2023-11-02 13:24:13 ET
Summary
- Civeo Corp has posted mixed results recently, but this doesn't make the company a bad prospect.
- Shares have outperformed the broader market and while results are a bit weak now, the long-term picture looks appealing.
- Management keeps increasing guidance and shares look incredibly cheap at this point in time.
One of my absolute favorite companies to write about is Civeo Corporation ( CVEO ). Not only are shares of the company incredibly cheap, there's also the fact that it is a truly one-of-a-kind enterprise from all that I can tell. For those who don't know, the company goes out where natural resources are extracted, largely in parts of Canada and Australia, establishes suitable accommodations, and then leases those out to the natural resource companies that go out to those regions for the purpose of extracting things like iron ore and bitumen. This saves the companies that work out there a significant amount of hassle since they otherwise would be responsible for establishing accommodations for their workers or for ferrying them to and from these remote locations on a regular basis.
My history of writing about the business has been quite positive. Since I last wrote about it in early August of this year, shares have generated a return for investors of 4.9%. That's far better than the 7.9% drop seen by the S&P 500 over the same window of time. In that article, I talked about how financial performance leading up to that point had been a bit weak. But because of how cheap shares were and because of how the company performed in Australia, I could not help but to rate it a ‘buy’. My track record over a longer window of time is even better. Since I last upgraded the company from a ‘hold’ to a ‘buy’ in October of 2019, shares have jumped 59.1% while the S&P 500 has risen a more modest 38.1%. You might think that I would be far more neutral now that the stock has risen nicely. But when you dig into the data, it becomes clear that additional upside exists from here even in spite of some weakness on the bottom line.
The big picture looks great
If you were to look at the share price performance of Civeo Corp since I last wrote about it, you might think that the return disparity between it and the market would be indicative of fundamental performance that was quite robust. But that's not what we have seen. Consider, for instance, the third quarter of the company's 2023 fiscal year. Revenue for that time came in at $183.6 million. That represents a decline of 0.3% compared to the $184.2 million generated one year earlier. This decline in revenue was really driven by two issues. First, in Canada, sales dropped from $103 million to $95.1 million. That decline was driven by decreased mobile asset activity from pipeline projects in Canada. A weaker Canadian dollar relative to the US dollar also played a role. Other revenue plunged from $7.4 million to only $0.5 million because of reduced activity in the US that management attributed to the sale of its well site and offshore businesses during the second half of the 2022 fiscal year.
This is not to say that there was weakness across the board. Because there wasn't. Australia proved to be a really bright spot for the company, with revenue skyrocketing 19.1% from $73.8 million to $87.9 million. Despite weakness in the Australian dollar relative to the U.S. dollar, the company benefited from higher occupancy at its villages there and increased activity at the integrated services villages that it has in Western Australia. A $1 increase in the average daily rate for villages contributed some of this increase in sales as well. This is actually an area that I am particularly interested in for the company. As I wrote about in two prior articles regarding Albemarle, located here and here , there is significant growth potential in Australia regarding lithium. I am not aware of any lithium customers that Civeo Corp might be servicing. In Australia, its customers really consist of those dedicated to iron ore and those dedicated to metallurgical coal. But over the next couple of decades, Australia does have the means to grow output of this resource nicely and it will likely become the second largest producer of lithium on the planet.
On the bottom line, the picture has been a bit more complicated. Net profits almost doubled from $5.2 million to $9 million. A nice reduction in depreciation and amortization expenses was helpful in pushing overall margins up considerably. But as a non-cash expense, this did not help the firm's cash flow figures. In fact, operating cash flow dropped from $38.8 million to $36.8 million. If we adjust for changes in working capital, we get a decline from $32.1 million to $31.6 million. And finally, EBITDA for the company fell from $35 million to $32.9 million.
As you can see in the chart above, financial performance for the third quarter was not the only time in which overall results were mixed. For the first nine months of this year relative to the same time last year, revenue, profits, and cash flows all fell. The same issues that caused pain in the third quarter and the same areas of strength that helped offset this pain during that same quarter also contributed to the performance for the first nine months of the year as a whole.
Despite this weakness, management has become more optimistic as time went on. The current expectation is for revenue this year to come in at between $675 million and $685 million. That's up from prior guidance of between $640 million and $650 million and it stacks up nicely against the initial guidance for this year of between $630 million and $650 million. Meanwhile, EBITDA is expected to come in between $95 million and $100 million. This is up from the $85 million to $95 million initially projected for this year.
If guidance should come to fruition, that should mean that adjusted operating cash flow this year should be around $91.4 million. That is still down from the $105.7 million reported for last year and the EBITDA reading of $97.5 million for this year at the midpoint would still be a drop from the $112.8 million reported for 2022. But even with those declines, shares of the company look very cheap. As you can see in the chart above, the stock is trading in the low single digits when it comes to both the price to operating cash flow multiple and the EV to EBITDA multiple.
You might think that there is something wrong with the company to be trading at levels like this. But I would say that there isn't. In fact, the firm continues to get healthier by the quarter. Back at the end of 2019, the company had net debt totaling $355.7 million. That translated to a net leverage ratio of 3.0. Over the quarters, management succeeded in paying much of this debt down. And as of this writing, net debt is only $95.2 million. That is a net leverage ratio of less than 1.0. The company has succeeded on this front because of the significant excess cash flows that it produces. Strategic asset sales have also been part of this picture. The most recent of these was just announced in September of this year. Management has agreed to sell the McClelland Lake Lodge for $36 million, with net proceeds expected of $30 million. That deal can be expected to close no later than the end of next January. And management is booking a gain on that sale of $35 million. So the company definitely got its money's worth. It's unclear how these proceeds will be used. But it wouldn't be unthinkable for management to pay debt down even further.
Takeaway
From all that I can tell, Civeo Corp is a truly fantastic enterprise. The picture for the company is not perfect. But it is looking solid. Shares are incredibly cheap even after achieving significant upside. Management has materially de risked the enterprise by reducing net leverage. While long term performance will fluctuate based on demand for certain natural resources, I have no doubt that the long-term picture will end up being positive. In fact, given the recent developments, I have decided to upgrade the company from a ‘buy’ to a ‘strong buy’ at this time.
For further details see:
Civeo Corporation: Another Upgrade Is Warranted