Civeo Corporation
Civeo Corp (Form: 10-Q, Received: 04/27/2017 13:04:24)

 

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 March 31, 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 132,008,760 common shares outstanding as of April 21, 2017.

 

 
1

 

 

CIVEO CORPORATION

 

INDEX

 

 

Page No.

                         Part I -- FINANCIAL INFORMATION

 
   

Item 1. Financial Statements:

 
   

Consolidated Financial Statements

 

Unaudited Consolidated Statements of Operations for the Three Months  Ended March 31, 2017 and 2016 

  3

Unaudited Consolidated Statements of Comprehensive Income (Loss) for the Three Months  Ended March 31, 2017 and 2016

  4

Consolidated Balance Sheets – as of March 31, 2017 (unaudited) and December 31, 2016

5

Unaudited Consolidated Statements of Changes in Shareholders’ Equity for the Three  Months Ended March 31, 2017 and 2016

  6

Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016 

  7

Notes to Unaudited Consolidated Financial Statements

8 – 15

   

Cautionary Statement Regarding Forward-Looking Statements

16

   

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

16-28

   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

28

   

Item 4. Controls and Procedures

29

   
   

                          Part II -- OTHER INFORMATION

 
   

Item 1. Legal Proceedings

30

   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

30

   

Item 6. Exhibits

31

   

(a) Index of Exhibits

31

   

Signature Page

32

 

 
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

 
   

MARCH 31,

 
   

201 7

   

201 6

 

Revenues:

               

Service and other

  $ 89,861     $ 91,767  

Product

    1,568       3,269  
      91,429       95,036  

Costs and expenses:

               

Service and other costs

    59,532       61,377  

Product costs

    2,140       4,566  

Selling, general and administrative expenses

    14,210       13,117  

Depreciation and amortization expense

    32,829       33,555  

Impairment expense

    --       8,400  

Other operating expense

    450       218  
      109,161       121,233  

Operating loss

    (17,732 )     (26,197 )
                 

Interest expense to third-parties

    (5,504 )     (4,944 )

Loss on extinguishment of debt

    (842 )     (302 )

Interest income

    10       86  

Other income

    254       112  

Loss before income taxes

    (23,814 )     (31,245 )

Income tax benefit

    2,948       4,571  

Net loss

    (20,866 )     (26,674 )

Less: Net income attributable to noncontrolling interest

    121       148  

Net loss attributable to Civeo Corporation

  $ (20,987 )   $ (26,822 )
                 
                 

Per Share Data (see Note 6 )

               

Basic net loss per share attributable to Civeo Corporation common shareholders

  $ (0.17 )   $ (0.25 )
                 

Diluted net loss per share attributable to Civeo Corporation common shareholders

  $ (0.17 )   $ (0.25 )
                 

Weighted average number of common shares outstanding:

               

Basic

    120,846       106,814  

Diluted

    120,846       106,814  

 

 

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

 
   

MARCH 31 ,

 
   

201 7

   

201 6

 
                 

Net loss

  $ (20,866 )   $ (26,674 )
                 

Other comprehensive income, net of tax:

               

Foreign currency translation adjustment, net of taxes of zero

    18,035       29,399  

Total other comprehensive income, net of tax

    18,035       29,399  
                 

Comprehensive income (loss)

    (2,831 )     2,725  

Comprehensive income attributable to noncontrolling interest

    (469 )     (191 )

Comprehensive income (loss) attributable to Civeo Corporation

  $ (3,300 )   $ 2,534  

 

 

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

 

 
4

 

 

CIVEO CORPORATION

 

CO NSOLIDAT ED BALANCE SHEETS

(In Thousands)

 

 

   

MARCH 31,

201 7

   

DECEMBER 31,

201 6

 
   

(Unaudited)

         
ASSETS                
                 

Current assets:

               

Cash and cash equivalents

  $ 27,136     $ 1,785  

Accounts receivable, net

    54,034       56,302  

Inventories

    3,604       3,112  

Prepaid expenses

    14,545       15,431  

Other current assets

    5,950       5,938  

Total current assets

    105,269       82,568  

Property, plant and equipment, net

    782,143       789,710  

Other intangible assets, net

    27,738       28,039  

Other noncurrent assets

    9,876       10,129  

Total assets

  $ 925,026     $ 910,446  
                 

LIABILITIES AND SHAREHOLDERS’ EQUITY

               
                 

Current liabilities:

               

Accounts payable

  $ 21,239     $ 21,119  

Accrued liabilities

    10,363       14,378  

Income taxes

    491       111  

Current portion of long-term debt

    15,566       15,471  

Deferred revenue

    5,053       6,792  

Other current liabilities

    1,952       2,572  

Total current liabilities

    54,664       60,443  

Long-term debt, less current maturities

    296,438       337,800  

Deferred income taxes

    6,556       9,194  

Other noncurrent liabilities

    28,642       27,019  

Total liabilities

    386,300       434,456  
                 

Commitments and contingencies (Note 9)

