Civeo Corporation
Civeo Corp (Form: 10-Q, Received: 10/26/2017 13:36:08)

 

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 September 30, 2017

 

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

(I.R.S. Employer

incorporation or organization)

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, a smaller reporting company or an emerging growth company. See the definitions of "accelerated filer," "large accelerated filer," "smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

(Check one):

Large Accelerated Filer [  ]

Accelerated Filer [X]   

Emerging Growth Company [  ]

     

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

Smaller Reporting Company [  ]  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

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 132,259,000 common shares outstanding as of October 23, 2017.

 

1

 

 

CIVEO CORPORATION

 

INDEX

 

 

Page No.

                         Part I -- FINANCIAL INFORMATION

 
   

Item 1. Financial Statements:

 
   

Consolidate d Financial Statements

 

Unaudited Consolidated Statements of Operations for the Three and Nine Month Periods Ended September 30, 2017 and 2016 

3

Unaudited Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Month Periods Ended September 30, 2017 and 2016

4

Consolidated Balance Sheets – September 30, 2017 (unaudited) and December 31, 2016

5

Unaudited Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended  September 30, 2017 and 2016

6

Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 201 7 and 2016 

7

Notes to Unaudited Consolidated Financial Statements

8 –18

   

Cautionary Statement Regarding Forward-Looking Statements

  19

   

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

19 -35

   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

  35

   

Item 4. Controls and Procedures

3 6

   
   

                          Part II -- OTHER INFORMATION

 
   

Item 1. Legal Proceedings

3 7

   

Item 1A. Risk Factors

3 7

   

Item 6. Exhibits

38

   

(a) Index of Exhibits

38

   

Signature Page

  39

   

 

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

   

NINE MONTHS ENDED

 
   

SEPTEMBER 30,

   

SEPTEMBER 30,

 
   

201 7

   

201 6

   

201 7

   

201 6

 

Revenues:

                               

Service and other

  $ 95,564     $ 97,792     $ 274,438     $ 290,307  

Product

    1,925       6,446       6,490       16,002  
      97,489       104,238       280,928       306,309  

Costs and expenses:

                               

Service and other costs

    62,668       61,534       179,044       181,510  

Product costs

    2,859       6,430       7,639       16,983  

Selling, general and administrative expenses

    15,871       13,644       44,141       42,056  

Depreciation and amortization expense

    32,700       33,721       97,083       100,444  

Impairment expense

    4,360       37,729       4,360       46,129  

Other operating expense

    375       138       1,104       356  
      118,833       153,196       333,371       387,478  

Operating loss

    (21,344 )     (48,958 )     (52,443 )     (81,169 )
                                 

Interest expense to third-parties

    (5,441 )     (6,072 )     (15,697 )     (16,941 )

Loss on extinguishment of debt

    --       --       (842 )     (302 )

Interest income

    49       26       69       140  

Other income

    517       1,338       1,247       1,058  

Loss before income taxes

    (26,219 )     (53,666 )     (67,666 )     (97,214 )

Income tax benefit

    4,011       11,697       9,875       17,217  

Net loss

    (22,208 )     (41,969 )     (57,791 )     (79,997 )

Less: Net income attributable to noncontrolling interest

    123       162       343       442  

Net loss attributable to Civeo Corporation.

  $ (22,331 )   $ (42,131 )   $ (58,134 )   $ (80,439 )
                                 
                                 

Per Share Data (see Note 6 )

                               

Basic net loss per share attributable to Civeo Corporation common shareholders

  $ (0.17 )   $ (0.39 )   $ (0.46 )   $ (0.75 )
                                 

Diluted net loss per share attributable to Civeo Corporation common shareholders.

  $ (0.17 )   $ (0.39 )   $ (0.46 )   $ (0.75 )
                                 

Weighted average number of common shares outstanding:

                               

Basic

    130,889       107,118       127,512       106,989  

Diluted.

    130,889       107,118       127,512       106,989  

 

 

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

   

NINE MONTHS ENDED

 
   

SEPTEMBER 30,

   

SEPTEMBER 30,

 
   

201 7

   

201 6

   

201 7

   

201 6

 
                                 

Net loss

  $ (22,208 )   $ (41,969 )   $ (57,791 )   $ (79,997 )
                                 

Other comprehensive income:

                               

Foreign currency translation adjustment, net of taxes of zero

    14,343       9,599       38,691       26,511  

Total other comprehensive income

    14,343       9,599       38,691       26,511  
                                 

Comprehensive loss

    (7,865 )     (32,370 )     (19,100 )     (53,486 )

Comprehensive income attributable to noncontrolling interest

    (126 )     (123 )     (667 )     (443 )

Comprehensive loss attributable to Civeo Corporation.

  $ (7,991 )   $ (32,493 )   $ (19,767 )   $ (53,929 )

 

 

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

 

4

 

 

CIVEO CORPORATION

 

CO NSOLIDAT ED BALANCE SHEETS

(In Thousands)

 

   

SEPTEMBER 30,

201 7

   

DECEMBER 31,

201 6

 
   

( Unaudited)

         
ASSETS                
                 

Current assets:

               

Cash and cash equivalents

  $ 54,002     $ 1,785  

Accounts receivable, net

    63,113       56,302  

Inventories

    4,857       3,112  

Prepaid expenses

    10,281       15,431  

Other current assets

    5,948       5,938  

Total current assets

    138,201       82,568  
                 

Property, plant and equipment, net

    756,138       789,710  

Other intangible assets, net

    24,700       28,039  

Oth er noncurrent assets

    10,711       10,129  

Total assets

  $ 929,750     $ 910,446  
                 

LIABILITIES AND S HAREHOLDERS’ EQUITY

               
                 

Current liabilities:

               

Accounts payable

  $ 23,893     $ 20,675  

Accrued liabilities

    19,429       14,822  

Income taxes

    407       111  

Current portion of long-term debt

    16,671       15,471  

Deferred revenue

    4,016       6,792  

Other current liabilities

    1,625       2,572  

Total current liabilities

    66,041       60,443  
                 

Long-term debt, less current maturities

    307,522       337,800  

Deferred income taxes

    --       9,194  

Other noncurrent liabilities

    30,358       27,019  

Total liabilities

    403,921       434,456  
                 

Commitments and contingencies (Note 9)

               
                 

S hareholders’ Equity:

               

Common shares (no par value; 550,000,000 shares authorized, 132,424,451 shares and 108,171,329 shares issued, respectively, and 132,259,000 shares and 108,103,048 shares outstanding, respectively)

    --       --  

Additional paid-in capital

    1,382,160       1,311,226  

Accumulated deficit

    (531,534 )     (472,764 )

Common shares held in treasury at cost, 165,451 and 68,281 shares, respectively

    (358 )     (65 )

Accumulated other comprehensive loss

    (324,563 )     (362,930 )

Total Civeo Corporation s hareholders’ equity

    525,705       475,467  

Noncontrolling interest

    124       523  

Total s hareholders’ equity

    525,829       475,990  

Total liabilities and s hareholders’ equity

  $ 929,750     $ 910,446  

 

 

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 5

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

Net income (loss)

    --       --       (80,439 )     --       --       442       (79,997 )

Currency translation adjustment .

    --       --       --       --       26,510       1       26,511  

Share-based compensation.

    --       4,535       --       (65 )     --       --       4,470  

Balance, September 30, 2016

  $ --     $ 1,310,465     $ (456,815 )   $ (65 )   $ (339,799 )   $ 968     $ 514,754  
                                                         
                                                         

Balance, December 31, 201 6

  $ --     $ 1,311,226     $ (472,764 )   $ (65 )   $ (362,930 )   $ 523     $ 475,990  

Net income (loss)

    --       --       (58,134 )     --       --       343       (57,791 )

Currency translation adjustment .

    --       --       --       --       38,367       324       38,691  

Dividends paid

    --       --       --       --       --       (1,066 )     (1,066 )

Cumulative effect of implementation of ASU 2016-09 .

    --       636       (636 )     --       --       --       --  

Isssuance of common shares

    --       64,817       --       --       --       --       64,817  

Share-based compensation.

    --       5,481       --       (293 )     --       --       5,188  

Balance, September 30, 2017

  $ --     $ 1,382,160     $ (531,534 )   $ (358 )   $ (324,563 )   $ 124     $ 525,829  

 

   

 

Common Stock (in thousands)

                                                 

Balance, December 31, 2016

    108,103                                                  

Issuance of common shares

    23,000                                                  

S hare-based compensation.

