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. Â
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. Â 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.Â
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.Â
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.
Oil
Oil
Noralta deal closing
Canada occupancy & pricing recovery
Australia stabilizing
Downside risk in price is $110m 2019 EBITDA x 8 multiple = 880M
– 449m debt = $431m / 193m s/o = $2.23 target
Put this out a few
Posted by buddha on 15th of Mar 2018 at 02:39 pm
Put this out a few days ago...good start! Look for pullbacks. Seems to be in clear air. CVEO
nice volume today too.
Posted by morton7 on 15th of Mar 2018 at 04:08 pm
nice volume today too.
upper rail target seems realistic
Posted by roger on 15th of Mar 2018 at 04:16 pm
upper rail target seems realistic based on indicators and pattern
here's one for the Canucks, eh?
CVEO
Posted by jdaswani on 15th of Mar 2018 at 03:38 pm
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. Â
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. Â 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.
Downside risk in price is $110m 2019 EBITDA x 8 multiple = 880M – 449m debt = $431m / 193m s/o = $2.23 target
Great analysis. Just caught it
Posted by buddha on 15th of Mar 2018 at 03:51 pm
Great analysis. Just caught it on a new highs scan. Will just trail on pivots and see how far it goes.
Good call buddha and thanks
Posted by steve on 15th of Mar 2018 at 02:49 pm
Good call buddha and thanks for sharing earlier
Thanks! do you like EC
Posted by buddha on 15th of Mar 2018 at 02:56 pm
Thanks! do you like EC setting up again?