Civeo Corporation
Civeo Corp (Form: 10-Q, Received: 07/29/2016 12:49:35)

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2016

 

OR

 

[ ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _________________________ to                          

 

Commission file number: 001- 36246

 

Civeo Corporation

_______________

 

(Exact name of registrant as specified in its charter)

 

British Columbia, Canada

98-1253716

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

   

Three Allen Center, 333 Clay Street, Suite 4980,

77002

Houston, Texas

(Zip Code)

(Address of principal executive offices)

 

 

(713) 510-2400


(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

                  YES [X]

NO [ ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

                  YES [X]

NO [ ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "accelerated filer," "large accelerated filer" and "smaller reporting company” in Rule 12b-2 of the Exchange Act.

(Check one):

 Large Accelerated Filer [ ]     

 Accelerated Filer [X]

 

 

 Non-Accelerated Filer [ ] (Do not check if a smaller reporting company)    

Smaller Reporting Company [ ]

                            

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

                  YES [ ]

NO [X ]

 

The Registrant had 108,084,356 common shares outstanding as of July 25, 2016.

 

 
1

 

 

CIVEO CORPORATION

 

INDEX

 

 

 

Page No.

 

                         Part I -- FINANCIAL INFORMATION

 
     
Item 1.

Financial Statements:

 
     
 

Consolidated Financial Statements

 
 

Unaudited Consolidated Statements of Operations for the Three and Six Month Periods Ended June 30, 2016 and 2015 

3

 

Unaudited Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Month Periods Ended June 30, 2016 and 2015

4

 

Consolidated Balance Sheets – June 30, 2016 (unaudited) and December 31, 2015

5

 

Unaudited Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2016 and 2015

6

 

Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015 

7

 

Notes to Unaudited Consolidated Financial Statements

8–17

 

 

 

Cautionary Statement Regarding Forward-Looking Statements

18

 

 

 
Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18-33

 

 

 
Item 3.

Quantitative and Qualitative Disclosures About Market Risk

33-34

 

 

 
Item 4.

Controls and Procedures

34

 

 

 
 

 

 
 

                          Part II -- OTHER INFORMATION

 
 

 

 
Item 1.

 Legal Proceedings

35

 

 

 
Item 1A.

Risk Factors

35

 

 

 
Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35

 

 

 
Item 6.

Exhibits

36

 

 

 
 

(a) Index of Exhibits

36-37

 

 

 
Signature Page   

38 

 

 

 
2

 

 

PART I -- FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

CIVEO CORPORATION

 

UNAUDITED CO NSOLIDAT ED STATEMENTS OF OPERATIONS

(In Thousands , Except Per Share Amounts )

 

   

THREE MONTHS ENDED

   

SIX MONTHS ENDED

 
   

JUNE 30,

   

JUNE 30,

 
   

201 6

   

201 5

   

201 6

   

201 5

 

Revenues:

                               

Service and other

  $ 100,748     $ 128,851     $ 192,515     $ 296,983  

Product

    6,287       14,296       9,556       17,151  
      107,035       143,147       202,071       314,134  

Costs and expenses:

                               

Service and other costs

    58,599       77,010       119,976       176,849  

Product costs

    5,987       12,414       10,553       15,486  

Selling, general and administrative expenses

    15,295       18,419       28,412       35,105  

Depreciation and amortization expense

    33,168       42,541       66,723       84,987  

Impairment expense

    --       9,473       8,400       12,211  

Other operating expense (income)

    --       (2,573 )     218       (1,243 )
      113,049       157,284       234,282       323,395  

Operating loss

    (6,014 )     (14,137 )     (32,211 )     (9,261 )
                                 

Interest expense to third-parties, net of capitalized interest

    (5,925 )     (6,248 )     (10,869 )     (11,857 )

Loss on extinguishment of debt

    --       --       (302 )     --  

Interest income

    28       687       114       1,809  

Other income (expense)

    (392 )     566       (280 )     1,564  

Loss before income taxes

    (12,303 )     (19,132 )     (43,548 )     (17,745 )

Income tax benefit

    949       5,863       5,520       4,706  

Net loss

    (11,354 )     (13,269 )     (38,028 )     (13,039 )

Less: Net income attributable to noncontrolling interest

    132       192       280       438  

Net loss attributable to Civeo Corporation

  $ (11,486 )   $ (13,461 )   $ (38,308 )   $ (13,477 )
                                 
                                 

Per Share Data (see Note 6 )

                               

Basic net loss per share attributable to Civeo Corporation common shareholders

  $ (0.11 )   $ (0.13 )   $ (0.36 )   $ (0.13 )
                                 

Diluted net loss per share attributable to Civeo Corporation common shareholders

  $ (0.11 )   $ (0.13 )   $ (0.36 )   $ (0.13 )
                                 

Weighted average number of common shares outstanding:

                               

Basic

    107,033       106,626       106,923       106,543  

Diluted.

    107,033       106,626       106,923       106,543  

   

The accompanying notes are an integral part of these financial statements.

 

 
3

 

 

CIVEO CORPORATION

 

UNAUDITED CO NSOLIDAT ED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In Thousands)

 

   

THREE MONTHS ENDED

JUNE 30,

   

SIX MONTHS ENDED

JUNE 30,

 
   

201 6

   

201 5

   

201 6

   

201 5

 
                                 

Net loss

  $ (11,354 )   $ (13,269 )   $ (38,028 )   $ (13,039 )
                                 

Other comprehensive income (loss):

                               

Foreign currency translation adjustment, net of taxes of zero, ($0.4) million, zero and $1.9 million, respectively

    (12,487 )     18,301       16,912       (92,723 )

Total other comprehensive income (loss)

    (12,487 )     18,301       16,912       (92,723 )
                                 

Comprehensive income (loss)

    (23,841 )     5,032       (21,116 )     (105,762 )

Comprehensive income attributable to noncontrolling interest

    (129 )     (252 )     (320 )     (312 )

Comprehensive income (loss) attributable to Civeo Corporation.

  $ (23,970 )   $ 4,780     $ (21,436 )   $ (106,074 )

 

The accompanying notes are an integral part of these financial statements.

 

 

 
4

 

 

CIVEO CORPORATION

 

CO NSOLIDAT ED BALANCE SHEETS

(In Thousands)

 

 

 

JUNE 30, 201 6

(Unaudited)

   

DECEMBER 31,

201 5

 
ASSETS                
                 

Current assets:

               

Cash and cash equivalents

  $ 2,255     $ 7,837  

Accounts receivable, net

    72,404       61,467  

Inventories

    4,931       5,631  

Prepaid expenses

    17,900       11,712  

Other current assets

    4,239       3,312  

Total current assets

    101,729       89,959  
                 

Property, plant and equipment, net

    906,322       931,914  

Other intangible assets, net

    32,359       35,309  

Other noncurrent assets

    11,120       9,347  

Total assets

  $ 1,051,530     $ 1,066,529  
                 

LIABILITIES AND SHAREHOLDERS’ EQUITY

               
                 

Current liabilities:

               

Accounts payable

  $ 33,236     $ 24,609  

Accrued liabilities

    12,475       14,834  

Income taxes

    44       1,104  

Current portion of long-term debt

    15,934       17,461  

Deferred revenue

    14,053       7,747  

Other current liabilities

    294       493  

Total current liabilities

    76,036       66,248  
                 

Long-term debt, less current maturities

    375,183       379,416  

Deferred income taxes

    22,270       25,391  

Other noncurrent liabilities

    32,375       31,704  

Total liabilities

    505,864       502,759  
                 

Commitments and contingencies (Note 9)

               
                 

Shareholders’ Equity:

               

Common shares (no par value; 550,000,000 shares authorized, 108,152,637 shares and 107,470,861 shares issued, respectively, and 108,084,356 shares and 107,470,861 shares outstanding, respectively)

    --       --  

Additional paid-in capital

    1,309,007       1,305,930  

Accumulated deficit

    (414,684 )     (376,376 )

Common shares held in treasury at cost, 68,281 and zero shares, respectively

    (65 )     --  

Accumulated other comprehensive loss

    (349,437 )     (366,309 )

Total Civeo Corporation shareholders’ equity

    544,821       563,245  

Noncontrolling interest

    845       525  

Total shareholders’ equity

    545,666       563,770  

Total liabilities and shareholders’ equity

  $ 1,051,530     $ 1,066,529  

   

The accompanying notes are an integral part of these financial statements.