    1,156                                                  

Balance, September 3 0 , 201 7

    132,259                                                  

 

 

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

 

6

 

 

CIVEO CORPORATION

 

UNAUDITED CO NSOLIDAT ED STATEMENTS OF CASH FLOWS

(In Thousands)

 

   

NINE MONTHS ENDED

 
   

SEPTEMBER 30,

 
   

201 7

   

201 6

 
                 

Cash flows from operating activities:

               

Net loss

  $ (57,791 )   $ (79,997 )

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

               

Depreciation and amortization

    97,083       100,444  

Impairment charges

    4,360       46,129  

Inventory write-down

    --       850  

Loss on extinguishment of debt

    842       302  

Deferred income tax benefit

    (11,026 )     (25,239 )

Non-cash compensation charge

    5,481       4,535  

( Gain) loss on disposal of assets

    (1,193 )     259  

Provision (benefit) for loss on receivables, net of recoveries

    8       (74 )

Other, net

    3,307       2,546  

Changes in o perating assets and liabilities:

               

Accounts receivable

    (2,845 )     (2,920 )

Inventories

    (1,507 )     1,484  

Accounts payable and accrued liabilities

    5,910       2,766  

Taxes payable

    9,928       4,832  

Other current assets and liabilities, net

    (7,032 )     (7,062 )

Net cash flows provided by operating activities

    45,525       48,855  
                 

Cash flows from investing activities:

               

Capital expenditures

    (8,020 )     (15,246 )

Proceeds from disposition of property, plant and equipment

    1,625       4,465  

Other, net

    548       (761 )

Net cash flows used in investing activities

    (5,847 )     (11,542 )
                 

Cash flows from financing activities:

               

Proceeds from issuance of common shares , net

    64,817       --  

Term loan repayments

    (12,214 )     (37,107 )

Revolving credit borrowings

    44,525       230,323  

Revolving credit repayments

    (84,462 )     (236,939 )

Debt issuance costs

    (1,795 )     (2,037 )

Other, net

    (293 )     (65 )

Net cash flows provided by (used in) financing activities

    10,578       (45,825 )
                 

Effect of exchange rate changes on cash

    1,961       3,205  

Net change in cash and cash equivalents

    52,217       (5,307 )

Cash and cash equivalents, beginning of period

    1,785       7,837  
                 

Cash and cash equivalents, end of period

  $ 54,002     $ 2,530  

 

 

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

 

7

 

 

CIVEO CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

 

1.

DESC R IPTION 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 – Canada, Australia and U.S.

 

On February 7, 2017, we closed a public offering of 23,000,000 common shares at $3.00 per share. We used a portion of the net proceeds of $64.8 million from the offering to repay amounts outstanding under several revolving credit facilities provided by our primary credit agreement (the Credit Agreement) and are using the remaining proceeds for general corporate purposes.

 

On February 17, 2017, the third amendment to the Credit Agreement (as so amended, the Amended Credit Agreement) became effective, which: (i) reduced the aggregate revolving loan commitments; (ii)  added one additional level to the total leverage-based grid for determining interest rates; and (iii) increased the maximum leverage ratio allowed under the Amended Credit Agreement. For further information, please see Note 7 – Debt.

 

Basis of Presentation

 

Unless otherwise stated or the context otherwise indicates : (i) all references in these consolidated financial statements to “Civeo,” “us,” “our” or “we” refer to Civeo Corporation and its consolidated subsidiaries; and (ii) all references in this report to “dollars” or “$” are to U.S. dollars.

 

The accompanying unaudited consolidated financial statements of Civeo have been prepared pursuant to the rules and regulations of the S ecurities and Exchange Commission (the 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 those rules and regulations. The unaudited financial statements included in this report reflect all the adjustments, consisting of normal recurring adjustments, which Civeo considers necessary for a fair presentation of the results of operations for the interim periods covered and for the financial condition of Civeo 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, 2016 consolidated balance sheet to conform to the current year presentation.

 

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, 201 6.

 

2.

RECENT ACCOUNTING PRONOUNCEMENT S

 

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 or other guidance updates, which are not yet effective, will not have a material impact on our consolidated financial statements upon adoption.

 

8

 

 

CIVEO CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

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. The changes to the accounting for forfeitures and excess tax benefits or deficiencies should be applied using a modified retrospective transition method with a cumulative-effect adjustment to retained earnings. Effective with our quarterly report on Form 10-Q for the quarter ended March 31, 2017, we have adopted this standard effective January 1, 2017. Upon adoption of this standard, we no longer estimate forfeitures in advance and now recognize forfeitures as they occur and have reflected a cumulative effect adjustment of $0.6 million to accumulated deficit in the accompanying unaudited consolidated balance sheet as of September 30, 2017. In addition, this new standard requires that companies classify the cash paid to a tax authority when shares are withheld to satisfy the employer’s statutory income tax withholding obligation as a financing activity. As a result of our withholding of shares for tax-withholding purposes, during the year ended December 31, 2016, we withheld approximately 68,000 shares at a total value of $0.1 million. As a result of our adoption of ASU 2016-09, we reclassified $0.1 million of tax-withholdings from operating activities to financing activities on the accompanying unaudited consolidated statement of cash flows for the nine months ended September 30, 2016.

 

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 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 and interim 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 we currently plan to use the modified retrospective method of adoption. We are continuing to evaluate the impact of this new standard on our consolidated financial statements upon adoption. Our evaluation includes performing a detailed review of key contracts representative of our different businesses and comparing historical accounting policies and practices to the new standard. Through the third quarter of 2017, we have reviewed a material amount of our lodge and village contracts, as well as other revenue generating contracts, in our Canadian, U.S. and Australian segments. Based on our review of these contracts, we do not expect the new revenue recognition standard to have a material impact on our consolidated financial statements upon adoption.

 

9

 

 

CIVEO CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

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 September 30, 2017 and December 31, 2016, we believe the carrying value of our floating-rate debt outstanding under our term loans and revolving credit facilities approximates fair value because the 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 third quarter of 2017 and the first and third quarters of 2016, we wrote down certain long-lived assets to their fair values. Our estimates 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 that might directly impact each of the relevant asset groups’ operations in the future and are therefore uncertain. These assumptions with respect to future circumstances included future oil, coal and natural gas prices, anticipated spending by our customers, the cost of capital, and industry and/or local market conditions. During the third quarter of 2017 and 2016, our estimates of fair value of certain undeveloped land positions in British Columbia were based on appraisals from third parties.

 

4.

DETAILS OF SELECTED BALANCE SHEET ACCOUNTS

 

Additional information regarding selected balance sheet accounts at September 30, 2017 and December 31, 2016 is presented below (in thousands):

 

   

September 30,

2017

   

December 31,

201 6

 

Accounts receivable, net:

               

Trade

  $ 40,790     $ 39,442  

Unbilled revenue

    21,659       16,063  

Other

    1,309       1,435  

Total accounts receivable

    63,758       56,940  

Allowance for doubtful accounts

    (645 )     (638 )

Total accounts receivable, net

  $ 63,113     $ 56,302  

 

 

   

September 30,

2017

   

December 31,

201 6

 

Inventories:

               

Finished goods and purchased products

  $ 2,371     $ 1,700  

Work in process

    882       3  

Raw materials

    1,604       1,409  

Total inventories

  $ 4,857     $ 3,112  

 

During the third quarter of 2016, we recorded a $0.9 million write-down of inventory at our modular construction and manufacturing plant in Canada, which is included in Service and other costs in our accompanying unaudited consolidated statements of operations.

 

10

 

 

CIVEO CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

   

Estimated

Useful Life

(in years)

   

September 30, 2017

   

December 31, 201 6

 

Property, plant and equipment, net:

                         

Land

            $ 42,563     $ 41,122  

Accommodations assets

   3 - 15       1,665,496       1,554,986  

Buildings and leasehold improvements

   5 - 20       31,015       28,104  

Machinery and equipment

   4 - 15       10,242       9,667  

Office furniture and equipment

   3 - 7       54,770       29,948  

Vehicles

   3 - 5       15,319       14,725  

Construction in progress

              3,163       23,016  

Total property, plant and equipment

              1,822,568       1,701,568  

Accumulated depreciation

              (1,066,430 )     (911,858 )

Total property, plant and equipment, net

            $ 756,138     $ 789,710  

 

 

 

   

September 30,

2017

   

December 31,

201 6

 

Accrued liabilities:

               

Accrued compensation

  $ 16,270     $ 13,189  

Accrued taxes, other than income taxes

    1,568       917  

Accrued interest

    15       194  

Other

    1,576       522  

Total accrued liabilities

  $ 19,429     $ 14,822  

 

5.

IMPAIRMENT CHARGES

 

2017 Impairment Charges

 

The following summarizes pre-tax impairment charges recorded during the nine month period ended September 30, 2017, which are included in Impairment expense in our accompanying unaudited consolidated statements of operations (in thousands):

 

   

Canada

   

 

Australia

   

U.S.

