Sid Arora

CVEO Long Thesis

September 1, 2015

Started from the bottom, now we here...

Recommendation: Long CVEO
Price: $1.95 ($210M impl. market cap, 33% 15 UFCF Yield, 0.3x TBV and 4.8x 15
EBITDA of $137M)
Price Target: $4.50 (8x 2016E Consensus EBITDA of $110M, 11% 16 Unlev. FCF Yield)
Upside/Downside: ~4:1 (+130% Upside/ 30% Downside)
Recommended Portfolio Allocation: 2-3%

CVEO Capitalization
($M, except as noted)
Share Price, as of 08/31/15
FDSO
Equity Value
Debt Outstanding
Cash Outstanding
Noncontrolling Int
Enterprise Value
Consensus '15 FCF
Impl. FCF Yield

$1.95
107.459
$209.5
$497.6
$50.5
$0.7
$657.4
$70.0
33%

6/30 LTM EBITDA

EV/LTM EBITDA

$264.0
2.5x

2015 Mgmt EBITDA

EV/15' Mgmt EBITDA

$137.0
4.8x

Investment Thesis

Civeo Corporation (NYSE:CVEO), which spun-off from Oil States International (OIS) mid last year under pressure
from JANA Partners, is an underfollowed workforce accommodation provider for oil and mining workers in remote
areas in the Canadian oil sands, Australia and the US. Its facilities (lodges/mobile open camps) are located in close
proximity to the lowest cost producers of oil and met coal. At its peak as the Accommodations Division of OIS, this
business generated $500M in EBITDA and grew its topline every single year until 2013.
The stock has gotten pummeled over the past year (off 93% its 52 week high of $26.13) and appears to trade
deceivingly similarly to an entity destined for bankruptcy, due to (i) the dramatic drop in commodity prices (both
oil and coal) as well as CAD/AUS currency headwinds; (ii) the decision to pursue a redomicile transaction in Canada
in favor of a REIT conversion which was looked down upon by the street, and more recently, (iii) overblown
concerns around its level of liquidity (fueled by inaccurate assumptions put forward by a misinformed short seller).
CVEOs management team has done an excellent job given the circumstances to proactively address these issues
head on and weather the downturn: they have (i) successfully completed CVEOs redomestication to take
advantage of lower tax rates and more efficiently utilize future cash flow, (ii) paid off a third of company debt with
cash on hand and amended the credit facility and leverage covenants which alleviates near-term liquidity related
concerns, (iii) secured multiple new contracts (contributions from which will show up in 2016 financials), (iv)
reduced headcount 38% since Sep 2014 (with 35% overhead reduction in Canada this year and over 20% redn. in
Australia over the past couple years), (v) reduced working capital 14% YTD, and above all, (iv) communicated
transparently with investors on the state of affairs, issuing conservative, achievable guidance (they blew past Q2
EBITDA guidance by 31% and Q1 results came in at the upper end of guidance) and theres reason to believe they
will hit their FY2015 numbers ($530-545M in Rev and $131-143M in EBITDA) given 90% of their 2H15 Lodge Rev
(over 75% of the business) is already contracted.
Although I expect some near-term volatility, I believe CVEO can trade up to 130% above todays levels to $4.50 /
share over the next 12-18 months, as the debt paydown, headcount reductions, lower taxes from the
redomestication and new contracts secured begin to reflect in the financials (as early as Q3) and the stock
reappears on institutional investor radars. Fidelitys small cap fund recently established an opportunistic 13%
position (Aug 10) and despite some investor fatigue from having gotten burned last year, I expect several others to
follow suit. CVEOs performance is no doubt geared heavily to the commodity/currency markets but this exposure
can be hedged to some extent via commodity ETFs/currency hedges. At a 33% 2015 Unlevered FCF Yield, CVEO
still represents one of the more attractive value plays out there on the eventual recovery of the oil and gas/met
coal markets.
1