 

 
5

 

 

CIVEO CORPORATION

 

UNAUDITED CO NSOLIDAT ED STATEMENTS OF

CHANGES IN SHAREHOLDERS’ EQUITY

(In Thousands)

 

   

Attributable to Civeo

                 
   

Common S hares

                                         
   

Par Value

   

Additional

Paid-in

Capital

   

Accumulated

Deficit

   

Treasury

Shares

   

Accumulated

Other

Comprehensive

Income (Loss)

   

Noncontrolling

Interest

   

Total

S hare holders’

Equity

 
                                                         

Balance, December 31, 201 4

  $ 1,067     $ 1,300,042     $ (244,617 )   $ --     $ (198,491 )   $ 2,108     $ 860,109  

Net income (loss)

    --       --       (13,477 )     --       --       438       (13,039 )

Currency translation adjustment.

    --       --       --       --       (92,597 )     (126 )     (92,723 )

Dividends paid.

    --       --       --       --       --       (1,690 )     (1,690 )

Share-based compensation.

    8       2,822       --       (146 )     --       --       2,684  

Balance, June 30, 2015

  $ 1,075     $ 1,302,864     $ (258,094 )   $ (146 )   $ (291,088 )   $ 730     $ 755,341  
                                                         
                                                         

Balance, December 31, 201 5

  $ --     $ 1,305,930     $ (376,376 )   $ --     $ (366,309 )   $ 525     $ 563,770  

Net income (loss)

    --       --       (38,308 )     --       --       280       (38,028 )

Currency translation adjustment.

    --       --       --       --       16,872       40       16,912  

Share-based compensation.

    --       3,077       --       (65 )     --       --       3,012  

Balance, June 30, 2016

  $ --     $ 1,309,007     $ (414,684 )   $ (65 )   $ (349,437 )   $ 845     $ 545,666  

   

 
6

 

 

CIVEO CORPORATION

 

UNAUDITED CO NSOLIDAT ED STATEMENTS OF CASH FLOWS

(In Thousands)

 

   

SIX MONTHS ENDED

JUNE 30,

 
   

201 6

   

201 5

 
                 

Cash flows from operating activities:

               

Net loss

  $ (38,028 )   $ (13,039 )

Adjustments to reconcile net loss to net cash provided by operating activities:

               

Depreciation and amortization

    66,723       84,987  

Impairment charges

    8,400       12,211  

Inventory write-down

    --       1,015  

Loss on extinguishment of debt

    302       --  

Deferred income tax benefit

    (8,026 )     (7,469 )

Non-cash compensation charge

    3,077       2,331  

(Gains) losses on disposals of assets

    377       (642 )

Provision for loss on receivables

    (112 )     1,055  

Other, net

    2,282       (164 )

Changes in operating assets and liabilities:

               

Accounts receivable

    (6,140 )     38,761  

Inventories

    979       5,352  

Accounts payable and accrued liabilities

    4,670       (14,561 )

Taxes payable

    (565 )     (7,324 )

Other current assets and liabilities, net

    1,189       (8,223 )

Net cash flows provided by operating activities

    35,128       94,290  
                 

Cash flows from investing activities:

               

Capital expenditures, including capitalized interest

    (9,893 )     (24,102 )

Proceeds from disposition of property, plant and equipment

    2,105       1,844  

Other, net

    (1,542 )     --  

Net cash flows used in investing activities

    (9,330 )     (22,258 )
                 

Cash flows from financing activities:

               

Proceeds from issuance of common stock

    --       500  

Revolving credit borrowings

    168,431       --  

Revolving credit repayments

    (163,676 )     --  

Term loan repayments

    (33,097 )     --  

Debt issuance costs

    (2,022 )     --  

Net cash flows provided by (used in) financing activities

    (30,364 )     500  
                 

Effect of exchange rate changes on cash

    (1,016 )     (20,677 )

Net change in cash and cash equivalents

    (5,582 )     51,855  

Cash and cash equivalents, beginning of period

    7,837       263,314  
                 

Cash and cash equivalents, end of period

  $ 2,255     $ 315,169  

   

 The accompanying notes are an integral part of these financial statements.

 

 
7

 

   

CIVEO CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

 

1.

DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

 

Description of the Business

 

We are one of the largest integrated providers of workforce accommodations, logistics and facility management services to the natural resource industry. Our scalable modular facilities provide long-term and temporary accommodations where traditional accommodations and related infrastructure is insufficient, inaccessible or not cost effective. Once facilities are deployed in the field, we also provide catering and food services, housekeeping, laundry, facility management, water and wastewater treatment, power generation, communications and redeployment logistics. Our accommodations support our customers’ employees and contractors in the Canadian oil sands and in a variety of oil and natural gas drilling, mining and related natural resource applications as well as disaster relief efforts, primarily in Canada, Australia and the United States. We operate in three principal reportable business segments – Canadian, Australian and U.S.

 

On May 30, 2014, Oil States International, Inc. (Oil States) spun-off its Accommodations Segment (Accommodations) into a standalone, publicly traded Delaware corporation (Civeo US). In accordance with the Separation and Distribution Agreement, the two companies were separated by Oil States distributing to its stockholders all 106,538,044 shares of common stock of Civeo US it held after the market closed on May 30, 2014 (the Spin-Off).

 

On July 17, 2015, we changed our place of incorporation, pursuant to which Civeo Corporation, a British Columbia, Canada limited company formerly named Civeo Canadian Holdings ULC (Civeo Canada), became the publicly traded parent company of the Civeo group of companies (the Redomicile Transaction). The Redomicile Transaction was effected pursuant to an Agreement and Plan of Merger, dated as of April 6, 2015, between Civeo US, Civeo US Merger Co, a Delaware corporation and wholly owned subsidiary of Civeo Canada (US Merger Co), and Civeo Canada. At the effective time of the merger, (i) US Merger Co was merged with Civeo US, with Civeo US surviving the merger as a wholly owned subsidiary of Civeo Canada, and (ii) each issued share of Civeo US common stock, other than those shares of Civeo US common stock held by Civeo US in treasury, was effectively transferred to Civeo Canada and converted into one common share, no par value, of Civeo Canada. An aggregate of approximately 107.5 million Civeo Canada common shares were issued at the effective time as merger consideration. The Civeo Canada common shares are listed on the NYSE under the symbol “CVEO,” the same symbol under which the Civeo US common stock traded prior to the effective time.