   

Total

 

Quarter ended September 30, 2017

                               

Long-lived assets

  $ 4,360     $ --     $ --     $ 4,360  

Total

  $ 4,360     $ --     $ --     $ 4,360  

 

Quarter ended September 30, 201 7 . During the third quarter of 2017, we made the decision to vacate an open camp facility in Canada and relocated the assets to a newly awarded contract for a Canadian mobile camp. We assessed the carrying value of the remaining assets to determine if they continued to be recoverable based on their estimated future cash flows. Based on the assessment, the carrying values of certain leasehold improvements were determined to not be fully recoverable, and we proceeded to compare the estimated fair value of those assets to their respective carrying values. Accordingly, the value of the remaining leasehold improvements were written down to their fair value of zero. As a result of the analysis described above, we recorded an impairment expense of $3.2 million associated with our leased properties in Canada.

 

We also recorded an impairment expense of $1.2 million related to undeveloped land positions in Canada, the fair market value of which was negatively impacted by the recent cancellation of an LNG project in British Columbia. 

 

11

 

 

CIVEO CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

2016 Impairment Charges

 

The following summarizes pre-tax impairment charges recorded during the nine month period ended September 30, 2016, which are included in Impairment expense in our accompanying unaudited consolidated statements of operations (in thousands):

 

   

Canada

   

 

Australia

   

U.S.

   

Total

 

Quarter ended March 31, 2016

                               

Long-lived assets

  $ --     $ --     $ 8,400     $ 8,400  

Quarter ended September 30, 2016

                               

Long-lived assets

    37,729       --       --       37,729  

Total

  $ 37,729     $ --     $ 8,400     $ 46,129  

 

Quarter ended September 30, 2016. During the third quarter of 2016, we identified an indicator that certain asset groups used, or expected to be used, in conjunction with potential LNG projects in British Columbia may be impaired due to market developments occurring in the third quarter of 2016, including the delay in the final investment decision regarding an LNG project in British Columbia.  We assessed the carrying value of each of the asset groups to determine if they continued to be recoverable based on their estimated future cash flows.  Based on the assessment, the carrying values of the mobile camp assets and certain undeveloped land positions in British Columbia were determined to not be fully recoverable, and we proceeded to compare the estimated fair value of those assets groups to their respective carrying values.  Accordingly, the mobile camp assets and undeveloped land positions were written down to their estimated fair values of $26.6 million and $5.6 million, respectively. 

 

As a result of the analysis described above, we recorded an impairment expense of $ 37.7 million associated with our mobile camp assets in Canada and undeveloped land positions in the British Columbia LNG market. 

 

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.

 

12

 

 

CIVEO CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

6.

EARNINGS PER SHARE

 

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

201 7

   

201 6

   

201 7

   

201 6

 

Basic Loss per Share

                               

Net loss attributable to Civeo

  $ (22,331 )   $ (42,131 )   $ (58,134 )   $ (80,439 )

Less: undistributed net income to participating securities

    --       --       --       --  

Net loss attributable to Civeo’s common shareholders - basic

  $ (22,331 )   $ (42,131 )   $ (58,134 )   $ (80,439 )
                                 

Weighted average common shares outstanding - basic

    130,889       107,118       127,512       106,989  
                                 

Basic loss per share

  $ (0.17 )   $ (0.39 )   $ (0.46 )   $ (0.75 )
                                 

Diluted Loss per Share

                               

Net loss attributable to Civeo’s common shareholders - basic

  $ (22,331 )   $ (42,131 )   $ (58,134 )   $ (80,439 )

Less: undistributed net income to participating securities

    --       --       --       --  

Net loss attributable to Civeo’s common shareholders - diluted

  $ (22,331 )   $ (42,131 )   $ (58,134 )   $ (80,439 )
                                 

Weighted average common shares outstanding - basic

    130,889       107,118       127,512       106,989  

Effect of dilutive securities (1 )

    --       --       --       --  

Weighted average common shares outstanding - diluted

    130,889       107,118       127,512       106,989  
                                 

Diluted loss per share

  $ (0.17 )   $ (0.39 )   $ (0.46 )   $ (0.75 )

 

(1 )

When an entity has a net loss from continuing operations, it is prohibited from including potential common shares in the computation of diluted per share amounts. Accordingly, we have utilized the basic shares outstanding amount to calculate both basic and diluted loss per share for the three and nine months ended September 30, 2017 and 2016. In the three months ended September 30, 2017 and 2016, we excluded from the calculation 2.2 million and 1.6 million share based awards, respectively, since the effect would have been anti-dilutive. In the nine months ended September 30, 2017 and 2016, we excluded from the calculation 2.1 million and 1.5 million share based awards, respectively, since the effect would have been anti-dilutive.

 

13

 

 

CIVEO CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

7.

DEBT

 

As of September 30, 2017 and December 31, 2016, long-term debt consisted of the following (in thousands):

 

   

September 30,

2017

   

December 31,

2016

 

U.S . term loan, which matures on May 28, 2019; weighted average interest rate of 4.3% for the nine-month period ended September 30, 2017

  $ 24,375     $ 24,375  
                 

Canadian term loan, which matures on May 28, 2019; 1.25% of aggregate principal repayable per quarter; weighted average interest rate of 4.3% for the nine-month period ended September 30, 2017

    303,405       293,763  
                 

U.S. revolving credit facility, which matures on May 28, 2019, weighted average interest rate of 6.3% for the nine-month period ended September 30, 2017

    --       --  
                 

Canadian revolving credit facility, which matures on May 28, 2019, weighted average interest rate of 5.1% for the nine-month period ended September 30, 2017

    --       23,089  
                 

Canadian revolving credit facility, which matures on May 28, 2019, weighted average interest rate of 5.1% for the nine-month period ended September 30, 2017

    --       9,533  
                 

Australian revolving credit facility, which matures on May 28, 2019, weighted average interest rate of 5.0% for the nine-month period ended September 30, 2017

    --       6,507  
      327,780       357,267  

Less: Unamortized debt issuance costs

    3,587       3,996  

Total debt

    324,193       353,271  

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

    16,671       15,471  

Long-term debt, less current maturities

  $ 307,522     $ 337,800  

 

We did not have any capitalized interest to net against interest expense for either of the three-month or nine-month periods ended September 30, 2017 or 2016.

 

Amended Credit Agreement

 

As of December 31, 2016, our Credit Agreement, as then amended to date, provided for: (i) a $350.0 million, revolving credit facility scheduled to mature on May 28, 2019, allocated as follows: (A) a $50.0 million senior secured revolving credit facility in favor of certain of our U.S. subsidiaries, as borrowers; (B) a $100.0 million senior secured revolving credit facility in favor of Civeo and certain of our Canadian subsidiaries, as borrowers; (C) a $100.0 million senior secured revolving credit facility in favor of Civeo, as borrower; and (D) a $100.0 million senior secured revolving credit facility in favor of one of our Australian subsidiaries, as borrower; and (ii) a $350.0 million term loan facility scheduled to mature on May 28, 2019 in favor of Civeo.

 

On February 17, 2017, the third amendment to the Credit Agreement (as amended by the third amendment, the Amended Credit Agreement) became effective, which:

 

 

p rovided for the reduction by $75 million of the aggregate revolving loan commitments under the Amended Credit Agreement, to a maximum principal amount of $275 million, allocated as follows: (1) a $40.0 million senior secured revolving credit facility in favor of certain of our U.S. subsidiaries, as borrowers; (2) a $90.0 million senior secured revolving credit facility in favor of Civeo and certain of our Canadian subsidiaries, as borrowers; (3) a $60.0 million senior secured revolving credit facility in favor of Civeo, as borrower; and (4) an $85.0 million senior secured revolving credit facility in favor of one of our Australian subsidiaries, as borrower;

 

 

e stablished one additional level to the total leverage-based grid such that the interest rates for the loans range from the London Interbank Offered Rate (LIBOR) plus 2.25% to LIBOR plus 5.50%, and increased the undrawn commitment fee from a range of 0.51% to 1.13% to a range of 0.51% to 1.24% based on total leverage;

 

14

 

 

CIVEO CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

 

a djusted the maximum leverage ratio financial covenant for the relevant periods, as follows:

 

Period Ended

Maximum Leverage Ratio

September 30, 2017

5.85

:

1.00

December 31, 2017

5.85

:

1.00 

March 31, 2018

5.85

:

1.00

June 30, 2018

5.85

:

1.00

September 30, 2018

5.85

:

1.00

December 31, 2018

5.50

:

1.00

March 31, 2019 & thereafter

5.25

:

1.00

 

   

; and

     
 

provided for o ther technical changes and amendments to the Amended Credit Agreement.

 

U.S. dollar amounts outstanding under the facilities provided by the Amended Credit Agreement bear interest at a variable rate equal to LIBOR plus a margin of 2.25% to 5.50%, or a base rate plus 1.25% to 4.50%, in each case based on a ratio of our total leverage to EBITDA (as defined in the Amended Credit Agreement). Canadian dollar amounts outstanding bear interest at a variable rate equal to the Canadian Dollar Offered Rate plus a margin of 2.25% to 5.50%, or a base rate plus a margin of 1.25% to 4.50%, in each case based on a ratio of our consolidated total leverage to EBITDA. Australian dollar amounts outstanding under the Amended Credit Facility bear interest at a variable rate equal to the Bank Bill Swap Bid Rate plus a margin of 2.25% to 5.50%, based on a ratio of our consolidated total leverage to EBITDA.