Sid Arora
CVEO Long Thesis

September 1, 2015

Business Model

As mentioned above, CVEO provides permanent (Lodges) and temporary (Mobile and Open Camps) workforce
accommodations for oil and mining workers in remote areas of Canada, Australia and the US. The company also
provides associated catering, facilities management, and logistics services, basically functioning as a full-service
hotel for these workers (see pictures in Appendix).
CVEO has over 14,400 rooms in Canada (68% and 66% of LTM Rev and EBITDA, 42% market share among 3rd party
providers and 20% overall including operator owned), over 9,000 rooms in Australia (24% and 32% of LTM Rev and
EBITDA,34% market share overall) and over 900 rooms in the US (8% and 4% of LTM Rev and EBITDA). On an LTM
basis as of 2Q15, the business generated $777M in Revenue and $264M in EBITDA (34% margin) and for 2015,
CVEO is well on track to generate between $530-545M in Revenue and $131-143M in EBITDA (~26% margin).
CVEOs facilities broadly fall into one of two categories: Villages/Lodges (76% of LTM Revenue) and Mobile/Open
Camps (24% of LTM Revenue). Villages and lodges are typically permanent styled structures with multi-year takeor-pay contracts (typically 1-3 yrs) which help mitigate short-term commodity price exposure on new capital
(majority of CVEOs contracts have termination provisions but customers incur a material termination fee).
o CVEOs lodge facilities are large high quality properties (theyre not dinky Howard Johnsons) where guests
receive the amenity level of a full- service hotel plus three meals a day. And to get an order of magnitude
of these facilities, CVEOs Wapasu Creek Lodge is the second largest lodging property in N. America
(behind a Vegas hotel, likely MGM). CVEO currently operates 7 lodges and 6 open camps in Canada, 9
villages (no open camps) in Australia and 4 open camps in the US.
o Mobile/open camps are smaller, more temporary facilities that can be quickly deployed on short-term
contracts (typically 16-18 months), usually to support transient drilling, pipeline, seismic work.
CVEOs largest customers include large, investment grade blue chip energy and mining names like Exxon
controlled Imperial Oil (10+% of its revenue), Fluor Canada and BM Alliance Coal Operations (an alliance between
BHP Billiton and Mitsubishi) well-capitalized industry behemoths who are making multi- billion dollar investments
to develop their prospects which generally have estimated reserve lives of 10 30+ yrs; these investments are
therefore dependent on those customers longer- term view of commodity demand and prices. Existing projects
have costs closer to C$30/bbl to operate and cover overhead. I believe CVEO's clients, mostly big names, will
actually benefit longer term as small, leveraged players go out of business.
Demand for CVEOs accommodations services generally originates from their customers projects, most
significantly during the development or construction phase and, to a lesser extent, the operations and production
phase. Demand for the companys customers services is primarily driven by these customers capital spending
programs related to the construction and development of oil sands projects, mines and other resource
developments including associated resource delineation and infrastructure.
o Demand in Canada will be driven by increased investment in the Canadian oil sands. Acc. to a WSJ article,
existing oil sands surface mines can make money at about $30 a barrel, and the most efficient
underground oil sands projects can stay in the black at $35 a barrel. That is still above the break-even
levels of many traditional oil wells, but below those of other unconventional sources of crude, including
most production from the Bakken Shale formation in North Dakota. Given the number of variables
influencing oil prices, it is difficult to time the recovery but per a recent WSJ article (published 8/31), it
appears things will get better before they get worse as oil prices are already up 29% from their 8/24 low.
2

Sid Arora
CVEO Long Thesis

September 1, 2015

Demand in Australia will be driven primarily by the outlook for met coal, whose pricing and growth in
production is influenced by levels of global steel production. Growth in worldwide steel demand
decreased from 3.8% in 2013 to 2% in 2014 on the back of a construction slowdown in China which is
beginning to change course as monthly home prices begin to climb back up (see here, and here). Met coal
prices have slumped to their lowest level in the last 3 yrs (see Appendix) to below $100/t but the Bowen
basin and Australia in general represents one of the lowest cost coal producers in the world.
CVEO has had a number of recent wins demonstrating success at winning contracts despite commodity price
weakness and has a robust pipeline of opportunities it is pursuing. The company was recently awarded a contract
from LNG Canada (led by Shell Canada) to support development of Sitka Lodge (436 rooms, 4Q15) which could
expand to a ~2K room relationship (mgmt. alluded to this target on their Q2 call and latest Aug 25 investor
presentation). Other recent contract extensions announced totaling US$120M+ include:
o Two contract awards for Moranbah Village totaling 260 room and $32 million over five years
o C$22 million contract to support redevelopment of Mariana Lake into a 526-room open lodge.
o C$31 million extension at Wapasu Creek for an average of 500 rooms through the end of 2017
o C$64 million of contract awards and extensions in Athabasca, comprised of accommodations, operations
and manufacturing mandates.
o