 

Basis of Presentation

 

Unless otherwise stated or the context otherwise indicates, all references in these consolidated financial statements to “Civeo,” “the Company,” “us,” “our” or “we” for the time periods prior to July 17, 2015 refer to Civeo US and its consolidated subsidiaries. For time periods after July 17, 2015, these terms refer to Civeo Canada and its consolidated subsidiaries.

 

The accompanying unaudited consolidated financial statements of Civeo have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) pertaining to interim financial information. Certain information in footnote disclosures normally included in financial statements prepared in accordance with Generally Accepted Accounting Principles (GAAP) has been condensed or omitted pursuant to these rules and regulations. The unaudited financial statements included in this report reflect all the adjustments, consisting of normal recurring adjustments, which the Company considers necessary for a fair presentation of the results of operations for the interim periods covered and for the financial condition of the Company at the date of the interim balance sheet. Results for the interim periods are not necessarily indicative of results for the full year. Certain reclassifications have been made to the December 31, 2015 consolidated balance sheet to conform to current year presentation.

 

 
8

 

 

CIVEO CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

The preparation of consolidated financial statements in conformity with GAAP requires the use of estimates and assumptions by management in determining the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. If the underlying estimates and assumptions upon which the financial statements are based change in future periods, actual amounts may differ from those included in the accompanying consolidated financial statements.

 

The financial statements included in this report should be read in conjunction with our audited financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

2.

RECENT ACCOUNTING PRONOUNCEMENTS

 

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the FASB), which are adopted by us as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on our consolidated financial statements upon adoption.

 

In June 2016, the FASB issued Accounting Standards Update (ASU) 2016-13, “Financial Instruments – Credit Losses” (ASU 2016-13). This new standard changes how companies will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. ASU 2016-13 is effective for financial statements issued for reporting periods beginning after December 15, 2019 and interim periods within the reporting periods. We are currently evaluating the impact of this new standard on our consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting” (ASU 2016-09). This new standard requires companies to recognize the income tax effects of awards in the income statement when the awards vest or are settled. ASU 2016-09 is effective for financial statements issued for reporting periods beginning after December 15, 2016 and interim periods within the reporting periods. We are currently evaluating the impact of this new standard on our consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842), which replaces the existing guidance for lease accounting, Leases (Topic 840).  ASU 2016-02 requires lessees to recognize a lease liability and a right-of-use asset for all leases with terms longer than 12 months.   The guidance is effective for financial statements issued for reporting periods beginning after December 15, 2018 and interim periods within the reporting periods. An entity will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. We are currently evaluating the impact of this new standard on our consolidated financial statements. 

 

In April 2015, the FASB issued ASU 2015-03 “Interest - Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs” (ASU 2015-03).  ASU 2015-03 simplifies the presentation of debt issuance costs by requiring that such costs be presented as a deduction from the corresponding debt liability.  Effective with our quarterly report on Form 10-Q for the quarter ended March 31, 2016, we have adopted the provisions of ASU 2015-03.  At December 31, 2015, as a result of our adoption of ASU 2015-03, we reclassified $4.7 million of debt issuance costs to reduce our recognized debt liabilities from other current assets ($1.3 million) and other non-current assets ($3.4 million) on the accompanying unaudited consolidated balance sheet. A portion of our debt issuance costs relate to revolving lines of credit and will accordingly continue to be included in “Other current assets” or “Other non-current assets”.

 

 
9

 

 

CIVEO CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

In May 2014, the FASB issued ASU 2014-09 establishing Accounting Standards Codification (ASC) Topic 606, “Revenue from Contracts with Customers” (ASC 606).  ASC 606 establishes a comprehensive new revenue recognition model designed to depict the transfer of goods or services to a customer in an amount that reflects the consideration the entity expects to be entitled to receive in exchange for those goods or services and requires significantly enhanced revenue disclosures.  The standard is effective for annual reporting periods beginning after December 15, 2017.  Accordingly, we plan to adopt this standard in the first quarter of 2018.  ASC 606 allows either full retrospective or modified retrospective transition, and early adoption is not permitted.  We continue to evaluate both the impact of this new standard on our consolidated financial statements and the transition method we will utilize for adoption.

 

3.

FAIR VALUE MEASUREMENTS

 

Our financial instruments consist of cash and cash equivalents, receivables, payables and debt instruments. We believe that the carrying values of these instruments on the accompanying consolidated balance sheets approximate their fair values.

 

As of June 30, 2016 and December 31, 2015, we believe the carrying value of our floating-rate debt outstanding under our term loans and revolving credit facilities approximates their fair values because their terms include short-term interest rates and exclude penalties for prepayment. We estimated the fair value of our floating-rate term loan and revolving credit facilities using significant other observable inputs, representative of a Level 2 fair value measurement, including terms and credit spreads for these loans.

 

During the first quarter of 2016 and the first and second quarters of 2015, we wrote down certain long-lived assets to their fair values. Our estimate of fair value required us to use significant unobservable inputs, representative of Level 3 fair value measurements, including numerous assumptions with respect to future circumstances, such as future oil, coal and natural gas prices, anticipated spending by our customers, the cost of capital and industry and/or local market conditions that might directly impact each of the asset groups’ operations in the future and are therefore uncertain.

 

4.

DETAILS OF SELECTED BALANCE SHEET ACCOUNTS

 

Additional information regarding selected balance sheet accounts at June 30, 2016 and December 31, 2015 is presented below (in thousands):

 

   

June 30, 2016

   

December 31, 201 5

 

Accounts receivable, net:

               

Trade

  $ 46,048     $ 44,650  

Unbilled revenue

    26,250       16,649  

Other

    1,103       1,289  

Total accounts receivable

    73,401       62,588  

Allowance for doubtful accounts

    (997 )     (1,121 )

Total accounts receivable, net

  $ 72,404     $ 61,467  

 

   

June 30, 2016

   

December 31, 201 5

 

Inventories:

               

Finished goods and purchased products

  $ 2,009     $ 1,854  

Work in process

    471       1,260  

Raw materials

    2,451       2,517  

Total inventories

  $ 4,931     $ 5,631  

 

 

 
10

 

 

CIVEO CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

   

Estimated

Useful Life

(in years)

   

June 30,

2016

   

December 31,

201 5

 

Property, plant and equipment, net:

                           

Land

              $ 48,560     $ 47,825  

Accommodations assets

    3 - 15       1,573,888       1,482,842  

Buildings and leasehold improvements

    3 - 20       28,063       29,099  

Machinery and equipment

    4 - 15       9,697       9,183  

Office furniture and equipment

    3 - 7       30,286       29,172  

Vehicles

    3 - 5       15,380       15,412  

Construction in progress

                30,383       52,558  

Total property, plant and equipment

                1,736,257       1,666,091  

Accumulated depreciation

                (829,935 )     (734,177 )

Total property, plant and equipment, net

              $ 906,322     $ 931,914  

 

   

June 30,

2016

   

December 31,

201 5

 

Accrued liabilities:

               

Accrued compensation

  $ 8,743     $ 11,726  

Accrued taxes, other than income taxes

    1,704       963  

Accrued interest

    36       12  

Other

    1,992       2,133  

Total accrued liabilities

  $ 12,475     $ 14,834  

   

5.

IMPAIRMENT CHARGES

 

Quarter ended March 31, 2016. During the first quarter of 2016, we recorded an impairment expense of $8.4 million, resulting from the impairment of fixed assets in our U.S. segment, due to a continued reduction of U.S. drilling activity in the Bakken Shale region. These fixed assets were written down to their fair value of $3.8 million. We assessed the carrying values of the asset groups to determine if they continued to be recoverable based on estimated future cash flows. Based on the assessment, the carrying values were determined to not be recoverable, and we proceeded to compare the fair value of those assets groups to their respective carrying values.