 

The Amended Credit Agreement contains customary affirmative and negative covenants that, among other things, limit or restrict: (i) subsidiary indebtedness, liens and fundamental changes; (ii) asset sales; (iii) acquisitions of margin stock; (iv) specified acquisitions; (v) certain restrictive agreements; (vi) transactions with affiliates; and (vii) investments and other restricted payments, including dividends and other distributions. In addition, we must maintain an interest coverage ratio, defined as the ratio of consolidated EBITDA 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 5.85 to 1.0 (as of September 30, 2017). 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 Agreement. EBITDA and consolidated interest, as defined, exclude goodwill and asset impairments, debt discount amortization and other non-cash charges. We were in compliance with all of these covenants as of September 30, 2017.

 

Borrowings under the Amended Credit Agreement are secured by a pledge of substantially all of our assets and the assets of our subsidiaries. The obligations under the Amended Credit Agreement are guaranteed by our significant subsidiaries. There are 15 lenders that are parties to the Amended Credit Agreement, with commitments ranging from $1.1 million to $122.2 million.

 

8.

IN COME TAXES

 

Our operations are conducted through various subsidiaries in a number of countries throughout the world. We have provided for income taxes based upon the tax laws and rates in the countries in which operations are conducted and income is earned.

 

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 from 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 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 any significant and unusual or extraordinary transactions are computed and recorded in the period that the specific transaction occurs.

 

15

 

 

CIVEO CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

Our income tax benefit for the nine months ended September 30, 2017 totaled $9.9 million, or 14.6% of pretax loss, compared to a benefit of $17.2 million, or 17.7% of pretax loss, for the nine months ended September 30, 2016. Our income tax benefit for the three months ended September 30, 2017 totaled $4 .0 million, or 15.3% of pretax loss, compared to a benefit of $11.7 million, or 21.8% of pretax loss, for the three months ended September 30, 2016. Our effective tax rate for the nine months ended September 30, 2017 and 2016 was reduced approximately 12% and 1 0%, respectively, by the exclusion of Australia and U.S. for purposes of computing the interim tax provision since they are loss jurisdictions for tax accounting purposes .

 

9.

COMMITMENTS AND CONTINGENCIES

 

We are a party to various pending or threatened claims, lawsuits and administrative proceedings seeking damages or other remedies concerning o ur 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 $38.4 million from $362.9 million at December 31, 2016 to $324.5 million at September 30, 2017, as a result of foreign currency exchange rate fluctuations. Changes in other comprehensive loss during the first nine months of 2017 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 September 30, 2017.

 

11.

S HARE BASED COMPENSATION

 

O ur 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 our Board of Directors and the Compensation Committee of our Board of Directors to approve grants of options, awards of restricted shares, performance awards and 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.

 

Outstanding Awards

 

Options.   Compensation expense associated with options recognized in both the three month periods ended September 30, 2017 and 2016 totaled less than $0.1 million.  Compensation expense associated with options recognized in both the nine month periods ended September 30, 2017 and 2016 totaled less than $0.1 million.  At September 30, 2017, unrecognized compensation cost related to options was less than $0.1 million, which is expected to be recognized over a weighted average period of 0.4 years. 

 

         Restricted Share / Deferred Share Awards.   On February 21, 2017, we granted 1,322,934 restricted share awards and deferred share awards under the Civeo Plan, which vest in three equal annual installments beginning on February 21, 2018.  On March 21, 2017, we granted 47,529 restricted share awards to one of our non-employee directors upon his appointment to our Board of Directors, which vest in their entirety on March 21, 2018.  On May 11, 2017, we granted 243,190 restricted share awards to our other non-employee directors, which vest in their entirety on May 11, 2018.

 

16

 

 

CIVEO CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

C ompensation expense associated with restricted share awards and deferred share awards recognized in the three month periods ended September 30, 2017 and 2016 totaled $0.9 million and $1.0 million, respectively. Compensation expense associated with restricted share awards and deferred share awards recognized in the nine month periods ended September 30, 2017 and 2016 totaled $3.2 million and $3.0 million, respectively. The total fair value of restricted share awards and deferred share awards that vested during each of the three months ended September 30, 2017 and 2016 was de minimis. The total fair value of restricted share awards and deferred share awards that vested during the nine months ended September 30, 2017 and 2016 was $2.4 million and $0.6 million, respectively.    

 

At September 30, 2017, unrecognized compensation cost related to restricted share awards and deferred share awards was $5.5 million, which is expected to be recognized over a weighted average period of 1.9 years.

 

Phantom Share Awards . On February 21, 2017, we granted 351,022 phantom share awards under the Civeo Plan, which vest in three equal annual installments beginning on February 21, 2018. We also granted 163,617 phantom share awards under the Canadian Long-Term Incentive Plan, which vest in three equal annual installments beginning on February 21, 2018.

 

During the three month periods ended September 30, 2017 and 2016, we recognized compensation expense associated with phantom shares totaling $2.4 million and a de minims amount, respectively. During the nine month periods ended September 30, 2017 and 2016, we recognized compensation expense associated with phantom shares totaling $6.6 million and $1.8 million, respectively. At September 30, 2017, unrecognized compensation cost related to phantom shares was $9.0 million, as remeasured at September 30, 2017, which is expected to be recognized over a weighted average period of 1.5 years.

 

Performance Awards . On February 21, 2017, we granted 762,497 performance awards under the Civeo Plan, which cliff vest in three years on February 21, 2020. 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 that includes 14 other companies.  

 

During the three month periods ended September 30, 2017 and 2016, we recognized compensation expense associated with performance awards totaling $ 0.8 million and $0.5 million, respectively. During the nine month periods ended September 30, 2017 and 2016, we recognized compensation expense associated with performance awards totaling $2.3 million and $1.4 million, respectively. At September 30, 2017, unrecognized compensation cost related to performance shares was $5.9 million, which is expected to be recognized over a weighted average period of 1.9 years.

 

17

 

 

CIVEO CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

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.

 

Financial information by business segment for each of the three and nine months ended September 30, 2017 and 2016 is summarized in the following table (in thousands):

 

   

Total

Revenues

   

Depreciation

and

amortization

   

Operating

income

(loss)

   

Capital

expenditures

   

 

Total

assets

 

Three months ended September 30 , 201 7

                                       

Canada

  $ 63,832     $ 18,402     $ (11,691 )   $ 679     $ 579,593  

Australia

    27,541       11,561       (3,667 )     756       391,520  

United States

    6,116       1,165       (3,941 )     422       31,161  

Corporate and eliminations

    --       1,572       (2,045 )     126       (72,524 )

Total

  $ 97,489     $ 32,700     $ (21,344 )   $ 1,983     $ 929,750  
                                         

Three months ended September 30 , 201 6

                                       

Canada

  $ 73,539     $ 20,702     $ (44,742 )   $ 1,085     $ 576,945  

Australia

    27,679       11,736       (1,918 )     2,132       409,982  

United States

    3,020       1,274       (3,271 )     --       31,926  

Corporate and eliminations

    --       9       973       2,136       (40,802 )

Total

  $ 104,238     $ 33,721     $ (48,958 )   $ 5,353     $ 978,051  
                                         

Nine months ended September 30 , 201 7

                                       

Canada

  $ 182,006     $ 54,374     $ (26,283 )   $ 2,195     $ 579,593  

Australia

    83,164       34,614       (8,284 )     2,211       391,520  

United States

    15,758       3,549       (10,347 )     1,058       31,161  

Corporate and eliminations

    --       4,546       (7,529 )     2,556       (72,524 )

Total

  $ 280,928     $ 97,083     $ (52,443 )   $ 8,020     $ 929,750  
                                         

Nine months ended September 30 , 201 6

                                       

Canada

  $ 216,168     $ 62,494     $ (53,758 )   $ 2,578     $ 576,945  

Australia

    80,694       34,348       (4,454 )     3,833       409,982  

United States

    9,447       4,462       (20,662 )     --       31,926  

Corporate and eliminations

    --       (860 )     (2,295 )     8,835       (40,802 )

Total

  $ 306,309     $ 100,444     $ (81,169 )   $ 15,246     $ 978,051  

 

18

 

 

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. The forward-looking statements in this report include, but are not limited to, the statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” relating to our expectations about the macroeconomic environment and industry conditions, including factors expected to impact supply and demand, as well as our expectations about capital expenditures in 2017 and beliefs with respect to liquidity needs. 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 6 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 , except to the extent required by applicable law.

 

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.

 

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. Historically, initial demand for our services has been 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 has been driven by continued development and expansion of natural resource production and operation of oil sands and mining facilities. In general, industry capital spending programs are 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 and metallurgical (met) coal.