               
                 

Shareholders’ Equity:

               

Common shares (no par value; 550,000,000 shares authorized, 132,167,300 shares and 108,171,329 shares issued, respectively, and 132,008,760 shares and 108,103,048 shares outstanding, respectively)

    --       --  

Additional paid-in capital

    1,378,576       1,311,226  

Accumulated deficit

    (494,387 )     (472,764 )

Common shares held in treasury at cost, 158,540 and 68,281 shares, respectively

    (344 )     (65 )

Accumulated other comprehensive loss

    (345,243 )     (362,930 )

Total Civeo Corporation shareholders’ equity

    538,602       475,467  

Noncontrolling interest

    124       523  

Total shareholders’ equity

    538,726       475,990  

Total liabilities and shareholders’ equity

  $ 925,026     $ 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)

    --       --       (26,822 )     --       --       148       (26,674 )

Currency translation adjustment

    --       --       --       --       29,356       43       29,399  

Share-based compensation

    --       1,115       --       (52 )     --       --       1,063  

Balance, March 31, 2016

  $ --     $ 1,307,045     $ (403,198 )   $ (52 )   $ (336,953 )   $ 716     $ 567,558  
                                                         
                                                         

Balance, December 31, 201 6

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

Net income (loss)

    --       --       (20,987 )     --       --       121       (20,866 )

Currency translation adjustment

    --       --       --       --       17,687       348       18,035  

Dividends paid

    --       --       --       --       --       (868 )     (868 )

Cumulative effect of implementation of ASU 2016-09

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

Equity offering

    --       64,847       --       --       --       --       64,847  

Share-based compensation

    --       1,867       --       (279 )     --       --       1,588  

Balance, March 31, 2017

  $ --     $ 1,378,576     $ (494,387 )   $ (344 )   $ (345,243 )   $ 124     $ 538,726  

 

 

   

Common

Stock (in

thousands)

 

Balance, December 31, 2016

    108,103  

Issuance of common shares

    23,000  

Stock-based compensation.

    906  

Balance, March 31, 201 7

    132,009  

 

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

 

 
6

 

 

CIVEO CORPORATION

 

UNAUDITED CO NSOLIDAT ED STATEMENTS OF CASH FLOWS

(In Thousands)

 

   

THREE MONTHS ENDED

 
   

MARCH 31,

 
   

201 7

   

201 6

 
                 

Cash flows from operating activities:

               

Net loss

  $ (20,866 )   $ (26,674 )

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

               

Depreciation and amortization

    32,829       33,555  

Impairment charge

    --       8,400  

Loss on extinguishment of debt

    842       302  

Deferred income tax benefit

    (3,120 )     (7,592 )

Non-cash compensation charge

    1,867       1,115  

Gains on disposals of assets

    (416 )     (39 )

Provision for loss on receivables, net of recoveries

    (60 )     (135 )

Other, net

    795       1,082  

Changes in operating assets and liabilities:

               

Accounts receivable

    3,258       4,353  

Inventories

    (440 )     792  

Accounts payable and accrued liabilities

    (4,521 )     (250 )

Taxes payable

    320       (2,395 )

Other current assets and liabilities, net

    (640 )     (1,184 )

Net cash flows provided by operating activities

    9,848       11,330  
                 

Cash flows from investing activities:

               

Capital expenditures, including capitalized interest

    (3,883 )     (4,761 )

Proceeds from disposition of property, plant and equipment

    578       1,599  

Other, net

    --       (302 )

Net cash flows used in investing activities

    (3,305 )     (3,464 )
                 

Cash flows from financing activities:

               

Proceeds from issuance of common shares, net

    64,847       --  

Revolving credit borrowings

    34,904       117,106  

Revolving credit repayments

    (74,868 )     (99,021 )

Term loan repayments

    (3,947 )     (29,055 )

Debt issuance costs

    (1,772 )     (2,035 )

Other, net

    (279 )     (52 )

Net cash flows provided by (used in) financing activities

    18,885       (13,057 )
                 

Effect of exchange rate changes on cash

    (77 )     322  

Net change in cash and cash equivalents

    25,351       (4,869 )

Cash and cash equivalents, beginning of period

    1,785       7,837  
                 

Cash and cash equivalents, end of period

  $ 27,136     $ 2,968  

 

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

 

 
7

 

 

CIVEO CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

 

1.

DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

 

Description of the Business and Certain Recent Developments

 

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 expect to use 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.

 

During the quarter ended March 31, 2017, we incurred costs related to the third amendment to the Credit Agreement totaling $1.8 million, of which $1.7 million has been capitalized as debt issuance costs, and the remaining $0.1 million was included in interest expense. During the quarter ended March 31, 2016, we incurred costs related to a prior amendment to the Credit Agreement totaling $2.1 million, of which $2.0 million has been capitalized as debt issuance costs, and the remaining $0.1 million was included in interest expense.