 

Quarter ended June 30, 2015 . During the second quarter of 2015, we recorded an impairment expense of $9.5 million, resulting from the impairment of fixed assets in a village located in Western Australia, due to the continued downturn in gold mining activity and lack of contract renewals. These fixed assets were written down to their fair value of $0.1 million. We assessed the carrying value of the asset group to determine if it continued to be recoverable based on estimated future cash flows. Based on the assessment, the carrying value was determined to not be recoverable.

 

Quarter ended March 31, 2015. During the first quarter of 2015, we made the decision to dispose of our manufacturing facility in Johnstown, Colorado. Accordingly, the facility met the criteria of held for sale, and its carrying value was adjusted downward to $8.7 million, which represents its estimated fair value less the cost to sell. We recorded a pre-tax impairment expense of $2.7 million and an additional $1.1 million write-down of our inventory as a result. During the fourth quarter of 2015, we completed the sale of the facility.

 

 
11

 

 

 

6.

EARNINGS PER SHARE

 

The calculation of earnings per share attributable to the Company is presented below for the periods indicated (in thousands, except per share amounts):

 

   

Three Months Ended

J une 30,

   

Six Months Ended

J une 30,

 
   

2016

   

201 5

   

2016

   

201 5

 

Basic Loss per Share

                               

Net loss attributable to Civeo

  $ (11,486 )   $ (13,461 )   $ (38,308 )   $ (13,477 )

Less: undistributed net income to participating securities

    --       --       --       --  

Net loss attributable to Civeo’s common shareholders - basic

  $ (11,486 )   $ (13,461 )   $ (38,308 )   $ (13,477 )
                                 

Weighted average common shares outstanding - basic

    107,033       106,626       106,923       106,543  
                                 

Basic loss per share

  $ (0.11 )   $ (0.13 )   $ (0.36 )   $ (0.13 )
                                 

Diluted Loss per Share

                               

Net loss attributable to Civeo’s common shareholders - basic

  $ (11,486 )   $ (13,461 )   $ (38,308 )   $ (13,477 )

Less: undistributed net income to participating securities

    --       --       --       --  

Net loss attributable to Civeo’s common shareholders - diluted

  $ (11,486 )   $ (13,461 )   $ (38,308 )   $ (13,477 )
                                 

Weighted average common shares outstanding - basic

    107,033       106,626       106,923       106,543  

Effect of dilutive securities

    --       --       --       --  

Weighted average common shares outstanding - diluted

    107,033       106,626       106,923       106,543  
                                 

Diluted loss per share

  $ (0.11 )   $ (0.13 )   $ (0.36 )   $ (0.13 )

 

7.

DEBT

 

As of June 30, 2016 and December 31, 2015, long-term debt consisted of the following (in thousands):

 

   

June 30, 2016

   

December 31, 2015

 

U.S. term loan, which matures on May 28, 2019; principal repayable on May 28, 2019; weighted average interest rate of 3.6% for the six month period ended June 30, 2016

  $ 24,375     $ 49,375  

Canadian term loan, which matures on May 28, 2019; 1.25% of aggregate principal repayable per quarter beginning December 31, 2015; weighted average interest rate of 3.7% for the six month period ended June 30, 2016

    311,274       300,165  

U.S. revolving credit facility, which matures on May 28, 2019, with available commitments up to $50.0 million; weighted average interest rate of 5.3% for the six month period ended June 30, 2016

    1,500       --  

Canadian revolving credit facility, which matures on May 28, 2019, with available commitments up to $100.0 million; weighted average interest rate of 3.9% for the six month period ended June 30, 2016

    33,823       52,020  

Canadian revolving credit facility, which matures on May 28, 2019, with available commitments up to $100.0 million; weighted average interest rate of 4.5% for the six month period ended June 30, 2016

    4,612       --  

Australian revolving credit facility, which matures on May 28, 2019, with available commitments up to $100.0 million; weighted average interest rate of 5.2% for the six month period ended June 30, 2016

    20,441       --  
      396,025       401,560  

Less: Unamortized debt issuance costs

    4,908       4,683  

Total debt

    391,117       396,877  

Less: Current portion of long-term debt, including unamortized debt issuance costs, net

    15,934       17,461  

Long-term debt, less current maturities

  $ 375,183     $ 379,416  

 

Interest expense on the accompanying unaudited consolidated statements of operations is net of capitalized interest of zero and $0.3 million for the three month periods ended June 30, 2016 and 2015, respectively. Interest expense on the accompanying unaudited consolidated statements of income is net of capitalized interest of zero and $0.7 million for the six months ended June 30, 2016 and 2015, respectively.

 

 
12

 

 

CIVEO CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

Amended Credit Facility

 

As of December 31, 2015, our revolving credit facility consisted of (i) a $375.0 million, 5-year revolving credit facility allocated as follows: (A) a $50.0 million senior secured revolving credit facility in favor of Civeo, as borrower, (B) a $100.0 million senior secured revolving credit facility in favor of certain of our Canadian subsidiaries, as borrowers, (C) a $125.0 million senior secured revolving credit facility in favor of certain of our Canadian subsidiaries, as borrowers, and (D) a $100.0 million senior secured revolving credit facility in favor of one of our Australian subsidiaries, as borrower, and (ii) a $375.0 million, 5-year term loan facility in favor of Civeo (collectively, the Amended Credit Facility).

 

On February 18, 2016, the second amendment to the Amended Credit Facility became effective, which provided for the following:

 

 

Civeo Management LLC, an indirect wholly owned subsidiary of the Company, became a co-borrower under the US$50.0 million U.S. revolving credit facility under the Amended Credit Facility;

 

 

The partial prepayment of the U.S. term loan under the Amended Credit Facility in the aggregate principal amount of US$25.0 million and the reduction by US$25.0 million of the aggregate revolving loan commitments under the Canadian revolving credit facility under the Amended Credit Facility to a maximum principal amount of US$100.0 million;

 

 

(i) Increased the interest rate margin by 0.25% when the leverage ratio is less than 1.50x (by removing the lowest level in the leverage-based interest rate margin grid), (ii) established two additional levels to the total leverage-based grid such that the interest rates for the loans range from LIBOR +2.25% to LIBOR +5.00% and (iii) increased the undrawn commitment fee from a range of 0.45% to 0.90% to a range of 0.51% to 1.13% based on total leverage;

 

 

 

Adjusted the maximum leverage ratio financial covenant, as follows:

 

 

 

 

Maximum Leverage Ratio

 
Period Ended            

December 31, 2015

    4.00 : 1.00  

March 31, 2016

    4.25 : 1.00  

June 30, 2016

    5.25 : 1.00  

September 30, 2016

    5.50 : 1.00  

December 31, 2016

    5.50 : 1.00  

March 31, 2017

    5.25 : 1.00  

June 30, 2017

    5.25 : 1.00  

September 30, 2017

    5.00 : 1.00  

December 31, 2017

    5.00 : 1.00  

March 31, 2018

    4.75 : 1.00  

June 30, 2018

    3.75 : 1.00  

September 30, 2018 & thereafter

    3.50 : 1.00  

 

 

Included a provision for a mandatory prepayment of the revolving credit facilities under the Amended Credit Facility in the event the Company and its subsidiaries hold an aggregate amount of cash exceeding US$40.0 million for a period of more than three consecutive business days, such mandatory prepayment to be made within two business days in an amount equal to the lesser of (a) an amount sufficient to reduce the aggregate amount of cash and permitted investments on hand at the Company and its subsidiaries to less than US$40.0 million or (b) an amount sufficient to repay all of the outstanding commitments under the revolving credit facilities under the Amended Credit Facility; and

 

 

Other technical changes and amendments to the Amended Credit Facility.

