Summary
- The cash balance is extremely low, but positive cash flow is being used to pay down debt.
- Even with some very conservative assumptions, the valuation looks attractive.
- Management continues to focus on debt reduction, which should eventually lead to a more deserving valuation multiple and significant upside.
Civeo Corporation (NYSE:CVEO) provides lodging and catering facilities to the natural resource extraction industries in the US, Canada, and Australia. In the fall of 2018, the stock was trading at over $4.00/share before a plunge in energy prices brought the stock down under $1.00/share.
On July 29, before market open, they reported results for 2Q20, and investors rewarded the company's performance with a 43% surge in the share price. But a very large risk remains.
As of June 30, CVEO only had $7M in cash, and total debt stood at $299M. Management has done a good job focusing on debt reduction, bringing total debt down from $357M at the end of December 2019.
On September 8, they announced amendments to their credit agreements, which included an 18-month extension to the maturity date of the revolving credit facilities and term loan. This gives them some additional breathing room, though the interest rate spread did increase slightly.
Even though debt levels are moving in the right direction, the low valuation indicates that the highly leveraged balance sheet is still a concern. But we think this is an acceptable risk, given the operating performance.
In 2019, CVEO generated an adjusted EBITDA of $108M. When 4Q19 results were announced, management guided for (at the midpoint) 2020 adjusted EBITDA of $104M. Due to the COVID-19 slowdown, this guidance has been withdrawn, and they now expect (as of July 29) an adjusted EBITDA of $83M.
To be conservative, let's assume that the 2020 COVID-19-impacted adjusted EBITDA guidance of $83M is the new normal. This amount actually includes $7M in one-time gain items from the Canadian territory (discussed on the earnings call), so let's go with $76M.
In 2019, depreciation and amortization expense was $124M, but we will use capex to more accurately reflect the actual cash expenses. In 2018, capex was $17M, but then increased to $30M in 2019. This jump was primarily related to the completed expansion of the Sitka Lodge in Kitimat, British Columbia. For 2020, initial capex guidance had been for $20M, but has since been lowered to $15M. Let's use the original $20M figure.
They are consistently paying down debt each quarter, though the savings from the lower outstanding balance will be roughly offset by the slight increase in the interest rate spread. We will annualize 2Q20 interest expense of $3.9M and use $16M as our annual interest expense.
Below, you can see our estimate of earnings to common shareholders (net of noncontrolling interests). We assume that the Preferred Shares will be converted to common shares at some point, and so no longer include the $1M spent per year on the Preferred Shares dividend.