 

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 Securities 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.

 

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, 2016.

 

 
8

 

 

CIVEO CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

2.

RECENT ACCOUNTING PRONOUNCEMENTS

 

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

 

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

 

In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting” (ASU 2016-09). This new standard requires companies to recognize the income tax effects of awards in the income statement when the awards vest or are settled. ASU 2016-09 is effective for financial statements issued for reporting periods beginning after December 15, 2016 and interim periods within the reporting periods. 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 this quarterly report on Form 10-Q, 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 March 31, 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 three months ended March 31, 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 approach includes performing a detailed review of key contracts representative of our different businesses and comparing historical accounting policies and practices to the new standard.

 

 
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 March 31, 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 first quarter of 2016, we wrote down certain long-lived assets to fair value. 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.

 

4.

DETAILS OF SELECTED BALANCE SHEET ACCOUNTS

 

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

 

   

March 31, 2017

   

December 31, 201 6

 

Accounts receivable, net:

               

Trade

  $ 36,209     $ 39,442  

Unbilled revenue

    17,624       16,063  

Other

    787       1,435  

Total accounts receivable

    54,620       56,940  

Allowance for doubtful accounts

    (586 )     (638 )

Total accounts receivable, net

  $ 54,034     $ 56,302  

 

 

   

March 31, 2017

   

December 31, 201 6

 

Inventories:

               

Finished goods and purchased products

  $ 1,963     $ 1,700  

Work in process

    335       3  

Raw materials

    1,306       1,409  

Total inventories

  $ 3,604     $ 3,112  

 

 

   

Estimated

Useful Life

(in years)

   

March 31, 2017

   

December 31, 201 6

 

Property, plant and equipment, net:

                           

Land

              $ 42,801     $ 41,122  

Accommodations assets

    3 - 15       1,578,066       1,542,806  

Buildings and leasehold improvements

    5 - 20       27,879       28,104  

Machinery and equipment

    4 - 15       9,805       9,667  

Office furniture and equipment

    3 - 7       51,527       29,948  

Vehicles

    3 - 5       15,005       14,725  

Construction in progress

                17,382       35,196  

Total property, plant and equipment

                1,742,465       1,701,568  

Accumulated depreciation

                (960,322 )     (911,858 )

Total property, plant and equipment, net

              $ 782,143     $ 789,710  

 

 
10

 

 

CIVEO CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

   

March 31,

2017

   

December 31,

201 6

 

Accrued liabilities:

               

Accrued compensation

  $ 7,580     $ 11,879  

Accrued taxes, other than income taxes

    2,078       727  

Accrued interest

    9       194  

Other

    696       1,578  

Total accrued liabilities

  $ 10,363     $ 14,378  

 

5.

IMPAIRMENT CHARGES

 

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

 

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

 
   

MARCH 31,

 
   

2017

   

201 6

 

Basic Loss per Share

               

Net loss attributable to Civeo

  $ (20,987 )   $ (26,822 )

Less: undistributed net income to participating securities

    --       --  

Net loss attributable to Civeo’s common shareholders - basic

  $ (20,987 )   $ (26,822 )
                 

Weighted average common shares outstanding - basic

    120,846       106,814  
                 

Basic loss per share

  $ (0.17 )   $ (0.25 )
                 

Diluted Loss per Share

               

Net loss attributable to Civeo’s common shareholders - basic

  $ (20,987 )   $ (26,822 )

Less: undistributed net income to participating securities

    --       --  

Net loss attributable to Civeo’s common shareholders - diluted

  $ (20,987 )   $ (26,822 )
                 
                 

Weighted average common shares outstanding - basic

    120,846       106,814  

Effect of dilutive securities (1)

    --       --  

Weighted average common shares outstanding - diluted

    120,846       106,814  
                 

Diluted loss per share

  $ (0.17 )   $ (0.25 )

 

(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 months ended March 31, 2017 and 2016. In the three months ended March 31, 2017 and 2016, we excluded from the calculation 1.8 million and 1.4 million share based awards, respectively, since the effect would have been anti-dilutive.


 
11

 

 

CIVEO CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

7.

