sands_employment.thumb.PNG.4ba39f21e96cdb7dd0a26698eed94674.PNG

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It looks like commentary from each of the company's you've mentioned has been pretty bleak, i've pasted below today's horizon release. I've heard that the competitive environment for this type of work is very different that a few years ago from some industry sources so i would say you should be cautious on interpreting historical results.

 

From what i've read, it seems to be general consensus that oil prices begin to recover in the second half of 2015, while the worst of it is still expected in Q1/15.

 

Horizon expects that its results for Q4 2014 will be in line with its previously provided guidance, generating EBITDAS levels similar to Q3 2014 results.  Horizon anticipates a challenging operating environment for 2015 and has updated its earnings and cash flow expectations accordingly.  Based on contracts currently in place, anticipated contract renewals and other highly probable activity, Horizon anticipates that EBITDAS levels for 2015 will be similar to 2014 results.

 

Horizon's Board of Directors recently approved an initial capital budget for 2015 of $25 million focused primarily on maintenance capital expenditures.  Capital expenditures related to potential growth opportunities will be evaluated on a case by case basis to ensure they meet the Corporation's investment criteria. 

 

Based on its earnings expectations for 2015 and a conservative capital program, Horizon expects its leverage position and financial flexibility to improve exiting 2014 and throughout 2015.  As a result, Horizon is confident that it will be able to maintain its current quarterly dividend, subject to review and evaluation by its Board of Directors on a quarterly basis.

 

"Given the challenging environment anticipated for 2015, management will be focused on controlling costs, improving project execution and on capital discipline.  This focus will allow us to maintain our core operating capabilities, improve our balance sheet position and manage through the cycle" noted Rod Graham, President and Chief Executive Officer.

 

http://www.newswire.ca/en/story/1467115/horizon-north-logistics-inc-provides-operational-update-and-announces-initial-2015-capital-budget?relation=org

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I viewed the Horizon North news as fairly good news. Keeping revenue stable at 2014 levels $450M and EBITDA of $90M. If you applied the same outlook to CVEO you'd have $930M revenue and $325M of EBITDA. At 8x EV/EBITDA that would imply a $19 stock. At this level operating cash flow would be $230M and if you subtract $70M of maintenance capex you get $1.45 of FCF per share or a 17% FCF yield at the current price. So even if you assume this continues going forward the price seems to more than compensate for the risk.

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I pulled up some recent reports on BDI. it looks like the group trades at 5-6x which would imply an enterprise value in the range of about 500 million assuming your 90 million of ebitda.

 

using q3 debt of ~960 million plus today's market capitalization of 880 million i'm not sure if i can see the same picture as you. i'd have to say downside protection doesn't look as good given the high debt load.

 

that said i believe the recent additions to the board could help trend things in the right way. has Jana or any of the other funds done a write up on the name?

 

what sort of range has the company/industry peers traded on a historical basis?

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I'm not sure I'm getting the same numbers as you. CVEO has $242M of cash $775M of debt and if you assume EBITDA in 2015 is flat to 2014 you have about $325M of EBITDA so EV is $8.50 x 110M shares + $750M debt -$242M cash = $1.4B EV divided by $325M EBITDA (which is I think temporarily depressed) is 4.4x EV/EBITDA.

 

BDI, has traded at an average of 7.8x EV/EBITDA since 2007 while generating 26% operating margins and growing revenues at 37% CAGR since 2007.

 

HNL does look to trade lower at about an average 6.8x EV/EBITDA but looks to be substantially less profitable generating 11% operating margins on a lower revenue base but has grown revenues at 25% CAGR since 2007.

 

All of these guys are levered less than 2x debt to EBITDA which isn't that dramatic considering most REITs are levered 4x or more. CVEO looks the cheapest and has the largest revenue base and is mostly permanent lodgings. They also have Australian villages as well although the iron ore decline is obviously not helping out there. They've generated an average 37% EBITDA margin since 2006 with 36% margins in 2008/2009 when oil hit $40 (although granted it didn't stay that low for very long).