 

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 along the U.S. Gulf Coast. The WCS Differential has varied depending on the extent of transportation capacity availability.

 

19

 

 

During the first quarter of 2016, global oil prices dropped to their lowest levels 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 WTI oil prices, WCS also fell.  Prices began to increase in March 2016, and continued to increase through the first quarter of 2017.  After falling slightly in the second quarter of 2017, prices began to increase towards the end of the third quarter of 2017.  WCS prices in the third quarter of 2017 averaged $37.72 per barrel compared to a low of $20.26 in the first quarter of 2016 and a high of $83.78 in the second quarter of 2014.  The WCS Differential decreased from $16.10 per barrel at the end of the fourth quarter of 2016 to $11.25 per barrel at the end of the third quarter of 2017.  As of October 23, 2017, the WTI price was $51.72 and the WCS price was $39.40, resulting in a WCS Differential of $12.32.

 

There remains a risk that prices for Canadian oil sands crude oil related products could 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 depressed price levels through the first quarter of 2016 negatively impacted exploration, development, maintenance and production spending and activity by Canadian operators and, therefore, demand for our services in late 2014 and throughout 2015 and 2016. Although we have seen an uplift in oil prices in late 2016 and through 2017, we are not expecting significant improvement in customer activity in the near-term, as we anticipate that our customers’ capital spending will generally lag increased oil prices by nine to 12 months. The current outlook for expansionary projects in Canada is primarily related to proposed pipeline and insitu oil sands projects. However, continued uncertainty and commodity price volatility and regulatory complications could cause our Canadian oil sands and pipeline customers to delay expansionary and maintenance spending and defer additional investments in their oil sands assets.

 

Our U.S. business is also primarily tied to oil prices, specifically oil shale drilling and completion activity, and therefore WTI oil prices, in the Bakken, Rockies and Permian basins.   With the recovery in oil prices in late 2016 and into 2017, coupled with ample capital availability for U.S. E&P companies, oil drilling and completion activity in the U.S. has significantly increased over the past year.   The U.S. oil rig count has increased from its low of 316 rigs in May of 2016 to over 700 rigs active in the third quarter of 2017.  As of October 20, 2017, there were 736 active oil rigs in the U.S. (as measured by Bakerhughes.com).  U.S. oil drilling and completion activity will continue to be dependent on WTI oil prices near or above $50 per barrel and sufficient capital to support E&P drilling and completion plans.

 

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 production growth in the Bowen Basin region is predominantly influenced by the levels of global steel production, which increased by 5.6% during the first nine months of 2017 compared to the corresponding period in 2016.  On March 28, 2017, a Category 4 cyclone made landfall on the coast of Queensland, Australia, temporarily shutting down the majority of Bowen Basin coal export rail infrastructure, causing another spike in met coal spot prices from $152 per metric tonne on March 31, 2017 to over $250 per metric tonne.  As of October 23, 2017, met coal spot prices are at $178 per metric tonne and benchmark contract prices for the fourth quarter of 2017 paid to Australian metallurgical coal producers by Japanese steel producers have not settled. Following cyclone Debbie, the market began to shift away from quarterly benchmark pricing to an index linked approach as a pricing mechanism. The changes in met coal pricing this year have not led our customers to approve any significant new projects.  We expect that customers will look for a period of sustained higher prices before we see any significant impact on customer activity levels and the demand for our accommodations.  Long-term demand for steel is expected to 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. Our customers continue to actively implement cost, productivity and efficiency measures to drive down their cost base.

 

20

 

 

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

 

    Average Price (1)  
   

WTI

   

WCS

   

Hard

 

Quarter

 

Crude

   

Crude

   

Coking Coal (Met Coal)

 

ended

 

(per bbl)

   

(per bbl)

   

(per ton ne )

 

Fourth Quarter through 10/23/2017

  $ 50.95     $ 39.63     $ N/A  

9 /30/2017

    48.16       37.72       170.00  

6 /30/2017

    48.11       38.20       193.50  

3 /31/2017

    51.70       38.09       285.00  

12 /31/2016

    49.16       34.34       200.00  

9 /30/2016

    44.88       30.67       92.50  

6 /30/2016

    45.53       32.84       84.00  

3 /31/2016

    33.41       20.26       81.00  

12/31/201 5

    42.02       27.82       89.00  

9 /30/2015

    46.48       31.54       93.00  

6/30/201 5

    57.64       48.09       109.50  

3/31/201 5

    48.49       35.03       117.00  

12/31/201 4

    73.21       57.75       119.00  

9/30/201 4

    97.60       78.69       120.00  

 


 

(1)

Source: WTI crude 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 is based on the duration of customer 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 30 years. Consequently, these investments are dependent on those customers’ long-term views of commodity demand and prices.

 

In response to decreases in crude oil prices beginning in late 2014, many of our customers in Canada curtailed their operations and spending, and most major oil sands mining operators are continuing to seek to reduce their costs and limit capital spending, thereby limiting the demand for accommodations of the kind we provide. In Australia, approximately 80% of our rooms are located in the Bowen Basin and primarily serve met coal mines in that region, where our customers continue to implement operational efficiency measures, in order to drive down their cost base.

 

In recent months, however, several catalysts have emerged that we believe could have favorable intermediate to long-term implications for our core end markets. Since the announcement by OPEC in late November 2016 to cut production quotas and the subsequent rise in oil prices and oil price expectations, certain operators with steam-assisted gravity drainage operations in the Canadian oil sands have increased capital spending in 2017. In addition, recent regulatory approvals of several major pipeline projects have the potential to both drive incremental demand for mobile accommodations assets and to improve take-away capacity for Canadian oil sands producers over the longer term. Additionally, we believe that the Keystone XL pipeline in the U.S., if constructed, would be a positive catalyst for Canadian oil sands producers, as it would bolster confidence in future take-away capacity from the region to U.S. Gulf Coast refineries. In Australia, we believe prices are currently at a level that may contribute to increased activity over the long term if our customers view these price levels as sustainable.

 

21

 

 

While we believe that these macroeconomic developments are positive for our customers and for the underlying demand for our accommodations services, we do not expect an immediate improvement in our business and are expecting our full year 2017 revenues and EBITDA to be materially lower compared to 2016. Accordingly, we plan to focus on enhancing the quality of our operations, maintaining financial discipline and proactively managing our business as market conditions continue to evolve.

 

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 (LNGC) for the provision of open lodge rooms and associated services that ran through September 2017. To support this contract, we developed a new accommodations facility, named Sitka Lodge, which includes private washrooms, recreational facilities and other amenities. This lodge currently has 436 rooms, with the potential to expand to serve future accommodations demand in the region.

 

In addition, we were awarded a contract with 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 (FID). The FID was originally planned for the end of 2016. However, FID has been delayed. Recent public statements by LNGC and news reports indicate that FID for LNGC is expected in the second half of 2018. Should the project ultimately move forward, British Columbia LNG activity could become a material driver of future activity for our Sitka Lodge, as well as for our mobile fleet assets, which are well suited for the related pipeline construction activity.

 

However, there can be no assurance that LNGC ’s joint venture participants will reach a positive FID or that our contracts with LNGC will be extended. Further, on July 25, 2017, Petronas and its partners announced the cancellation of their Pacific NorthWest (“PNW”) liquefied natural gas project they had planned to build in Port Edward, British Columbia.  If the LNGC project, and other potential projects in the area, do not move forward, our future results of operations and our existing long-lived assets in Canada, including our Sitka Lodge, may be negatively affected, and we may be required to record material impairment charges equal to the excess of the carrying values of these assets over their fair values.  As of September 30, 2017, the net book value of long-lived assets that are currently supporting, or could be used to support, potential LNG projects in British Columbia was approximately $75 million.

 

As a result of the PNW cancellation, we identified an indicator that certain asset groups used, or expected to be used, in conjunction with potential LNG projects in British Columbia may be impaired. As a result, we assessed the carrying values of each of the asset groups to determine if they continued to be recoverable based on their estimated future cash flows. Based on the assessment, the carrying values of certain undeveloped land positions in British Columbia were determined to not be recoverable,  and an impairment charge totaling $1.2 million was recorded in the third quarter of 2017.

 

In estimating future cash flows, we made numerous assumptions with respect to future circumstances that might directly impact each of the asset groups ’ operations in the future and are therefore uncertain.  These assumptions with respect to future circumstances included future oil, coal and natural gas prices, anticipated customer spending, and industry and/or local market conditions.  These assumptions represented our best judgment based on the current facts and circumstances.  However, different assumptions could result in a determination that the carrying values of additional asset groups are no longer recoverable based on estimated future cash flows.  Our estimate of fair value was primarily calculated using the income approach, which derives a present value of the asset group based on the asset groups estimated future cash flows.  We discounted our estimated future cash flows using a long-term weighted average cost of capital based on our estimate of investment returns required by a market participant.

