Budha, your chart jives with my fundamental work. I wrote up the company on Sumzero back in December. I am copying and pasting the write up.  

Civeo Corp

Date 12/20/2017

Closing Price $2.29

Civeo Corp provides lodging services to the energy industry: the company operates facilities in the Canada oil sands, in Australia serving the metallurgical coal mining industry, and (a small item) in the Bakken. In June 2014, Civeo spun off from Oil States International (OIS) after being pressured by Jana & Greenlight funds. At the time investors argued for a REIT structure and lodging multiples on EBITDA.

At the time, activist and hedge funds dominated the holders list with lofty target prices. Smart investors plus strong oil prices made Civeo the name to own, than it all fell apart. First, Management dropped the first bomb, they will not be able to gain REIT status, as majority of the revenues came from Canada. Than came the Oil price plunge courtesy of OPEC (Saudi Arabia), as they flooded the market with Oil to combat against Shale companies. Oil went from $110 down to $29.64 a barrel in January 2016. During the same period, Civeo’s EBITDA forecast went from $270 to 320 range down to a low of $11m in FY 2015. Likewise, Civeo’s Stock price declined from $28.44 to $0.75, decline of 97.4%. A far cry from the $50 to $75 Hedge Fund price target.

After four painful years, Civeo looks like its reaching the inflection point in the business.  

On November 27, 2017, Civeo acquired Noralta Lodge (Competitor) in the Oil Sands region in Canada for $289m in cash & securities. Deal structure is for $169m cash plus 32.8m shares at $2.10 share.  In addition to non-voting 2% preferred equity, convertible into 29.3m shares.

Noralta is a premier, Alberta based provider of remote accommodations to the Canadian Oil sands region with more than 7800 guest rooms across eleven lodges. Noralta generated $155m (CN) revenues, $32m (CN) in net income and $71m (CN) in EBITDA during 12mths ending August 2017. EBITDA margins 46% on a trailing 12mth basis ending Aug 2017. That compares to CIVEOs current EBITDA margin of 17.5%.

The transaction strengthens Civeo’s workforce accommodations with multiple complementary locations and a large percentage of premium private rooms. On a pro-forma basis, LTM operation cash flow increases by 75% and Q3 2017 leverage ratio improves to 3.2x, compared to 4.4x leverage.

Noralta’s 2 largest contracts support large developed Oil Sand regions with room to grow. Deal reduces the volatility and improves predictability as the contracts add recurring revenues and earnings.

On a Pro – Forma basis, the combined company will operate 20 lodges across Canada with 22,600 rooms. Combined company will generate $124M (CN) EBITDA.  Pro Forma Total debt $449m and 3.22x Total Debt to EBITDA (TTM). Leverage covenant is 5.85x.

With the combination of CVEO/Noralta, the new company is operationally stronger, leaner and levered to a recovery in Oil Prices.

Which brings us to Oil Prices and where we see it going.  Based on recent events in Washington, Tax cuts will drive CY18 GDP as companies reinvest into there businesses. Federal Express, Apple and many other large companies have expressed increase investments in capex in 2018, if tax cuts pass. Tax cuts passed both Senate & House today (12/20/17) and is expected to be signed by the president in early January. In addition to taxes, Trumps next agenda is the infrastructure bill in 2018 which can be an additional stimulus in the US Markets. So demand side of the equation for Oil is looking better, supply side of the equation has been flattening with OPECs decision to extend cuts. In 2018, Saudi Aramco is looking to go public to raise funds for Saudi Arabia’s economic diversification initiative, although nothing tangible, as the largest member in OPEC, it might be a safe bet that they support the price of Oil, if not try to squeeze it higher.

To be perfectly clear, Oil is a commodity and it is highly cyclical in nature. Oil prices have recovered into the high 50’s and it is profitable for many of the better run E&P companies. Based on the Tax stimulus, OPEC cuts, it would not surprise us to see Oil touch $70 in 2018. This call can easily be applied to all levered E&P’s & O&G Equipment companies. As a firm we are overweight Energy into 2018.

Circling back to Civeo, I think Bradley Dodson (CEO) has done a great job stabilizing the business during the down turn and has created a lean operating structure. Lodging in general is highly leveraged, dependent on price and utilization rates. As lodges fill up, pricing power will come back. As of the most recent earnings call, Civeo’s average occupancy rate in Canada was 81%, flat sequentially with ADR (Average Daily Rate) of $92, compared to $89 in Q2. Oil prices were in the High 40’s, Low $50s. So far in Q4, prices have averaged in the mid $50s for Oil.  Australia Occupancy rates remain low at 42%, down 3% from the quarter before. Average Daily rate increased to $81/night up $1 from Q2. Despite low operating rates, Australia remains EBITDA positive and contributed $9.7m in Q3.

Based on recent guidance, FY17 Revenues will come in at $376-380M, EBITDA of $63m to 66m. Pre Deal, Our core Civeo model forecast revenues of $410m and EBITDA $75.85m, which exceeds street estimates of $387 and 71.7m EBITDA. If we look out to 2019, Core CIVEO Revenues $459.2m and EBITDA $96.4M.

If we take Noralta numbers and assumed no growth or deterioration and add back 10m synergies by 2019, I am getting Revenues $155 CN (.80 FX Rate) is $124m + $459.2m Core Civeo = $583M and EBITDA $96.4m + (Noralta $71m CN (.80 FX rate) is $58.3m + 10M synergies for a combined EBITDA $164.7m.

Lets fully dillute CIVEO shares outstanding. 130.9m today + 32.8m + 29.3m = 193 million shares outstanding. Current share price is $2.29, implies a market cap $441.97m + Net Debt $449m gets us $890.97m Enterprise value. This implies EV to EBITDA of 5.4x 2019 EBITDA ests. Most hotels trade 12 to 14x EBITDA, but the cyclicality will reduce that multiple. Given the leverage and where we are in the cycle, 10x will likely be a better number to use.  At 10x 164.7M, EV would be $1647 – Debt 449m (assumes no debt paydown even though they are generating FCF) gets us Cap $1198 / 193m s/o = $6.20 Target.

Risks are fairly defined on this company.

1. Oil
2. Oil
3. Noralta deal closing
4. Canada occupancy & pricing recovery
5. Australia stabilizing

Downside risk in price is $110m 2019 EBITDA x 8 multiple = 880M – 449m debt = $431m / 193m s/o = $2.23 target