DEBT

 

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

 

   

March 31,

2017

   

December 31,

2016

 

U.S. term loan, which matures on May 28, 2019; weighted average interest rate of 4.3% for the three-month period ended March 31, 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 4.5% for the three-month period ended March 31, 2017

    292,103       293,763  
                 

U.S. revolving credit facility, which matures on May 28, 2019, weighted average interest rate of 6.3% for the three-month period ended March 31, 2017

    --       --  
                 

Canadian revolving credit facility, which matures on May 28, 2019, weighted average interest rate of 5.2% for the three-month period ended March 31, 2017

    --       23,089  
                 

Canadian revolving credit facility, which matures on May 28, 2019, weighted average interest rate of 5.2% for the three-month period ended March 31, 2017

    --       9,533  
                 

Australian revolving credit facility, which matures on May 28, 2019, weighted average interest rate of 5.2% for the three-month period ended March 31, 2017

    --       6,507  
      316,478       357,267  

Less: Unamortized debt issuance costs

    4,474       3,996  

Total debt

    312,004       353,271  

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

    15,566       15,471  

Long-term debt, less current maturities

  $ 296,438     $ 337,800  

 

We did not have any capitalized interest to net against interest expense for either of the three-month periods ended March 31, 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 became effective, which:

 

 

provided 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;

 

 

established 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;

 

 
12

 

   

CIVEO CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

 

adjusted the maximum leverage ratio financial covenant, as follows:

 

Period Ended

 

Maximum Leverage Ratio

 

December 31, 2016 (no change)

    5.50 : 1.00  

March 31, 2017 (no change)

    5.25 : 1.00  

June 30, 2017 (no change)

    5.25 : 1.00  

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 other 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 5.25 to 1.0 (as of March 31, 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 March 31, 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.

INCOME 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 now loss jurisdictions for tax accounting purposes, Australia and the U.S. have been removed from the annual effective tax rate computation for purposes of computing the interim tax provision. Income taxes for any significant and unusual or extraordinary transactions are computed and recorded in the period that the specific transaction occurs.

 

 
13

 

 

CIVEO CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

   

Our income tax benefit for the three months ended March 31, 2017 totaled $2.9 million, or 12.4% of pretax loss, compared to a benefit of $4.6 million, or 14.6% of pretax loss, for the three months ended March 31, 2016. The effective tax rates in 2017 and 2016 were impacted by discrete items totaling $0.6 million and $0.9 million, respectively.

 

9.

COMMITMENTS AND CONTINGENCIES

 

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

 

10.

ACCUMULATED OTHER COMPREHENSIVE LOSS

 

Our accumulated other comprehensive loss decreased $17.7 million from $362.9 million at December 31, 2016 to $345.2 million at March 31, 2017, as a result of foreign currency exchange rate fluctuations. Changes in other comprehensive loss during the first quarter 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 March 31, 2017.

 

11.

S HARE BASED COMPENSATION

 

Our employees and non-employee directors participate in the Amended and Restated 2014 Equity Participation Plan of Civeo Corporation (the Civeo Plan). The Civeo Plan authorizes 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 the three months ended March 31, 2017 and 2016 totaled less than $0.1 million and $ 0.1 million, respectively. At March 31, 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 0.9 years.

 

Restricted S hare / 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.

 

Compensation expense associated with restricted share awards and deferred share awards recognized in the three-month periods ended March 31, 2017 and 2016 totaled $1.2 million and $1.1 million, respectively. The total fair value of restricted share awards and deferred share awards that vested during the three months ended March 31, 2017 and 2016 was $1.3 million and $0.3 million, respectively.

 

At March 31, 2017, unrecognized compensation cost related to restricted share awards and deferred share awards was $6.9 million, which is expected to be recognized over a weighted average period of 2.4 years.

 

 
14

 

 

CIVEO CORPORATION

 

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

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 March 31, 2017 and 2016, we recognized compensation expense associated with phantom share awards totaling $3.0 million and $0.2 million, respectively. At March 31, 2017, unrecognized compensation cost related to phantom share awards was $12.7 million, as remeasured at March 31, 2017, which is expected to be recognized over a weighted average period of 2.0 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 March 31, 2017 and 2016, we recognized compensation expense associated with performance awards totaling $0.6 million and $0.1 million, respectively. At March 31, 2017, unrecognized compensation cost related to performance awards was $7.6 million, which is expected to be recognized over a weighted average period of 2.4 years.   

 

12.

SEGMENT AND RELATED INFORMATION

 

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

 

Financial information by reportable segment for each of the three months ended March 31, 2017 and 2016 is summarized in the following table (in thousands):

 

   

Total

Revenues

   

Less:

Intersegment

Revenues

   

Revenue s

from

U naffiliated

C ustomers

   

Depreciation

and

A mortization

   

Operating

I ncome

( L oss)

   

Capital

E xpenditures

   

Total

A ssets

 

Three months ended March 31, 201 7

                                                       

Canada

  $ 60,506       --     $ 60,506     $ 18,413     $ (5,006 )   $ 1,051     $ 546,642  

Australia

    27,016       --       27,016       11,822       (1,201 )     855       387,196  

U.S.

    3,907       --       3,907       1,190       (2,802 )     424       30,523  

Corporate and eliminations

    --       --       --       1,404       (8,723 )     1,553       (39,335 )

Total

  $ 91,429     $ --     $ 91,429     $ 32,829     $ (17,732 )   $ 3,883     $ 925,026  
                                                         

Three months ended March 31, 201 6

                                                       

Canada

  $ 65,522       --     $ 65,522     $ 20,339     $ (9,699 )   $ 1,047     $ 605,414  

Australia

    25,510       --       25,510       11,178       (1,622 )     607       432,314  

U.S.