 

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. $0.80 for the third quarter of 2017, compared to U.S. $0.77 for the third quarter of 2016, an increase of approximately 4%. The Canadian dollar was valued at an average exchange rate of U.S. $0.77 for the first nine months of 2017 compared to U.S. $0.76 for the first nine months of 2016, an increase of approximately 1%. The Canadian dollar was valued at an exchange rate of $0.80 on September 30, 2017 and $0.74 on December 31, 2016. The Australian dollar was valued at an average exchange rate of U.S. $0.79 for the third quarter of 2017 compared to U.S. $0.76 for the third quarter of 2016, an increase of approximately 4%. The Australian dollar was valued at an average exchange rate of U.S. $0.77 for the first nine months of 2017 compared to U.S. $0.74 for the first nine months of 2016, an increase of approximately 3%. The Australian dollar was valued at an exchange rate of $0.78 on September 30, 2017 and $0.72 on December 31, 2016. 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.

 

22

 

 

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 activities. We currently expect that our 2017 capital expenditures, exclusive of any business acquisitions, will total approximately $12 million to $15 million, compared to 2016 capital expenditures of $19.8 million. Please see “Liquidity and Capital Resources below for further discussion of 2017 capital expenditures.

 

During February 2017, we completed a public offering of 23 million common shares. We used a portion of the net proceeds of $64.8 million from the offering to repay amounts outstanding under several revolving credit facilities provided by our primary credit agreement (the Credit Agreement) and are using the remaining proceeds for general corporate purposes.

 

Results of Operations

 

Unless otherwise indicated, discussion of results for the three- and nine- month period s ended September 30, 2017 , is based on a comparison to the corresponding period s of 201 6 .

 

Results of Operations – Three Months Ended September 30, 201 7 Compared to Three Months Ended September 30, 201 6

 

   

T hree M onths E nded

S eptember 30 ,

 
   

201 7

   

201 6

   

Change

 
   

($ in thousands)

 

Revenues

                       

Canada

  $ 63,832     $ 73,539     $ (9,707 )

Australia

    27,541       27,679       (138 )

United States and other

    6,116       3,020       3,096  

Total revenues

    97,489       104,238       (6,749 )

Costs and expenses

                       

Cost of sales and services

                       

Canada

    43,331       50,571       (7,240 )

Australia

    14,451       13,441       1,010  

United States and other

    7,745       3,952       3,793  

Total cost of sales and services

    65,527       67,964       (2,437 )

Selling, general and administrative expenses

    15,871       13,644       2,227  

Depreciation and amortization expense

    32,700       33,721       (1,021 )

Impairment expense

    4,360       37,729       (33,369 )

Other operating expense

    375       138       237  

Total costs and expenses

    118,833       153,196       (34,363 )

Operating loss

    (21,344 )     (48,958 )     27,614  
                         

Interest expense and income, net

    (5,392 )     (6,046 )     654  

Other income

    517       1,338       (821 )

Loss before income taxes

    (26,219 )     (53,666 )     27,447  

Income tax benefit

    4,011       11,697       (7,686 )

Net loss

    (22,208 )     (41,969 )     19,761  

Less: Net income attributable to noncontrolling interest

    123       162       (39 )

Net loss attributable to Civeo

  $ (22,331 )   $ (42,131 )   $ 19,800  

 

23

 

 

We reported net loss attributable to Civeo for the quarter ended September 30, 2017 of $22.3 million, or $0.17 per diluted share.   As further discussed below, net loss included a $4.4 million pre-tax loss ($3.2 million after-tax, or $0.02 per diluted share) resulting from the impairment of fixed assets included in Impairment expense below.

 

We reported net loss attributable to Civeo for the quarter ended September 30, 2016 of $42.1 million, or $0.39 per diluted share. As further discussed below, net loss included a $37.7 million pre-tax loss ($27.5 million after-tax, or $0.26 per diluted share) resulting from the impairment of fixed assets included in Impairment expense below.

 

Revenues. Consolidated revenues decreased $6.7 million, or 6%, in the third quarter of 2017 compared to the third quarter of 2016. This decline was primarily due to decreases in Canada resulting from lower rates and lower mobile, open camp and product activity and decreases in Australia due to reduced take-or-pay revenues on expired contracts at our villages in the Bowen Basin. This was partially offset by increases in the U.S., due to overall increased activity, as well as stronger Canadian and Australian dollars relative to the U.S. dollar in the third quarter of 2017 compared to the third quarter of 2016. Please see the discussion of segment results of operations below for further information.

 

Cost of Sales and Service s . Our consolidated cost of sales decreased $2.4 million, or 4%, in the third quarter of 2017 compared to the third quarter of 2016, primarily due to decreases in Canada resulting from lower mobile, open camp and product activity. This was partially offset by increases in the U.S., due to overall increased activity, as well as stronger Canadian and Australian dollars relative to the U.S. dollar in the third quarter of 2017 compared to the third quarter of 2016. Please see the discussion of segment results of operations below for further information.

 

Selling, General and Administrative Expenses . Selling, general and administrative (SG&A) expense increased $2.2 million, or 16%, in the third quarter of 2017 compared to the third quarter of 2016. This increase was primarily due to higher share based compensation expense associated with phantom share awards and higher incentive compensation costs. The increase in share based compensation was due to the increase in our share price during the period, which is used to remeasure the phantom share awards at each reporting date. These items were partially offset by reduced compensation as a result of workforce reductions in 2016, lower professional fees when compared to 2016 and other administrative cost reductions.

 

Depreciation and Amortization Expense. Depreciation and amortization expense decreased $1.0 million, or 3%, in the third quarter of 2017 compared to the third quarter of 2016, primarily due to reduced depreciation expense resulting from impairments recorded in 2016, partially offset by increased depreciation expense associated with an enterprise information system placed in service in 2017.

 

Impairment Expense . Impairment expense of $4.4 million in the third quarter of 2017 consisted of leasehold improvements and undeveloped land positions in our Canadian segment. Impairment expense of $37.7 million in the third quarter of 2016 consisted of pre-tax impairment losses of $37.7 million related to mobile camp assets and certain undeveloped land positions in the British Columbia LNG market in our Canadian segment. Please see Note 5 - Impairment Charges to the notes to the unaudited consolidated financial statements of this quarterly report for further discussion.

 

Operating Loss . Consolidated operating loss decreased by $27.6 million, or 56%, in the third quarter of 2017 compared to the third quarter of 2016, primarily due to lower impairment expense and lower contracted rates in Canada.

 

Interest Expense and Interest Income, net. Net interest expense decreased by $0.7 million, or 11%, in the third quarter of 2017 compared to the third quarter of 2016, primarily due to lower amounts outstanding under our revolving credit facilities in the third quarter of 2017 as compared to the third quarter of 2016, partially offset by higher interest rates on our term loan borrowings.

 

Other Income . Other income decreased by $0.8 million, or 61%, in the third quarter of 2017 compared to the third quarter of 2016, primarily due to income recorded in the third quarter of 2016 from an unconsolidated investment related to the engineering and planning work performed for LNGC’s accommodation center in Kitimat, which was not repeated in the third quarter of 2017.

 

24

 

 

Income Tax Benefit.   Our income tax benefit for the three months ended September 30, 2017 totaled $4.0 million, or 15.3% of pretax loss, compared to a benefit of $11.7 million, or 21.8% of pretax loss, for the three months ended September 30, 2016 .  Our effective tax rates in 2017 and 2016 were reduced by the exclusion of Australia and U.S. for purposes of computing the interim tax provision since they are loss jurisdictions for tax accounting purposes.  In addition, the effective tax rates for the three months ended September 30, 2017 and 2016 were impacted by changes in annual effective rates, as required under ASC 740-270, Accounting for Income Taxes, the quarterly tax provision is based on our current estimate of the annual effective tax rate less the prior quarter’s year-to-date tax provision .  

 

Other Comprehensive Income ( Loss ) . Other comprehensive income increased $4.7 million in the third quarter of 2017 compared to the third quarter of 2016, primarily as a result of foreign currency translation adjustments due to changes in the Canadian and Australian dollar exchange rates compared to the U.S. dollar. The Canadian dollar exchange rate compared to the U.S. dollar increased 4% from June 30, 2017 to September 30, 2017 compared to a 1% decrease from June 30, 2016 to September 30, 2016. The Australian dollar exchange rate compared to the U.S. dollar increased 2% from June 30, 2017 to September 30,2017 compared to a 3% increase from June 30, 2016 to September 30, 2016.