Liquidity

Understanding liquidity is absolutely critical to this investment thesis as this has been the biggest concern. CVEO
formally amended its credit facility on Jul 17, 2015, which in addition to permitting the redomiciling to Canada,
provided additional lending capacity in Canada, reduced both the existing U.S. term loan and U.S. revolver and
increased the maximum leverage ratio allowed under the credit facility.
As of Jul 27, 2015, subsequent to the completion of the redomestication, CVEOs total debt balance stood at
roughly $500 million (after a $275M debt paydown), with cash on hand of $50.5 million. On a PF basis, this
amounts to Total Debt/LTM EBITDA of 1.9x vs a Sep 2015 covenant of 3.5x which steps up to 4x in Q4 2015,
4.25x in Q1 2016 and to 4.5x for the remainder of 2016.
o Assuming the company hits its projected guidance of $20-25M in EBITDA for Sep 2015 and there are no
further debt paydowns, the leverage ratio would stand at 2.6x as of Sep 30, 2015 (off ~$194M in LTM
EBITDA). Further, assuming the co. hits its FY2015 EBITDA of $131-143M and there is no additional debt
paydown (highly unlikely given expected 2H15 FCF generation), were looking at a 3.6x leverage ratio (vs
4x covenant) which is tight but still manageable.
o Over the next 12-18 months, I expect the situation to get better as debt paydowns continue and I take
comfort in that fact that management made it explicitly clear on their Q2 call that this was a top priority
before any other value enhancing initiatives were undertaken.

Sid Arora
CVEO Long Thesis

September 1, 2015

Valuation

CVEO is one of the few accommodations providers that service the entire value chain from site identification to
long- term facility management and there are no real US listed comps. The companys closest Canadian listed
comps are Black Diamond (BDI) and Horizon North (HNL), both of which are much smaller businesses which have
traded in the 7-9x EBITDA multiple range over the past 5 yrs
o BDl trades closer to the 9x multiple and is the more relevant comp as a pure play vs HNL which derives
85% of its business from camps (which I argue should be valued at a lower multiple given the shorter-term
nature of the contract and lower margin (23%) vs CVEOs lodges (traditionally 30+%)) and 15% comes from
a matting business which is essentially a solid surface over unstable ground conditions to facilitate heavy
equipment movement).
o CVEO has a greater share of the market vs both of these players and these competitors do not have the
breadth or scale of their lodge operations and should command a premium.
Assuming (i) consensus 2016 trough EBITDA of $110M (which could be meaningfully lower than what 2016 shapes
up to be given the recent contract extensions) at an 8x multiple, and (ii) the business pays down an additional
$50M in debt (off $60-75M FCF generated over the next 15 mo.), I arrive at a $4.5 target (no changes in cash/NCI).
My downside price, $1.35, is derived from an illustrative liquidation value analysis (see Appendix) where Ive taken
significant (50+% haircuts for the majority of line items) to all assets, with liabilities being paid out at face value.

Risks

CVEO is highly correlated to the strength of the oil/gas/met coal markets and as the past twelve months have
shown, any bulls dismissing/underestimating commodities exposure have been proven dead wrong. This thesis is
predicated on the debt paydown and management navigating the downturn successfully, not on growth opps.
Inability of mgmt. to renew additional contracts / customers shift workers to customer operated rooms.
FX translation risk involving AUD and CAD which to an extent has been mitigated by redomiciling to Canada.
4

Sid Arora
CVEO Long Thesis

September 1, 2015

Disclaimer:
The above text is the view of the author alone and is for informational and educational purposes only. It should not be
construed as investment advice or a solicitation to buy or sell securities. The author may hold a position in the securities
mentioned, and does not have to provide updates for changes to his view. The author does not warrant his work for
correctness or accuracy. Perform your own due diligence before making investment decisions.
I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Sid Arora
CVEO Long Thesis

September 1, 2015

Appendices
Stock Price Performance (Since CVEO began trading in late May 2014)

Sep 14: CVEO board

announces decision
to redomicile vs
converting to a REIT

Dec 14: CVEO

issues weak 2015
guidance given
market weakness

CVEO Market Share (Per Mgmt. Estimates CVEO Investor Pres)