    4,004       --       4,004       1,906       (13,599 )     --       58,633  

Corporate and eliminations

    --       --       --       132       (1,277 )     3,107       (13,082 )

Total

  $ 95,036     $ --     $ 95,036     $ 33,555     $ (26,197 )   $ 4,761     $ 1,083,279  

 

 
15

 

 

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, metallurgical (met) coal and natural gas.

 

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

 

 
16

 

 

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 Brent Crude and WTI oil prices, WCS also fell. Prices began to increase in March 2016, and have continued to increase in the first quarter of 2017. WCS prices in the first quarter of 2017 averaged $38.09 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 $11.40 per barrel at the end of the first quarter of 2017. As of April 21, 2017, the WTI price was $49.27 and the WCS price was $39.27, resulting in a WCS Differential of $10.00.

 

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 into 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. However, our Canadian oil sands customers could continue to delay maintenance spending and additional investments in their oil sands assets as well.

 

In Australia, approximately 80% of our rooms are located in the Bowen Basin and primarily serve met coal mines in that region. Met coal pricing and production growth in the Bowen Basin region is predominantly influenced by the levels of global steel production, which increased by 5.7% during the first quarter 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 $300 per metric tonne. As of April 21, 2017, met coal spot prices were $263 per metric tonne and benchmark prices for the second quarter of 2017 have not settled. The prior contract met coal price was $285 per metric tonne, significantly higher than the September 2016 contract price of $92.50 per metric tonne. This sudden increase in contract price was primarily due to supply side factors, including Chinese domestic coal production policies and the adverse Australian weather conditions mentioned above, which together restricted met coal supply volumes. Despite the increase, we have seen a limited impact on the general willingness of customers to increase activity. We expect that spot prices for met coal will need to be sustained at levels above $150 per metric tonne for at least nine to 12 months before we see any significant impact on customer activity levels and, as a result, the demand for 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.

 

Natural gas and WTI crude oil prices, discussed above, have an impact on the demand for our U.S. accommodations business. With limited export capabilities, U.S. natural gas prices are primarily influenced by domestic supply and demand dynamics and resultant inventory levels. U.S. natural gas production has continued to outpace demand, which has caused prices to continue to be weak relative to historical prices over the past decade. U.S. natural gas inventory levels at March 31, 2017 were 2.1 Tcf, 17% lower than inventory levels from March 31, 2016 but still 15% over seasonally comparable average inventory levels over the past five years. Prices for natural gas in the U.S. averaged $3.06 per mcf in the first quarter of 2017, a 55% increase from the average price in the first quarter of 2016. Although natural gas prices increased slightly in the fourth quarter of 2016 and into 2017, at these levels, it is uneconomic to increase development in several domestic, gas-focused basins. If natural gas production growth continues to surpass demand in the U.S. and/or the supply of natural gas increases, whether the supply comes from conventional or unconventional production or associated natural gas production from oil wells, prices for natural gas could be constrained for an extended period and result in fewer rigs drilling for natural gas in the near-term.

 

 
17

 

 

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

 

   

Average Price (1)

 
   

WTI

   

WCS

   

Hard

   

Henry

Hub

 

Quarter

 

Crude

   

Crude

   

Coking Coal

(Met Coal)

   

Natural

Gas

 

ended

 

(per bbl)

   

(per bbl)

   

(per ton ne )

   

(per mcf)

 

Second Quarter through 4/21/2017

  $ 51.73     $ 42.03     $ N/A     $ 3.20  

3/31/2017

    51.70       38.09       285.00       3.06  

12/31/2016

    49.16       34.34       200.00       3.18  

9/30/2016

    44.88       30.67       92.50       2.79  

6/30/2016

    45.53       32.84       84.00       2.25  

3/31/2016

    33.41       20.26       81.00       1.98  

12/31/2015

    42.02       27.82       89.00       2.23  

9/30/2015

    46.48       31.54       93.00       2.73  

6/30/2015

    57.64       48.09       109.50       2.73  

3/31/2015

    48.49       35.03       117.00       2.81  

12/31/2014

    73.21       57.75       119.00       3.83  

9/30/2014

    97.60       78.69       120.00       3.95  

6/30/2014

    103.06       83.78       120.00       4.58  

3/31/2014

    98.68       77.76       143.00       5.18  

__________

 

(1)

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

 

Overview

 

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

 

Our business is predominantly located in northern Alberta, Canada and Queensland, Australia, and we derive most of our business from resource companies who are developing and producing oil sands and met coal resources and, to a lesser extent, other hydrocarbon and mineral resources. More than three-fourths of our revenue is generated by our large-scale lodge and village facilities. Where traditional accommodations and infrastructure are insufficient, inaccessible or cost ineffective, our lodge and village facilities provide comprehensive accommodations services similar to those found in an urban hotel. We typically contract our facilities to our customers on a fee-per-day basis that covers lodging and meals and 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 cost productivity and 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 announced increased capital budgets for 2017. In addition, recent regulatory approvals of several major pipeline projects has 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.