 

25

 

 

 

Segment Results of Operations Canad i a n Segment

 

   

Three Months Ended

September 30 ,

 
   

201 7

   

201 6

   

Change

 

Revenues ($ in thousands)

                       

Lodge revenue (1)

  $ 59,484     $ 61,712     $ (2,228 )

Mobile, open camp and product revenue

    4,348       11,827       (7,479 )

Total revenues

  $ 63,832     $ 73,539     $ (9,707 )
                         

Cost of sales and services ($ in thousands)

  $ 43,331     $ 50,571     $ (7,240 )
                         

Gross margin as a % of revenues

    32.1 %     31.2 %     0.9 %
                         

Average available lodge rooms (2)

    14,720       14,670       50  
                         

Rentable rooms for lodges (3)

    8,698       10,588       (1,890 )
                         

Average daily rate for lodges (4)

  $ 92     $ 100     $ (8 )
                         

Occupancy in lodges (5)

    81 %     64 %     17 %
                         

Canadian dollar to U .S. dollar

  $ 0.799     $ 0.766     $ 0.033  

 


 

(1)

Includes revenue related to rooms as well as the fees associated with catering, laundry and other services including facilities management.

 

(2)

Average available rooms include rooms that are utilized for our personnel.

 

(3)

Rentable rooms exclude rooms that are utilized for our personnel and out-of-service rooms .

 

(4)

Average daily rate is based on rentable rooms and lodge/village revenue.

 

(5)

Occupancy represents total billed days divided by rentable days.  Rentable days excludes staff rooms and out-of-service rooms. The increase in occupancy percentage for the three months ended September 30, 2017 compared to the same period in 2016 is largely due to the reduction in the number of rentable rooms driven primarily by the use of more rooms during the Fort McMurray fires in 2016.

 

Our Canadian segment reported revenues in the third quarter of 2017 that were $9.7 million, or 13%, lower than the third quarter of 2016. The strengthening of the average exchange rates for the Canadian dollar relative to the U.S. dollar by 4% in the third quarter of 2017 compared to the third quarter of 2016 resulted in a $2.7 million period-over-period increase in revenues. Excluding the impact of the stronger Canadian exchange rates, the segment experienced an 8% decline in lodge revenues. This decline was driven primarily by lower rates. In 2016, more rentable rooms were utilized due to the Fort McMurray fires. Finally, mobile, open camp and product revenues declined due to overall lower activity levels.

 

Our Canadian segment cost of sales and services decreased $7.2 million, or 14%, in the third quarter of 2017 compared to the third quarter of 2016 primarily due to the decline in mobile, open camp and product activity, as well as a focus on cost containment and operational efficiencies. This was partially offset by increased warranty related costs resulting from a product sale.

 

Our Canadian segment gross margin as a percentage of revenues increased from 31% in the third quarter of 2016 to 32% in the third quarter of 2017. This increase was driven by lower costs due to a focus on cost containment and operational efficiencies.

 

26

 

 

Segment Results of Operations Australian Segment

 

   

Three Months Ended

September 30 ,

 
   

201 7

   

201 6

   

Change

 

Revenues ($ in thousands)

                       

Village revenue (1)

  $ 27,541     $ 27,679     $ (138 )

Total revenues

    27,541       27,679       (138 )
                         

Cost of sales ($ in thousands)

  $ 14,451     $ 13,441     $ 1,010  
                         

Gross margin as a % of revenues

    47.5 %     51.4 %     (3.9 )%
                         

Average available village rooms (2)

    9,359       9,344       15  
                         

R entable rooms for villages (3)

    8,725       8,675       50  
                         

Average daily rate for villages (4)

  $ 81     $ 81     $ --  
                         

Occupancy in Villages ( 5)

    42 %     43 %     (1% )
                         

Australian dollar to U .S. dollar

  $ 0.790     $ 0.758     $ 0.032  

 


 

(1)

Includes revenue related to rooms as well as the fees associated with catering, laundry and other services including facilities management.

 

(2)

Average available rooms include rooms that are utilized for our personnel.

 

(3)

Rentable rooms exclude room s that are utilized for our personnel and out-of-service rooms .

 

(4)

Average daily rate is based on rentable rooms and lodge/village revenue.

 

(5)

Occupancy represents total billed days divided by rentable days. Rentable days excludes staff rooms and out -of -service rooms .

 

Our Australian segment reported revenues in the third quarter of 2017 that were $0.1 million, or 0.5%, lower than the third quarter of 2016. The strengthening of the average exchange rates for Australian dollars relative to the U.S. dollar by 4% in the third quarter of 2017 compared to the third quarter of 2016 resulted in a $1.1 million period-over-period increase in revenues. Excluding the impact of the stronger Australian exchange rates, the Australian segment experienced a 4% decline in revenues due to reduced take-or-pay revenues on expired contracts at our villages in the Bowen Basin, primarily as a result of the ongoing slowdown in mining activity.

 

Our Australian segment cost of sales increased $1.0 million, or 8%, in the third quarter of 2017 compared to the third quarter of 2016. The increase was driven by the strengthening of the Australian dollar.

 

Our Australian segment gross margin as a percentage of revenues decreased to 48% in the third quarter of 2017 from 51% in the third quarter of 2016. This was primarily driven by reduced take-or-pay revenues on expired contracts compared to the third quarter of 2016.

 

Segment Resu lts of Operations – U . S . Segment

 

   

T hree M onths E nded

S eptember 30 ,

 
   

201 7

   

201 6

   

Change

 
                         

Revenues ($ in thousands)

  $ 6,116     $ 3,020     $ 3,096  
                         

Cost of sales ($ in thousands)

  $ 7,745     $ 3,952     $ 3,793  
                         

Gross margin as a % of revenues

    (26.6% )     (30.9% )     4.3 %

 

Our U .S. segment reported revenues in the third quarter of 2017 that were $3.1 million, or 103%, higher than the third quarter of 2016. The increase was primarily due to greater U.S. drilling activity in the Bakken, Rockies and Texas markets and higher revenues from our offshore business.

 

27

 

 

Our U.S. cost of sales increased $3.8 million, or 96%, in the third quarter of 2017 compared to the third quarter of 2016.   The increase was driven by greater U.S. drilling activity in the Bakken, Rockies and Texas markets, greater activity in our offshore business and cost associated with an unforeseen contract cancellation.

 

Our U.S. segment gross margin as a percentage of revenues increased from ( 31%) in the third quarter of 2016 to (27%) in the third quarter of 2017 primarily due to increased activity in the Bakken, Rockies and Texas markets.

 

Results of Operations Nine Months Ended September 30, 201 7 Compared to Nine Months Ended September 30, 201 6

 

   

NINE MONTHS ENDED

SEPTEMBER 30 ,

 
   

201 7

   

201 6

   

Change

 
   

($ in thousands)

 

Revenues

                       

Canada

  $ 182,006     $ 216,168     $ (34,162 )

Australia

    83,164       80,694       2,470  

United States and other

    15,758       9,447       6,311  

Total revenues

    280,928       306,309       (25,381 )

Costs and expenses

                       

Cost of sales and services

                       

Canada

    125,449       145,914       (20,465 )

Australia

    41,753       39,092       2,661  

United States and other

    19,481       13,487       5,994  

Total cost of sales and services

    186,683       198,493       (11,810 )

Selling, general and administrative expenses

    44,141       42,056       2,085  

Depreciation and amortization expense

    97,083       100,444       (3,361 )

Impairment expense

    4,360       46,129       (41,769 )

Other operating expense

    1,104       356       748  

Total costs and expenses

    333,371       387,478       (54,107 )

Operating loss

    (52,443 )     (81,169 )     28,726  
                         

Interest expense and income, net

    (16,470 )     (17,103 )     633  

Other income

    1,247       1,058       189  

Loss before income taxes

    (67,666 )     (97,214 )     29,548  

Income tax benefit

    9,875       17,217       (7,342 )

Net loss

    (57,791 )     (79,997 )     22,206  

Less: Net income attributable to noncontrolling interest

    343       442       (99 )

Net loss attributable to Civeo

  $ (58,134 )   $ (80,439 )   $ 22,305  

 

We reported net loss attributable to Civeo for the nine months ended September 30, 2017 of $58.1 million, or $0.46 per diluted share.   As further discussed below, net loss included a $4.4 million pre-tax loss ($3.2 million after-tax, or $0.02 per diluted share) resulting from the impairment of fixed assets included in Impairment expense below.

 

We reported net loss attributable to Civeo for the nine months ended September 30, 2016 of $80.4 million, or $0.75 per diluted share. As further discussed below, net loss included (i) an $46.1 million pre-tax loss ($35.9 million after-tax, or $0.34 per diluted share) resulting from the impairment of fixed assets, included in Impairment expense, and (ii) a $1.3 million pre-tax loss ($1.2 million after-tax, or $0.01 per diluted share) from costs incurred in connection with our redomicile to Canada, included in Selling, general and administrative (SG&A) expense below.

 

Revenues. Consolidated revenues decreased $25.4 million, or 8%, in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. This decline was largely driven by decreases in Canada due to lower rates and lower mobile, open camp and product activity, offset by increases in the U.S. due to increased activity levels and in Australia due to increased occupancy at our villages in Western Australian, as well as stronger Canadian and Australian dollars in 2017 compared to 2016. Please see the discussion of segment results of operations below for further information.