 

 
13

 

 

CIVEO CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

As a result of the second amendment, we recognized a loss during the first quarter of 2016 of approximately $0.3 million related to unamortized debt issuance costs, which is included in “Loss on extinguishment of debt” on the accompanying unaudited consolidated statements of operations.

 

U.S. dollar amounts outstanding under the Amended Credit Facility bear interest at a variable rate equal to LIBOR plus a margin of 2.25% to 5.00%, or a base rate plus 1.25% to 4.00%, in each case based on a ratio of our total leverage to EBITDA (as defined in the Amended Credit Facility). Canadian dollar amounts outstanding under the Amended Credit Facility bear interest at a variable rate equal to CDOR plus a margin of 2.25% to 5.00%, or a base rate plus a margin of 1.25% to 4.00%, in each case based on a ratio of our consolidated total leverage to EBITDA (as defined in the Amended Credit Facility). Australian dollar amounts outstanding under the Amended Credit Facility bear interest at a variable rate equal to BBSY plus a margin of 2.25% to 5.00%, based on a ratio of our consolidated total leverage to EBITDA (as defined in the Amended Credit Facility).

 

The Amended Credit Facility contains customary affirmative and negative covenants that, among other things, limit or restrict (i) subsidiary indebtedness, liens and fundamental changes, (ii) asset sales, (iii) margin stock, (iv) specified acquisitions, (v) restrictive agreements, (vi) transactions with affiliates and (vii) investments and other restricted payments, including dividends and other distributions. Specifically, we must maintain an interest coverage ratio, defined as the ratio of consolidated EBITDA (as defined in the Amended Credit Facility) to consolidated interest expense, of at least 3.0 to 1.0 and our maximum leverage ratio, defined as the ratio of total debt to consolidated EBITDA, of no greater than 5.25 to 1.0 (as of June 30, 2016). As noted above, the permitted maximum leverage ratio changes over time. Each of the factors considered in the calculations of these ratios are defined in the Amended Credit Facility. EBITDA and consolidated interest, as defined, exclude goodwill and asset impairments, debt discount amortization and other non-cash charges. We were in compliance with these covenants as of June 30, 2016.

 

We have 15 lenders in our Amended Credit Facility with commitments ranging from $1.2 million to $135.7 million.

 

8.

INCOME TAXES

 

The Company’s operations are conducted through its various subsidiaries in a number of countries throughout the world. The Company has provided for income taxes based upon the tax laws and rates in the countries in which operations are conducted and income is earned. For the three and six months ended June 30, 2016, Civeo Canada is the public parent registered under the laws of British Columbia, Canada. For the three and six months ended June 30, 2015, Civeo US, a Delaware corporation, was the public parent registered in the U.S.

 

We operate primarily in three jurisdictions, Canada , Australia and the U.S., where statutory tax rates range from 27% to 35%. Our effective tax rate will vary period to period based on changes in earnings mix between these different jurisdictions.

 

We compute our quarterly taxes under the effective tax rate method by applying an anticipated annual effective rate to our year-to-date income, except for significant unusual or extraordinary transactions. As Australia and the U.S. are now loss jurisdictions for tax accounting purposes, Australia and the U.S. have been removed from the annual effective tax rate computation for purposes of computing the interim tax provision. Income taxes for significant and unusual or extraordinary transactions are computed and recorded in the period that the specific transaction occurs.

 

Our income tax benefit for the six months ended June 30, 2016 totaled $5.5 million, or 12.7% of pretax loss, compared to a benefit of $4.7 million, or 26.5% of pretax loss, for the six months ended June 30, 2015. Our income tax benefit for the three months ended June 30, 2016 totaled $0.9 million, or 7.7% of pretax income, compared to a benefit of $5.9 million, or 30.6% of pretax income, for the three months ended June 30, 2015. As noted above, our effective tax rates in 2016 were impacted by the exclusion of Australia and U.S. for purposes of computing the interim tax provision. Our effective tax rate in 2015 was impacted by a $2.7 million charge, related to an increase in statutory tax rates in Alberta, Canada, which reduced our 2015 income tax benefit.       

 
14

 

 

CIVEO CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

9.

COMMITMENTS AND CONTINGENCIES

 

We are a party to various pending or threatened claims, lawsuits and administrative proceedings seeking damages or other remedies concerning our commercial operations, products, employees and other matters, including warranty and product liability claims as a result of our products or operations. Although we can give no assurance about the outcome of pending legal and administrative proceedings and the effect such outcomes may have on us, management believes that any ultimate liability resulting from the outcome of such proceedings, to the extent not otherwise provided for or covered by insurance, will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.

 

10.

ACCUMULATED OTHER COMPREHENSIVE LOSS

 

Our accumulated other comprehensive loss decreased $16.9 million from $366.3 million at December 31, 2015 to $349.4 million at June 30, 2016, as a result of foreign currency exchange rate differences. Changes in other comprehensive loss during the first half of 2016 were primarily driven by the Australian dollar and Canadian dollar increasing in value compared to the U.S. dollar. Excluding intercompany balances, our Canadian dollar and Australian dollar functional currency net assets totaled approximately C$0.2 billion and A$0.5 billion, respectively, at June 30, 2016.

 

11.

S HARE BASED COMPENSATION

 

Our employees and non-employee directors participate in the Amended and Restated 2014 Equity Participation Plan of Civeo Corporation (the Civeo Plan). The Civeo Plan authorizes the Board of Directors to grant options, awards of restricted shares, performance awards, dividend equivalents, awards of deferred shares, and share payments to our employees and non-employee directors. No more than 14.0 million Civeo common shares may be awarded under the Civeo Plan.

 

Upon effectiveness of the Redomicile Transaction, Civeo Canada assumed the Civeo US employee equity plans and related award agreements, including all options and awards issued or granted under such plans, as well as certain Civeo US benefit plans and agreements.

 

Outstanding Awards

 

Options. Compensation expense associated with options recognized in the three month periods ended June 30, 2016 and 2015 totaled zero and $0.1 million, respectively. Compensation expense associated with options recognized in the six month periods ended June 30, 2016 and 2015 totaled $ 0.1 million and $ 0.2 million, respectively. At June 30, 2016, unrecognized compensation cost related to options was $ 0.2 million, which is expected to be recognized over a weighted average period of 1.3 years.

 

Restricted S hare / Deferred Share Awards. On February 23, 2016, we granted 231,934 restricted share and deferred share awards under the Civeo Plan, which vest in three equal annual installments beginning on February 23, 2017. On May 12, 2016, we granted 401,070 restricted share awards to our directors, which vest in their entirety on May 12, 2017.