 

 
18

 

 

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 runs through September 2017. To support this contract, we have developed a new accommodations facility, named Sitka Lodge, which includes private washrooms, recreational facilities and other amenities. This lodge currently has 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 until an indeterminate future time. We are currently in discussions with LNGC to extend this contract until a positive FID is made. 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, should the project, and other potential projects in the area, not move forward, the resulting impact may negatively affect our future results of operations and our existing long-lived assets in Canada, including our Sitka Lodge, and may require us to record material impairment charges equal to the excess of the carrying values of these assets over their fair values. With the delay in the FID, we currently expect that LNGC will continue to utilize rooms at our Sitka Lodge through September 2017 in accordance with the terms of our contract. However, this contract may be extended to a new FID date based upon our current discussions with LNGC. 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.

 

We expanded our Australian room capacity in 2012 and 2013 to meet increasing demand, notably in the Bowen Basin in Queensland and in the Gunnedah Basin in New South Wales to support coal production, and in Western Australia to support LNG and other energy-related projects. In early 2013, a confluence of falling met coal prices, additional carbon and mining taxes on our Australian customers and several years of cost inflation caused several of our customers to curtail or cease production from higher cost mines and delay or materially reduce their growth plans. This negatively affected our ability to expand our room count and led to a decrease in occupancy levels. With supply disruptions in the fourth quarter of 2016 due to Chinese production policy and adverse Australian weather conditions, the supply and demand balance in global met coal has improved. As a result, met coal prices have increased materially. We expect our Australian customers will wait for prices to stabilize above $150/tonne before significantly increasing their spending, which may take nine months or longer.

 

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. $0.76 for the first quarter of 2017, compared to U.S. $0.73 for the first quarter of 2016, an increase of approximately 4%. The Canadian dollar was valued at an exchange rate of $0.75 on March 31, 2017 and $0.74 on December 31, 2016. The Australian dollar was valued at an average exchange rate of U.S. $0.76 for the first quarter of 2017 compared to U.S. $0.72 for the first quarter of 2016, an increase of approximately 5%. The Australian dollar was valued at an exchange rate of $0.76 on March 31, 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.

 

 
19

 

 

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 $15 million to $18 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 January 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 expect to use the remaining proceeds for general corporate purposes.

 

 
20

 

 

Results of Operations

 

Unless otherwise indicated, discussion of results for the three-month period ended March 31, 201 7 is based on a comparison to the corresponding period of 201 6 .

 

Consolidated Results of Operations

 

   

THREE MONTHS ENDED

MARCH 31,

 
   

201 7

   

201 6

   

Change

 
   

($ in thousands)

 

Revenues

                       

Canada

  $ 60,506     $ 65,522     $ (5,016 )

Australia

    27,016       25,510       1,506  

United States and other

    3,907       4,004       (97 )

Total revenues

    91,429       95,036       (3,607 )

Costs and expenses

                       

Cost of sales and services

                       

Canada

    43,288       47,764       (4,476 )

Australia

    13,402       12,519       883  

United States and other

    4,982       5,660       (678 )

Total cost of sales and services

    61,672       65,943       (4,271 )

Selling, general and administrative expenses

    14,210       13,117       1,093  

Depreciation and amortization expense

    32,829       33,555       (726 )

Impairment expense

    --       8,400       (8,400 )

Other operating expense (income)

    450       218       232  

Total costs and expenses

    109,161       121,233       (12,072 )

Operating income (loss)

    (17,732 )     (26,197 )     8,465  
                         

Interest expense and income, net

    (6,336 )     (5,160 )     (1,176 )

Other income

    254       112       142  

Income (loss) before income taxes

    (23,814 )     (31,245 )     7,431  

Income tax benefit

    2,948       4,571       (1,623 )

Net income (loss)

    (20,866 )     (26,674 )     5,808  

Less: Net income attributable to noncontrolling interest

    121       148       (27 )

Net income (loss) attributable to Civeo

  $ (20,987 )   $ (26,822 )   $ 5,835  

 

We reported net loss attributable to Civeo for the first quarter of 2017 of $21.0 million, or $0.17 per diluted share.

 

We reported net loss attributable to Civeo for the first quarter of 2016 of $26.8 million, or $0.25 per diluted share. As further discussed below, the net loss included (1) an $8.4 million pre-tax loss ($5.5 million after-tax, or $0.05 per diluted share) resulting from the impairment of fixed assets, and (2) a $1.0 million pre-tax loss ($0.7 million after-tax, or $0.01 per diluted share) from costs incurred in connection with our redomicile transaction, included in Selling, general and administrative (SG&A) expenses.