 

I think Black Diamond and Horizon might also be cheap as well but with CVEO you have JANA and Einhorn involved which could push for a larger dividend or adding some leverage to the balance sheet to buy back shares, call it a free activist option.

 

Also BDI just announced they expect EBITDA for 2015 will come in slightly below 2014 levels and believe they are well positioned for softer demand. If you assume slightly lower EBITDA BDI is trading at 5x EV/EBITDA so across the board I think all of these guys might be way too cheap.

 

 

 

 

 

 

 

 

 

 

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No problem Notorious

 

interesting article:

 

http://www.edmontonsun.com/2014/12/18/hicks-price-of-oil-is-falling-but-the-sky-isnt

 

Oil Sands projects are hard to shut down. Unlike conventional oil or even shale plays which can quickly shut down and start up production when prices rise or fall, oil sands keeps going. Good news if you provide accommodations.

 

Another interesting article

 

http://www.businessweek.com/articles/2014-12-22/canadas-oil-sands-are-better-bets-than-shale-oil

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Articles have some good points on the long life nature of the projects and how it is pretty difficult to shut in production.

 

What impact do you think the overall reduction in spending will have on the subsector then? Company's like MEG are spending substantially less compared to 2013-14. Which could be likely to impact production growth in 2016 and beyond.

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I know this is a value board but I'll throw this out there. A day before year end every holder has a large tax loss and a day and a half to take it. I think at 4 it's oversold for tax reasons and there's a good shot of a bounce in the new year.

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This reminds me of SGU that I bought a decade back. Star gas had investors like Loeb, Pabrai. the high heating oil price killed the co and the dividend was cut, the stock fell 60 or 70%. i took a initial position at $2 and it promptly dropped another 50%. It used to trade at $24. I bought more again at $1.2. The company went through recap, new management & cut debt big time.

 

It eventually recovered to $6 now, they started paying dividends. It is a ghost of former self and old investors never regained what they lost. I got out between 4 & 5. The wait to get k-1 was a pain. It was a great learning experience in distressed investing.

 

 

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This reminds me of SGU that I bought a decade back. Star gas had investors like Loeb, Pabrai. the high heating oil price killed the co and the dividend was cut, the stock fell 60 or 70%. i took a initial position at $2 and it promptly dropped another 50%. It used to trade at $24. I bought more again at $1.2. The company went through recap, new management & cut debt big time.

 

It eventually recovered to $6 now, they started paying dividends. It is a ghost of former self and old investors never regained what they lost. I got out between 4 & 5. The wait to get k-1 was a pain. It was a great learning experience in distressed investing.

 

Kind of like XCO right now.

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I know this is a value board but I'll throw this out there. A day before year end every holder has a large tax loss and a day and a half to take it. I think at 4 it's oversold for tax reasons and there's a good shot of a bounce in the new year.

 

Rightly because this is a value board any stock that drops 50% should be looked at to see if the selling is merited, more so because the stock was considered here before today's selloff. The company's new EBITDA forecast for 2015 (for what it's worth) leaves the stock trading at around 6.5x EV/EBITDA (at $4 a share), not too bad if the forecast holds up.

 

I can only add that not only may tax loss selling be a factor today but the dividend cut means that funds that have the word 'income' in their name may not be able to hold these shares now... so perhaps some forced selling? Stock could be interesting at this level because everyone seems to think its toast.

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For you to be able to take a tax loss (at least in Canada and US) the stock has to SETTLE before year-end. Therefore the last day to sell Canadian stocks and qualify was Dec 24th and Dec 26th in the US. Therefore price action since Monday should have nothing to do with taxes.

 

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Well this seems to be the worst case scenario. If all projects are cancelled maybe they go to zero but still seems like there's value here. They can pay down their debt shut lodges and layoff workers so it's not 100% fixed cost. They've operated at more than 20% operating margins for over a decade and when oil was much lower so I guess we'll just have to see what happens. But as a value investor you search for stocks when there's  blood in the street and you try to find ones that will survive where the price offers a good margin of safety but it doesn't always work out so we'll just have to wait and see.

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