 

Compensation expense associated with restricted share awards and deferred share awards recognized in the three month periods ended June 30, 2016 and 2015 totaled $0.9 million and $1.1 million, respectively. Compensation expense associated with restricted share awards and deferred share awards recognized in the six month periods ended June 30, 2016 and 2015 totaled $2.0 million and $2.2 million, respectively. The total fair value of restricted share awards and deferred share awards that vested during the three months ended June 30, 2016 and 2015 was $0.3 million and $0.3 million, respectively. The total fair value of restricted share awards and deferred share awards that vested during the six months ended June 30, 2016 and 2015 was $0.6 million and $0.9 million, respectively.    

 

 
15

 

 

CIVEO CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

At June 30, 2016, unrecognized compensation cost related to restricted share awards and deferred share awards was $6.3 million, which is expected to be recognized over a weighted average period of 2.0 years.

 

Phantom Share Awards . On February 23, 2016, we granted 2,917,130 phantom share awards under the Civeo Plan, which vest in three equal annual installments beginning on February 23, 2017. We also granted 3,099,194 phantom share awards under the Canadian Long-Term Incentive Plan, which vest in three equal annual installments beginning on February 23, 2017.

 

During the three month periods ended June 30, 2016 and 2015, we recognized compensation expense associated with phantom shares totaling $1.6 million and $0.5 million, respectively. During the six month periods ended June 30, 2016 and 2015, we recognized compensation expense associated with phantom shares totaling $1.8 million and $0.8 million, respectively. At June 30, 2016, unrecognized compensation cost related to phantom shares was $12.0 million, as remeasured at June 30, 2016, which is expected to be recognized over a weighted average period of 2.6 years.

 

Performance Awards . On February 23, 2016, we granted 2,400,606 performance awards under the Civeo Plan, which cliff vest in three years on February 23, 2019. These awards will be earned in amounts between 0% and 200% of the participant’s target performance share award, based on the payout percentage associated with Civeo’s relative total shareholder return rank among a peer group of 12 other companies. Shareholder approval to grant these awards as equity awards to be settled in shares was obtained on May 12, 2016. Accordingly, the awards are being accounted for as equity awards, with a fair value of $3.18 calculated as of May 12, 2016.  

 

During the three month periods ended June 30, 2016 and 2015, we recognized compensation expense associated with performance awards totaling $0.9 million and zero, respectively. During the six month periods ended June 30, 2016 and 2015, we recognized compensation expense associated with performance awards totaling $1.0 million and zero, respectively. At June 30, 2016, unrecognized compensation cost related to performance shares was $6.6 million, which is expected to be recognized over a weighted average period of 2.7 years.

 

12.

SEGMENT AND RELATED INFORMATION

 

In accordance with current accounting standards regarding disclosures about segments of an enterprise and related information, we have identified the following reportable segments: Canada, Australia and U.S., which represent our strategic focus on workforce accommodations.

 

 
16

 

 

CIVEO CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

Financial information by business segment for each of the three and six months ended June 30, 2016 and 2015 is summarized in the following table (in thousands):

 

   

Total

Revenues

   

Less:

Intersegment

Revenues

   

Revenues

from

unaffiliated

customers

   

Depreciation

and

amortization

   

Operating

income

(loss)

   

Capital

expenditures

   

Total assets

 

Three months ended

June 30 , 201 6

                                                       

Canada

  $ 77,107     $ --     $ 77,107     $ 21,453     $ 683     $ 446     $ 636,008  

Australia

    27,505       --       27,505       11,434       (914 )     1,094       409,350  

United States

    2,423       --       2,423       1,282       (3,792 )     --       33,913  

Corporate and eliminations

    --       --       --       (1,001 )     (1,991 )     3,593       (27,741 )

Total

  $ 107,035     $ --     $ 107,035     $ 33,168     $ (6,014 )   $ 5,133     $ 1,051,530  
                                                         

Three months ended

June 30 , 201 5

                                                       

Canada

  $ 90,072     $ --     $ 90,072     $ 25,217     $ (3,820 )   $ 9,113     $ 903,435  

Australia

    38,268       --       38,268       13,799       (4,882 )     1,868       621,831  

United States

    14,807       --       14,807       3,395       (1,801 )     130       112,407  

Corporate and eliminations

    --       --       --       130       (3,634 )     2,289       59,051  

Total

  $ 143,147     $ --     $ 143,147     $ 42,541     $ (14,137 )   $ 13,400     $ 1,696,724  
                                                         

Six months ended

June 30 , 201 6

                                                       

Canada

  $ 142,629     $ --     $ 142,629     $ 41,792     $ (9,016 )   $ 1,493     $ 636,008  

Australia

    53,015       --       53,015       22,612       (2,536 )     1,701       409,350  

United States

    6,427       --       6,427       3,188       (17,391 )     --       33,913  

Corporate and eliminations

    --       --       --       (869 )     (3,268 )     6,699       (27,741 )

Total

  $ 202,071     $ --     $ 202,071     $ 66,723     $ (32,211 )   $ 9,893     $ 1,051,530  
                                                         

Six months ended

June 30 , 201 5

                                                       

Canada

  $ 206,972     $ --     $ 206,972     $ 49,975     $ 8,300     $ 15,566     $ 903,435  

Australia

    80,127       --       80,127       27,712       1,845       5,135       621,831  

United States

    29,431       (2,396 )     27,035       7,074       (8,695 )     1,246       112,407  

Corporate and eliminations

    (2,396 )     2,396       --       226       (10,711 )     2,155       59,051  

Total

  $ 314,134     $ --     $ 314,134     $ 84,987     $ (9,261 )   $ 24,102     $ 1,696,724  

 

 

 

 
17

 

 

Cautionary Statement Regarding Forward-Looking Statements

 

This quarterly report on Form 10-Q contains certain “forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the Exchange Act). The Private Securities Litigation Reform Act of 1995 provides safe harbor provisions for forward-looking information. The forward-looking statements can be identified by the use of forward-looking terminology including "may," "expect," "anticipate," "estimate," "continue," "believe" or other similar words. A ctual results could differ materially from those projected in the forward-looking statements as a result of a number of important factors. For a discussion of known material factors that could affect our results, please refer to “Risk Factors,” “Forward-Looking Statements,” and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year ended December 31, 201 5 and our subsequent SEC filings . Sho uld one or more of these risks or uncertainties materialize, or should the assumptions prove incorrect, actual results may differ materially from those expected, estimated or projected. Our management believes these forward-looking statements are reasonable. However, you should not place undue reliance on these forward-looking statements, which are based only on our current expectations and are not guarantees of future performance. All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the foregoing. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to publicly update or revise any of them in light of new information, future events or otherwise.

 

In addition, in certain places in this quarterly report, we refer to reports published by third parties that purport to describe trends or developments in the energy industry. We do so for the convenience of our s hare holders and in an effort to provide information available in the market that will assist our investors in a better understanding of the market environment in which we operate. However, we specifically disclaim any responsibility for the accuracy and completeness of such information and undertake no obligation to update such information.

 

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

You should read the following discussion and analysis together with our consolidated financial statements and the notes to those statements included elsewhere in this quarterly report on Form 10-Q.

 

Redomiciling to Canada

 

On July 17, 2015, we completed our change in place of incorporation from Delaware to British Columbia, Canada (the Redomicile Transaction). In the Redomicile Transaction, Civeo Corporation, a British Columbia, Canada limited company formerly named Civeo Canadian Holdings ULC (Civeo Canada), became the publicly traded parent company of the Civeo group of companies, and our former publicly traded Delaware parent (Civeo US) became a wholly owned subsidiary of Civeo Canada. Each issued share of Civeo US common stock, other than those shares of Civeo US common stock held by Civeo US in treasury, was effectively transferred to Civeo Canada and converted into one common share, no par value, of Civeo Canada. An aggregate of approximately 107.5 million Civeo Canada common shares were issued in the Redomicile Transaction. The Civeo Canada common shares are listed on the NYSE under the symbol “CVEO,” the same symbol under which the Civeo US common stock traded prior to the effective time.