 

Revenues. Consolidated revenues decreased $3.6 million, or 4%, in the first quarter of 2017 compared to the first quarter of 2016. This decline was largely driven by decreases in Canada due to lower mobile, open camp and product activity, somewhat mitigated by higher lodge occupancy and decreases in Australia due to lower occupancy at our villages in the Bowen Basin. This was partially offset by increases in Australia, resulting from 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.

 

Cost of Sales and Services. Our consolidated cost of sales decreased $4.3 million, or 6%, in the first quarter of 2017 compared to the first quarter of 2016, primarily due to decreases in Canada due to lower mobile, open camp and product activity and in the U.S. due to a focus on cost containment and operational efficiencies. This was partially offset by increases in Australia, as well as stronger Canadian and Australian dollars in the first quarter of 2017 compared to the first quarter of 2016. Please see the discussion of segment results of operations below for further description.

 

 
21

 

 

Selling, General and Administrative Expenses. SG&A expense increased $1.1 million, or 8%, in the first quarter of 2017 compared to the first quarter of 2016. This increase was primarily due to higher share-based compensation expense associated with phantom share awards. The increase in share-based compensation was largely due to an increase in our share price during the first quarter of 2017. We use current market prices to remeasure these awards at each reporting date. This increase was partially offset by reduced compensation as a result of workforce reductions in 2016 and lower professional fees when compared to 2016.

 

Depreciation and Amortization Expense. Depreciation and amortization expense decreased $0.7 million, or 2%, in the first quarter of 2017 compared to the first 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 . We recorded pre-tax impairment expense of $8.4 million in the first quarter of 2016 related to 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.

 

Operating Loss . Consolidated operating loss decreased $8.5 million, or 32%, in the first quarter of 2017 compared to the first quarter of 2016, primarily due to the impairment expense recorded in the first quarter of 2016, which was not repeated in the first quarter of 2017.

 

Interest Expense and Interest Income, net. Net interest expense increased by $1.2 million, or 23%, in the first quarter of 2017 compared to the first quarter of 2016, primarily due to 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, partially offset by lower amounts outstanding under the revolving credit facility in the first quarter of 2017 as compared to the first quarter of 2016.

 

Income Tax Benefit. Our income tax benefit for the three months ended March 31, 2017 totaled $2.9 million, or 12.4% of pretax loss, compared to a benefit of $4.6 million, or 14.6% of pretax loss, for the three months ended March 31, 2016. The decrease in the effective tax rate from the prior year was largely the result of a change in the earnings mix between different tax jurisdictions. In addition, 2017 and 2016 include discrete items totaling $0.6 million and $0.9 million, respectively.

 

Other Comprehensive Income ( Loss ) . Other comprehensive income decreased $11.4 million in the first quarter of 2017 compared to the first 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 to the U.S. dollar increased 1% in the first quarter of 2017 compared to a 7% increase in the first quarter of 2016. The Australian dollar exchange rate to the U.S. dollar increased 6% in the first quarter of 2017 compared to a 5% increase in the first quarter of 2016.

 

 
22

 

 

Segment Results of Operations – Canadian Segment

 

   

THREE MONTHS ENDED

MARCH 31,

 
   

201 7

   

201 6

   

Change

 

Revenues ($ in thousands)

                       

Lodge revenue (1)

  $ 55,920     $ 54,886     $ 1,034  

Mobile, open camp and product revenue

    4,586       10,636       (6,050 )

Total revenues

  $ 60,506     $ 65,522     $ (5,016 )
                         

Cost of sales and services ($ in thousands)

  $ 43,288     $ 47,764     $ (4,476 )
                         

Gross margin as a % of revenues

    28.5 %     27.1 %     1.4 %
                         

Average available lodge rooms (2)

    14,720       14,602       118  
                         

Rentable rooms for lodges (3)

    8,859       9,103       (244 )
                         

Average daily rate for lodges (4)

  $ 97     $ 111     $ (14 )
                         

Occupancy in lodges (5)

    72 %     60 %     12 %
                         

Average Canadian dollar to U.S. dollar

  $ 0.756     $ 0.728     $ 0.028  

                                                

 

(1)

Includes revenues 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.

 

Our Canadian segment reported revenues in the first quarter of 2017 that were $5.0 million, or 8%, lower than the first quarter of 2016. The strengthening of the average exchange rates for the Canadian dollar relative to the U.S. dollar by 4% in the first quarter of 2017 compared to the first quarter of 2016 resulted in a $2.2 million year-over-year increase in revenues. Excluding the impact of the stronger Canadian exchange rates, the segment experienced a 2% decline in lodge revenues, primarily due to lower room rates partially offset by higher lodge occupancy. Finally, mobile, open camp and product revenues declined due to overall lower activity levels.