Jun/Jul 15:
Successfully
amends facility and
completes
redomestication

Sid Arora
CVEO Long Thesis

September 1, 2015

Liquidation Value Analysis

CVEO Balance Sheet Recovery / Liquidation Value Analysis

1.35

Impact of Accomodations Assets Recovery % on Liq Value Estimate

30%
35%
40%
45%
50%
(0.14) $
0.61 $
1.35 $
2.09 $
2.84 $

$ in MM
12/31/14
Assets
Cash and cash equivalents
Accounts receivable, net
Inventories
Prepaid expenses
Other current assets
Assets held for sale
Total current assets

Adj Amt
Estim
06/30/15 As of 7/27/15 Recovery

Liquidation
Value

100%
25%
25%
25%
25%
0%

$50.5
27.8
1.6
7.6
1.6
0
$89.1

$263.3
160.3
13.2
20.7
6.5
0
$464.0

$315.2
111.1
6.2
30.6
6.5
8.5
$478.1

Estimated Useful
Property, plant and equipment, net:
Life (in years)
Land
Accommodations assets
3-15
Buildings and leasehold improvements
3-20
Machinery and equipment
4-15
Office furniture and equipment
3-7
Vehicles
3-5
Construction in progress
Total PP&E
Accumulated depreciation
Net PPE

$55.4
1,687.0
40.3
12.1
32.2
19.1
70.6
$1,916.7
(668.3)
$1,248.4

$47.7
1,598.8
31.2
10.0
30.3
17.4
67.4
$1,802.9
(697.4)
$1,105.5

Goodwill, net
Other intangible assets, net
Other noncurrent assets
Total Assets

$45.3
50.9
20.6
$1,829.2

$45.0
43.5
24.6
$1,696.7

0%
0%
0%

Liabilities
Current liabilities:
Accounts payable
Accrued liabilities
Income taxes
Current portion of long-term debt
Deferred revenue
Other current liabilities
Total current liabilities

$36.3
22.5
0.1
19.4
18.5
21.7
$118.4

$25.0
15.9
0.0
38.8
13.1
21.7
$114.4

100%
100%
100%
100%
100%
100%

Long-term debt, less current maturities

Deferred income taxes
Other noncurrent liabilities
Total liabilities

$755.6
55.5
39.5
$969.1

$736.3
53.0
37.8
$941.4

$50.5

0.0

$497.6

50%
40% <<Key Assumpn
50%
50%
50%
50%
50%

$23.8
639.5
15.6
5.0
15.2
8.7
33.7
$741.6

67%

$741.6

(A)

0
0
0
$830.6

(B)

$25.0
15.9
0.0
0
13.1
21.7
$75.6

100%
100%
100%

Liquidation Value Est

Value Per Share

55%
3.58

$497.6
53.0
37.8
$685.7
(A - B)
$

$145.0
1.35

Sid Arora
CVEO Long Thesis

September 1, 2015

Additional Liquidity Related Data

Sid Arora
CVEO Long Thesis

September 1, 2015

CVEO Summary P&L

CVEO Summary P&L / Operating Stats

2011

2012

Historical
2013

2014

Revenue
Lodge/Village Revenue
Canada
Australia
Total Lodge/Village Revenue
% of Total