 

The Redomicile Transaction qualified as a “self-directed redomiciling” of the Company as permitted under the U.S. Internal Revenue Code. U.S. federal income tax laws permit a company to change its domicile to a foreign jurisdiction without corporate-level U.S. federal income taxes provided that such company has “substantial business activity” in the relevant jurisdiction. “Substantial business activity” is defined as foreign operations consisting of over 25% of the company’s total (i) revenues, (ii) assets, (iii) employees and (iv) employee compensation. With approximately 50% or more of our operations in Canada based on these metrics, we qualified for a self-directed redomiciling.

 

We incurred costs related to the Redomicile Transaction totaling $0.2 million and $2.4 million for the three months ended June 30, 2016 and 2015, respectively. We incurred costs related to the Redomicile Transaction totaling $1.3 million and $3.6 million for the six months ended June 30, 2016 and 2015, respectively.

 

 
18

 

 

Macroeconomic Environment

 

We provide workforce accommodations to the natural resource industry in Canada, Australia and the U.S. Demand for our services can be attributed to two phases of our customers’ projects: (1) the development or construction phase and (2) the operations or production phase. Initial demand for our services is driven by our customers’ capital spending programs related to the construction and development of oil sands and coal mines and associated infrastructure as well as the exploration for oil and natural gas. Long-term demand for our services is driven by continued development and expansion of natural resource production and operation of oil sands and mining facilities. Industry capital spending programs are generally based on the outlook for commodity prices, economic growth and estimates of resource production. As a result, demand for our products and services is largely sensitive to expected commodity prices, principally related to crude oil, metallurgical (met) coal and natural gas.

 

In Canada, Western Canadian Select (WCS) crude is the benchmark price for our oil sands accommodations customers. Pricing for WCS is driven by several factors, including the underlying price for West Texas Intermediate (WTI) crude and the availability of transportation infrastructure. Historically, WCS has traded at a discount to WTI, creating a “WCS Differential,” due to transportation costs and limited capacity to move Canadian heavy oil production to refineries, primarily in the U.S. Gulf Coast. The WCS Differential has varied depending on the extent of transportation capacity availability.

 

During the first quarter of 2016, global oil prices dropped to their lowest level in over ten years due to concerns over global oil demand, global crude inventory levels, worldwide economic growth and price cutting by major oil producing countries, such as Saudi Arabia. Increasing global supply, including increased U.S. shale oil production, also negatively impacted pricing. With falling Brent Crude and WTI oil prices, WCS also fell. Prices began to increase in March 2016. WCS prices in the second quarter of 2016 increased moderately to an average of $32.84 per barrel, from a low of $20.26 in the first quarter of 2016, compared to a high of $83.78 in the second quarter of 2014. The WCS Differential increased modestly from $13.25 per barrel at the end of the fourth quarter of 2015 to $13.80 per barrel at the end of the second quarter of 2016. As of July 25, 2016, the WTI price was $42.38 and the WCS price was $28.38, resulting in a WCS Differential of $14.00.

 

There remains a significant risk that prices for Canadian oil sands crude oil related products could continue to deteriorate or remain at current depressed levels for an extended period of time, and the discount between WCS crude prices and WTI crude prices could widen. The continuation of these depressed price levels has negatively impacted exploration, development, maintenance and production spending and activity by Canadian operators and, therefore, demand for our services in late 2014, 2015 and 2016. Our Canadian oil sands customers could continue to delay maintenance spending and additional investments in their oil sands assets as well.

 

In Australia, approximately 80% of our rooms are located in the Bowen Basin and primarily serve met coal mines in that region. Met coal pricing and growth in production in the Bowen Basin region is influenced by levels of global steel production. Global steel production has decreased 1.9% during the first half of 2016 compared to the same period in 2015. Furthermore, Chinese steel production decreased 1.1% for the first six months of 2016 compared to the same period in 2015, and accordingly, Chinese demand for imported steel inputs, such as met coal and iron ore, has continued to decrease during 2016 compared to prior periods. Because of this, coupled with the fact that Australian met coal output has decreased 2% during the first half of 2016 compared to the same period in 2015, met coal prices have decreased materially from over $160 per metric tonne at the beginning of 2013 to approximately $84.00 per metric tonne in the second quarter of 2016. As of July 25, 2016, contract met coal prices were approximately $92.50 per metric tonne. We expect the historically low contract price of met coal to continue to negatively impact occupancy at our Bowen Basin villages throughout 2016. Depressed met coal prices have led to the implementation of cost control measures by our customers, some coal mine closures and delays in the start-up of new coal mining projects in Australia. A continued depressed met coal price will impact our customers’ future capital spending programs. Long-term demand for steel will be driven by increased steel consumption per capita in developing economies, such as China and India, whose current consumption per capita is a fraction of developed countries.

 

 
19

 

 

Natural gas and WTI crude oil prices, discussed above, have an impact on the demand for our U.S. accommodations. With limited export capabilities, U.S. natural gas prices are primarily influenced by domestic supply/demand dynamics and resultant inventory levels. U.S. natural gas production has continued to outpace demand, which has caused prices to continue to be weak relative to historical prices over the past decade. U.S. natural gas inventory levels at June 30, 2016 were 3.14 Tcf, 22% over inventory levels from June 30, 2015 and 25% over seasonally comparable average inventory levels over the past five years. Prices for natural gas in the U.S. averaged $2.25 per mcf in the second quarter of 2016, a 18% decrease over the average price in the second quarter of 2015. These weaker prices are expected to continue. At these levels, it is uneconomic to increase development in several domestic, gas-focused basins. If natural gas production growth continues to surpass demand in the U.S. and/or the supply of natural gas were to increase, whether the supply comes from conventional or unconventional production or associated natural gas production from oil wells, prices for natural gas could be constrained for an extended period and result in fewer rigs drilling for natural gas in the near-term.

 

Recent WTI crude, WCS crude, met coal and natural gas pricing trends are as follows:

 

   

Average Price (1)

 

Quarter

ended

 

WTI

 

Crude

(per bbl)

   

WCS

 

Crude

(per bbl)

   

Hard

Coking Coal

(Met Coal)

(per ton ne )

   

Henry

Hub

Natural

Gas

(per mcf)

 

Third Quarter through 7/25/2016

  $ 45.39     $ 31.47     $ 92.50     $ 2.76  

6/30/2016

    45.53       32.84       84.00       2.25  

3/31/2016

    33.41       20.26       81.00       1.98  

12/31/2015

    42.02       27.82       89.00       2.23  

9/30/2015

    46.48       31.54       93.00       2.73  

6/30/2015

    57.64       48.09       109.50       2.73  

3/31/2015

    48.49       35.03       117.00       2.81  

12/31/2014

    73.21       57.75       119.00       3.83  

9/30/2014

    97.60       78.69       120.00       3.95  

6/30/2014

    103.06       83.78       120.00       4.58  

3/31/2014

    98.68       77.76       143.00       5.18  

12/31/2013

    97.50       66.34       152.00       3.85  

9/30/2013

    105.83       83.10       145.00       3.55  

6/30/2013

    94.05       77.48       172.00       4.02  

__________

(1)     Source: WTI crude and natural gas prices are from U.S. Energy Information Administration (EIA), and WCS crude prices and Seaborne hard coking coal contract prices are from Bloomberg.