 

Cost of Sales and Services. Our consolidated cost of sales decreased $11.8 million, or 6%, in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, primarily due to decreases in Canada due to lower mobile, open camp and product activity, as well as a focus on cost containment and operational efficiencies. This was partially offset by increases in the U.S. due to increased activity levels and in Australia due to increased occupancy at our villages in Western Australia, as well as stronger Canadian and Australian dollars in 2017 compared to 2016. Please see the discussion of segment results of operations below for further information.

 

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Selling, General and Administrative Expenses. SG&A expense increased $2.1 million, or 5%, in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. This increase was primarily due to higher share based compensation expense associated with phantom share awards and higher incentive compensation costs. The increase in share based compensation was due to the increase in our share price during the period, which is used to remeasure the phantom share awards at each reporting date. These items were partially offset by reduced compensation as a result of workforce reductions in 2016, lower professional fees when compared to 2016 and other administrative cost reductions.

 

Depreciation and Amortization Expense. Depreciation and amortization expense decreased $3.4 million, or 3%, in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 primarily due to reduced depreciation expense resulting from impairments recorded in 2016, partially offset by increased depreciation expense associated with an enterprise information system placed in service in 2017.

 

Impairment Expense. Impairment expense of $4.4 million in the nine months ended September 30, 2017 consisted of leasehold improvements and undeveloped land positions in our Canadian segment.

 

Impairment expense of $46.1 million in the nine months ended September 30, 2016 consisted of:

 

 

P re-tax impairment losses of $37.7 million related to mobile camp assets and certain undeveloped land positions in the British Columbia LNG market in our Canadian segment; and

 

 

P re-tax impairment losses of $8.4 million related to the impairment of fixed assets in our U.S. segment.

 

Please see Note 5 - Impairment Charges to the notes to the unaudited consolidated financial statements of this quarterly report for further discussion.

 

Operating Loss . Consolidated operating loss decreased $28.7 million, or 35%, in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 primarily due to lower impairment expense in the 2017 period and lower depreciation and amortization expense, partially offset by lower contracted rates in Canada.

 

Interest Expense and Interest Income, net. Net interest expense decreased by $0.6 million, or 4%, in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 primarily due to lower amounts outstanding under our revolving credit facilities in the first nine months of 2017 as compared to the first nine months of 2016, offset by increases from the 2017 write-off of $0.8 million of debt issuance costs associated with an amendment to the Credit Agreement (as compared to a $0.3 million write-off of debt issuance costs in the first quarter 2016) and higher interest rates on term loan and revolving credit facility borrowings.

 

Income Tax Benefit . Our income tax benefit for the nine months ended September 30, 2017 totaled $9.9 million, or 14.6% of pretax loss, compared to a benefit of $17.2 million, or 17.7% of pretax loss, for the nine months ended September 30, 2016. Our effective tax rates in 2017 and 2016 were reduced approximately 11% and 10%, respectively, by the exclusion of Australia and U.S. for purposes of computing the interim tax provision since they are loss jurisdictions for tax accounting purposes.

 

Other Comprehensive Income (Loss ). Other comprehensive income increased $12.2 million in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 primarily as a result of foreign currency translation adjustments due to changes in the Canadian and Australian dollar exchange rates compared to the U.S. dollar. The Canadian dollar exchange rate compared to the U.S. dollar increased 8% from December 31, 2016 to September 30, 2017 compared to a 6% increase from December 31, 2015 to September 30, 2016. The Australian dollar exchange rate compared to the U.S. dollar increased 8% from December 31, 2016 to September 30, 2017 compared to a 5% increase from December 31, 2015 to September 30, 2016.

 

29

 

 

Segment Results of Operations – Canadian Segment

 

   

Nine Months Ended

September 30 ,

 
   

201 7

   

201 6

   

Change

 

Revenues ($ in thousands)

                       

Lodge revenue (1)

  $ 168,654     $ 182,899     $ (14,245 )

Mobile, open camp and product revenue

    13,352       33,269       (19,917 )

Total revenues

  $ 182,006     $ 216,168     $ (34,162 )
                         

Cost of sales and services ($ in thousands)

  $ 125,449     $ 145,914     $ (20,465 )
                         

Gross margin as a % of revenues

    31.1 %     32.5 %     (1.4% )
                         

Average available lodge rooms (2)

    14,720       14,647       73  
                         

Rentable rooms for lodges (3)

    8,564       10,199       (1,635 )
                         

Average daily rate for lodges (4)

  $ 93     $ 106     $ (13 )
                         

Occupancy in lodges (5)

    78 %     62 %     16 %
                         

Canadian dollar to U .S. dollar

  $ 0.766     $ 0.757     $ 0.009  

 


 

(1)

Includes revenue related to rooms as well as the fees associated with cat ering, laundry and other services including facilities management.

 

(2)

Average available rooms include rooms that are utilized for our personnel.

 

(3)

Rentable rooms exclude rooms that are utilized for our personnel and out-of-service rooms .

 

(4)

Average daily rate is b ased on rentable rooms and lodge/village revenue.

 

(5)

Occupancy represents total billed days divided by rentable days. Rentable days excludes staff rooms and out -of -service rooms

 

Our Canadian segment reported revenues in the nine months ended September 30, 201 7 that were $34.2 million, or 16%, lower than the nine months ended September 30, 2016. The strengthening of the average exchange rates for the Canadian dollar relative to the U.S. dollar by 1% in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 resulted in a $2.3 million year-over-year increase in revenues. In addition, excluding the impact of the stronger Canadian exchange rates, the segment experienced a 9% decline in lodge revenues, primarily due to lower rates. Finally, mobile, open camp and product revenues declined due to overall lower activity levels.

 

Our Canadian segment cost of sales and services decreased $20.5 million, or 14%, in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, primarily due to the decline in mobile, open camp and product activity, as well as a focus on cost containment and operational efficiencies.

 

Our Canadian segment gross margin as a percentage of revenues decreased from 3 3% in the nine months ended September 30, 2016 to 31% in the nine months ended September 30, 2017 primarily due to lower rates, partially offset by lower costs due to a focus on cost containment and operational efficiencies.

 

30

 

 

Segment Results of Operations – Australian Segment

 

   

Nine Months Ended

September 30 ,

 
   

201 7

   

201 6

   

Change

 

Revenues ($ in thousands)

                       

Village revenue (1)

  $ 83,164     $ 80,694     $ 2,470  

Total revenues

    83,164       80,694       2,470  
                         

Cost of sales ($ in thousands)

  $ 41,753     $ 39,092     $ 2,661  
                         

Gross margin as a % of revenues

    49.8 %     51.6 %     (1.8% )
                         

Average available village rooms (2)

    9,377       9,317       60  
                         

R entable rooms for villages (3)

    8,753       8,700       53  
                         

Average daily rate for villages (4)

  $ 81     $ 75     $ 6  
                         

Occupancy in Villages ( 5)

    43 %     45 %     (2% )
                         

Australian dollar to U .S. dollar

  $ 0.766     $ 0.742     $ 0.024  

 


 

(1)

Includes revenue related to rooms as well as the fees associated with catering, laundry and other services including facilities management.

 

(2)

Average available rooms include rooms that are utilized for our personnel.

 

(3)

Rentable rooms exclude rooms that are utilized for our personnel and out-of-service rooms .

 

(4)

Average daily rate is based on rentable rooms and lodge/village revenue.

 

(5)

Occupancy represents tot al billed days divided by rentable days. Rentable days excludes staff rooms and out -of -service rooms .

 

Our Australian segment reported revenues in the nine months ended September 30, 2017 that were $2.5 million, or 3%, higher than the nine months ended September 30, 2016. The strengthening of the average exchange rates for Australian dollars relative to the U.S. dollar by 3% in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 resulted in a $2.6 million year-over-year increase in revenues. Excluding the impact of the stronger Australian exchange rates, the segment was flat due to increased occupancy at our villages in Western Australian, offset by reduced occupancy at our villages in the Bowen Basin. Occupancy increased in Western Australia during the nine months ended September 30, 2017 with increased activity from anchor tenants at both our Western Australian village locations. Reduced occupancy in the Bowen Basin is primarily a result of the ongoing slowdown in mining activity.

 

Our Austr alian segment cost of sales increased $2.7 million, or 7%, in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The increase was driven by higher occupancy levels at our villages in Western Australian as well as the strengthening of the Australian dollar.

 

Our Australian segment gross margin as a percentage of revenues decreased to 50% in the nine months ended September 30, 2017 from 52% in the nine months ended September 30, 2016. This was primarily driven by reduced take-or-pay revenues on expired contracts compared to the nine months ended September 30, 2016.

 

31

 

 

Segment Results of Operations – U . S . Segment

 

<
   

N ine M onths E nded

S eptember 30 ,

 
   

201 7

   

201 6

   

Change

 
                         

Revenues ($ in thousands)

  $ 15,758     $ 9,447     $ 6,311