 

Our Canadian segment cost of sales and services decreased $4.5 million, or 9%, in the first quarter of 2017 compared to the first 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 decrease was partially offset by the strengthening of the Canadian dollar.

 

Our Canadian segment gross margin as a percentage of revenues increased from 27% in the first quarter of 2016 to 29% in the first quarter of 2017, primarily due to lower costs related to a focus on cost containment and operational efficiencies.

 

 
23

 

 

Segment Results of Operations – Australian Segment

 

   

THREE MONTHS ENDED

MARCH 31,

 
   

201 7

   

201 6

   

Change

 

Revenues ($ in thousands)

                       

Village revenue (1)

  $ 27,016     $ 25,510     $ 1,506  

Total revenues

    27,016       25,510       1,506  
                         

Cost of sales ($ in thousands)

  $ 13,402     $ 12,519     $ 883  
                         

Gross margin as a % of revenues

    50.4 %     50.9 %     (0.5 %)
                         

Average available village rooms (2)

    9,386       9,296       90  
                         

Rentable rooms for villages (3)

    8,776       8,696       80  
                         

Average daily rate for villages (4)

  $ 81     $ 68     $ 13  
                         

Occupancy in Villages (5)

    42 %     47 %     (5 %)
                         

Australian dollar to U.S. dollar

  $ 0.758     $ 0.721     $ 0.037  

                                               

 

(1)

Includes revenues 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.

 

Our Australian segment reported revenues in the first quarter of 2017 that were $1.5 million, or 6%, higher than the first quarter of 2016. The strengthening of the average exchange rates for Australian dollars relative to the U.S. dollar by 5% in the first quarter of 2017 compared to the first quarter of 2016 resulted in a $1.3 million year-over-year increase in revenues. Excluding the impact of the stronger Australian exchange rates, the segment experienced a 1% increase in revenues due to increased occupancy at our villages in Western Australia, due to increased activity from anchor tenants at both villages in the first quarter of 2017 compared to the first quarter of 2016. This increase was offset by reduced occupancy at our villages in the Bowen Basin, due to a general slowdown in mining activity.

 

Our Australian segment cost of sales increased $0.9 million, or 7%, in the first quarter of 2017 compared to the first quarter of 2016. The increase was driven by higher occupancy levels at our villages in Western Australia as well as the strengthening of the Australian dollar.

 

Our Australian segment gross margin as a percentage of revenues decreased to 50% in the first quarter of 2017 from 51% in the first quarter of 2016. This decrease was primarily driven by reduced take or pay revenues on expired contracts compared to the first quarter of 2016.

 

 
24

 

 

Segment Results of Operations – U . S . Segment

 

   

THREE MONTHS ENDED

MARCH 31 ,

 
   

201 7

   

201 6

   

Change

 
                         

Revenues ($ in thousands)

  $ 3,907     $ 4,004     $ (97 )
                         

Cost of sales ($ in thousands)

  $ 4,982     $ 5,660     $ (678 )
                         

Gross margin as a % of revenues

    (27.5 %)     (41.4 %)     13.9 %

 

Our U.S. segment reported revenues in the first quarter of 2017 that were $0.1 million, or 2%, lower than the first quarter of 2016. The reduction was primarily due to decreased revenues from our offshore business partially offset by greater U.S. drilling activity in the Bakken, Rockies and Texas markets.

 

Our U.S. cost of sales decreased $0.7 million, or 12%, in the first quarter of 2017 compared to the first quarter of 2016. The decrease was driven by a focus on cost containment and operational efficiencies.

 

Our U.S. segment gross margin as a percentage of revenues increased from (41)% in the first quarter of 2016 to (28)% in the first quarter of 2017, primarily due to a focus on cost containment and operational efficiencies and increased activity in the Bakken, Rockies and Texas markets.

 

Liquidity and Capital Resources

 

Our primary liquidity needs are to fund capital expenditures, which in the past have included expanding and improving our accommodations, developing new lodges and villages, purchasing or leasing land under our land banking strategy, and for general working capital needs. In addition, capital has been used to repay debt, fund strategic business acquisitions and pay dividends. Historically, our primary sources of funds have been available cash, cash flow from operations, borrowings under the Credit Agreement (as amended by the third amendment described below, the Amended Credit Agreement) and proceeds from our equity issuance. In the future, we may seek to access the debt and equity capital markets from time to time to raise additional capital, increase liquidity, fund acquisitions and refinance debt.

 

The following table summarizes our consolidated liquidity position as of March 31, 2017 and December 31, 2016:

 

   

March 31 ,

201 7

   

December 31,

2016

 

Lender commitments (1)

  $ 275,000     $ 350,000  

Reductions in availability (2)

    (100,941 )     (144,803 )

Borrowings against revolving credit capacity

    --       (39,129 )

Outstanding letters of credit

    (1,397 )     (1,571 )

Unused availability

    172,662       164,497  

Cash and cash equivalents

    27,136       1,785  

Total available liquidity

  $