 

Overview

 

As noted above, demand for our services is primarily tied to the outlook for crude oil and met coal prices. Other factors that can affect our business and financial results include the general global economic environment and regulatory changes in Canada, Australia, the U.S. and other markets.

 

Our business is predominantly located in northern Alberta, Canada and Queensland, Australia, and we derive most of our business from resource companies who are developing and producing oil sands and met coal resources and, to a lesser extent, other hydrocarbon and mineral resources. More than three-fourths of our revenue is generated by our large-scale lodge and village facilities. Where traditional accommodations and infrastructure are insufficient, inaccessible or cost ineffective, our lodge and village facilities provide comprehensive accommodations services similar to those found in an urban hotel. We typically contract our facilities to our customers on a fee per day basis that covers lodging and meals and that is based on the duration of their needs which can range from several weeks to several years.

 

Generally, our customers are making multi-billion dollar investments to develop their prospects, which have estimated reserve lives ranging from ten years to in excess of thirty years. Consequently, these investments are dependent on those customers’ longer-term view of commodity demand and prices. Announcements of certain new and expanded oil sands projects can create the opportunity to extend existing accommodations contracts and incremental contracts for us in Canada. There have been few new or expanded projects announced in recent months.

 

 
20

 

 

With the current commodity price environment and expected demand, concerns about take-away capacity out of the Canadian oil sands region and continued high costs including labor costs, the current outlook for Canadian oil sands activity has continued to deteriorate in 2016. Although we are currently the primary third-party accommodations provider for the two major construction projects in the Canadian oil sands region, the Fort Hills project and the Kearl project, outlook for additional major oil sands construction projects is limited. Oil sands operators are looking to reduce their costs and capital spending, limiting the demand for accommodations like we provide. As a result, we experienced materially lower revenues and earnings from our Canadian operations in the first half of 2016 compared to the first half of 2015 and expect this trend to continue for the rest of 2016.

 

We began expansion of our room count in Kitimat, British Columbia during the second half of 2015 to support potential liquefied natural gas (LNG) projects on the west coast of British Columbia. We were awarded a contract with LNG Canada for the provision of open lodge rooms and associated services. To support this contract, we have developed a new accommodations facility, named Sitka Lodge, which includes private washrooms, recreational facilities and other amenities. This lodge currently has 386 rooms with the potential to expand to serve future accommodations demand in the region.

 

In addition, we were awarded a contract with LNG Canada (LNGC) to construct a 4,500 person workforce accommodation center (Cedar Valley Lodge) for a proposed liquefaction and export facility in Kitimat, British Columbia. Construction of Cedar Valley Lodge will not commence until LNGC’s joint venture participants have made a positive final investment decision. The final investment decision was originally planned for the end of 2016; however, this decision has been delayed until a future time that has not yet been determined. If the final investment decision continues to be delayed, or if the investment is cancelled, the resulting impact may negatively affect our results of operations and the value of our existing long-lived assets in Canada and may require us to record impairment charges equal to the excess of the carrying value of these assets over fair value. With the delay in the final investment decision, we currently expect that LNGC will continue to utilize rooms at our Sitka Lodge through September 2017 in accordance with the terms of our contract. There can be no assurance that LNGC’s joint venture participants will reach a positive final investment decision.

 

We expanded our Australian room capacity in 2012 and 2013 to meet increasing demand, notably in the Bowen Basin in Queensland and in the Gunnedah Basin in New South Wales to support coal production, and in Western Australia to support LNG and other energy-related projects. In early 2013, a confluence of low met coal pricing, additional carbon and mining taxes on our Australian accommodations customers and several years of cost inflation caused several of our customers to curtail or cease production from higher cost mines and delay or materially reduce their growth plans. This has negatively affected our ability to expand our room count and has led to a decrease in occupancy levels. Despite the repeal of carbon and mining taxes, continued concerns about China’s economy, which significantly influences the global demand for steel, and therefore, met coal, the outlook for met coal demand continues to be negative. As a result, our Australian business experienced lower occupancy levels throughout 2015, and this trend is continuing in 2016.

 

Exchange rates between the U.S. dollar and each of the Canadian dollar and the Australian dollar influence our U.S. dollar reported financial results. Our business has historically derived the vast majority of its revenues and operating income in Canada and Australia. These revenues and profits are translated into U.S. dollars for U.S. Generally Accepted Accounting Principles (U.S. GAAP) financial reporting purposes. The Canadian dollar was valued at an average exchange rate of U.S. $0.78 for the second quarter of 2016 compared to U.S. $0.81 for the second quarter of 2015, a decrease of approximately 5%. The Canadian dollar was valued at an average exchange rate of U.S. $0.75 for the first half of 2016 compared to U.S. $0.81 for the first half of 2015, a decrease of approximately 7%. The Canadian dollar was valued at an exchange rate of $0.77 on June 30, 2016 and $0.72 on December 31, 2015. The Australian dollar was valued at an average exchange rate of U.S. $0.75 for the second quarter of 2016 compared to U.S. $0.78 for the second quarter of 2015, a decrease of approximately 4%. The Australian dollar was valued at an average exchange rate of U.S. $0.73 for the first half of 2016 compared to U.S. $0.78 for the first half of 2015, a decrease of approximately 6%. The Australian dollar was valued at an exchange rate of $0.74 on June 30, 2016 and $0.73 on December 31, 2015. These fluctuations of the Canadian and Australian dollars have had and will continue to have an impact on the translation of earnings generated from our Canadian and Australian subsidiaries and, therefore, our financial results.

 

We continue to monitor the global economy, the demand for crude oil, met coal and natural gas and the resultant impact on the capital spending plans of our customers in order to plan our business. We currently expect that our 2016 capital expenditures will total approximately $25 million, compared to 2015 capital expenditures of $62 million. Please see “Liquidity and Capital Resources below for further discussion of 2016 capital expenditures.

 

 

 
21

 

 

Results of Operations

 

Unless otherwise indicated, discussion of results for the three- and six- month period s ended June 30, 2016 , is based on a comparison to the corresponding period s of 201 5 .

 

Results of Operations – Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015

 

   

Three Months Ended

June 30 ,

 
   

201 6

   

201 5

   

Change

 
   

($ in thousands)

 

Revenues

                       

Canada

  $ 77,107     $ 90,072     $ (12,965 )

Australia

    27,505       38,268       (10,763 )

United States and other

    2,423       14,807       (12,384 )

Total revenues

    107,035       143,147       (36,112 )

Costs and expenses

                       

Cost of sales and services

                       

Canada

    47,579       61,375       (13,796 )

Australia

    13,132       16,032       (2,900 )

United States and other

    3,875       12,017       (8,142 )

Total cost of sales and services

    64,586       89,424       (24,838 )

Selling, general and administrative expenses

    15,295       18,419       (3,124 )

Depreciation and amortization expense

    33,168       42,541       (9,373 )

Impairment expense

    --       9,473       (9,473 )

Other operating expense (income)

    --       (2,573 )     2,573  

Total costs and expenses

    113,049       157,284       (44,235 )

Operating loss

    (6,014 )     (14,137 )     8,123  
                         

Interest expense and income, net

    (5,897 )     (5,561 )     (336 )

Other income (expense)

    (392 )     566       (958 )

Loss before income taxes