413
196
609
70%

550
274
824
74%

549
256
805
77%

497
213
710
75%

158
80
238
76%

Mobile & Open Camp

Canada
Australia
US
Total Mobile/Open Camp Revenue
% of Total

167
1
88
256
30%

167
3
116
286
26%

162
0
75
237
23%

164
0
68
232
25%

49
0
27
76
24%

$717
$277
$116
$1,110
28%

$711
$256
$75
$1,042
-6%

$661
$213
$68
$942
-10%

24%
41%
32%

-1%
-8%
-35%

-7%
-17%
-9%

Total Canada Revenue

Total Australia Revenue
Total US Revenue
Total Revenue
% Growth

$580
$197
$88
$865

Canada % Growth
Australia % Growth
US % Growth

1H15

$207
$80
$27
$314

Mgmt
2015

$365
$135
$38
$538
-43%

$217
$107
$32
($3)
$353

$298
$156
$47
($7)
$494
45%

$279
$142
$13
($8)
$425
41%

$236
$109
$13
($18)
$340
36%

$62
$40
$2
($11)
$94
30%

$96
$62
$3
($24)
$137
25%

Canada % Margin
Australia % Margin
US % Margin

37%
54%
36%

42%
56%
41%

39%
55%
17%

36%
51%
19%

30%
50%
7%

26%
46%
8%

8,985
6,012
14,997

10,660
7,761
18,421

11,541
8,925
20,466

12,557
9,271
21,828

13,225
9,296
22,521

$126
$89
$111

$141
$97
$123

$130
$79
$108

$108
$63
$89

$66
$47
$58

81%
96%
88%

93%
93%
93%

92%
83%
87%

85%
68%
78%

65%
62%
64%

1.0117
1.0324

1.0006
1.0359

0.971
0.965

0.906
0.902

0.810
0.782

RevPAR
Canada
Australia
Total RevPAR
Occupancy in Lodges/Villages
Canada
Australia
Total Occupancy
Avg Exchange Rate
CAD/US
AUD/US

$481
-11%

-45%
-37%
-45%

EBITDA
Canada
Australia
US
Corp/Other
Adjusted EBITDA
% Margin

Avg. Available Lodge/Village Rooms

Canada
Australia
Total Lodge/Village Rooms

Consensus
2016

High 40s/
Low 50s
Guidance

$110
23%

Sid Arora
CVEO Long Thesis

September 1, 2015

CVEO Facilities Overview

Canada
Lodges
Wapasu
Henday (1)
McClelland Lake Lodge
Athabasca (1)
Beaver River
Conklin
Anzac
Lakeside (2)
Total Rooms

Region
N. Athabasca
N. Athabasca
N. Athabasca
N. Athabasca
N. Athabasca
S. Athabasca
S. Athabasca
N. Athabasca

Open Camps
Mariana Lake
Boundary
Waskada
Antler River
Red Earth
Redvers
Geetla
Christina Lake
Total Rooms

Province
Alberta
Saskatchewan
Manitoba
Manitoba
Alberta
Saskatchewan
British Columbia
Alberta

Extraction
Technique
mining
mining/in situ
mining
mining
mining
mining/in situ
in situ
mining

2010
4,013
-

2011
5,174
120

2012
5,174
1,698

1,537
732
608

1,776
732
584

1,877
876
948

510
7,400

510
8,896

510
11,083

2010
247

2011
478

2012
478
196

247

478

92
102
135
10
1,013

2010
1,654
1,249
889
690

2011
2,556
1,491
1,180
816

2012
2,912
1,912
1,240
816

238

242
490
300
238

5,210

7,313

502
490
300
238
208
8,618

2013
5,174
1,698
1,557
1,094
1,036
526
510
11,595
2013
486
346
196

2014
5,174
1,698
1,888
2,005
1,094
700
526
13,085
2014
435
346

2Q15
5,174
1,698
1,997
2,005
1,094
700
526
13,194
2Q15
435
346

114
102
81
65
1,390

212
114
102
81
35
1,325

212
114
102
81
35
1,325

2013
3,048
1,912
1,240
816
508
502
490
300
238
208
9,262

2014
3,048
1,798
1,240
816
662
502
490
300
232
208
9,296

2Q15
3,048
1,798
1,240
816
662
502
490
300

2013
166
274
126
199
765

2014
310
274
235
157
976

2Q15
310
274
235
157
976

Australia
Villages
Coppabella
Dysart
Moranbah
Middlemount
Boggabri
Narrabri
Nebo
Calliope
Kambalda(3)
Karratha
Total Rooms

Resource
Basin
Bowen
Bowen
Bowen
Bowen
Gunnedah
Gunnedah
Bowen

Pilbara

Commodity
met coal
met coal
met coal
met coal
met/thermal coal
met/thermal coal
met coal
LNG
Gold
LNG, iron ore

490

208
9,064

United States
US Open Camp Rooms
West Permian
Three Rivers
Killdeer
Stanley House
Total Open Camp Rooms

State
TX
TX
ND
ND

2010

2011

2012
106
199
305

Source:CVEO Investor Presentation (Aug 25, 2015)

(1) Temporarily closed due to lower expected activity in the region.

(2) Permanently closed in Q4 2014.

(3) Permanently closed in Q2 2015.

10

Sid Arora
CVEO Long Thesis

September 1, 2015

Industry Stats (Per latest CVEO Investor Pres)

11

Sid Arora
CVEO Long Thesis

September 1, 2015

12

Sid Arora
CVEO Long Thesis

September 1, 2015

Facility Pictures (Per CVEO website)

13