Regan Nielsen - Corporate Development Associate Bradley J. Dodson - CEO and Director Frank C. Steininger - SVP, CFO and Treasurer.

Blake Hancock - Scotia Howard Weil Stephen Gengaro - Loop Capital Mike Malouf - Craig-Hallum Capital Group Benjamin Owens - RBC Capital Markets.

Good day and welcome to the Civeo Second Quarter Earnings Call. Today's conference is being recorded, and at this time, I'd like to turn the conference over to Regan Nielsen, Manager, Corporate Development and Investor Relations at Civeo. Please go ahead, sir..

Thank you and welcome to Civeo's second quarter 2017 earnings conference call. Today our call will be led by Bradley Dodson, Civeo's President and Chief Executive Officer, and Frank Steininger, Senior Vice President and Chief Financial Officer. Before we begin, we would like to caution listeners regarding forward-looking statements.

To the extent that our remarks today contain information other than historical information, please note that we're relying on the Safe Harbor protections afforded by federal law. Any such remarks should be read in the context of the many factors that affect our business, including risks disclosed in our Form 10-K, 10-Q and other SEC filings.

I will now turn the call over to Bradley..

Thank you, Regan. Good morning, everyone. Thank you for joining us on our second quarter earnings call. I'll begin with an overview of our performance during the quarter. Next, Frank will give a detailed financial review and segment level performance.

And then I'll finish off by providing third quarter and full year 2017 guidance, before we move to the question-and-answer portion of the call. Our second quarter was better than expected. We generated revenues of $92 million, above the high end of our guidance range, primarily due to better than expected occupancy in Canada.

We recorded adjusted EBITDA of $18.6 million, which was up sequentially across all three segments and was also above the high end of our guidance range.

Adjusted EBITDA outperformance was driven by stronger than anticipated occupancy related to construction projects and shutdown and turnaround work in Canada as well as continued improvement in Australia driven by shorter term occupancy related to mine maintenance work.

Across our business, we remain focused on our strategic priorities of generating free cash flow, reducing debt, minimizing costs, and pursuing organic and inorganic growth opportunities. We believe these priorities best position our business for success, irrespective of the underlying commodity price environments in which we operate.

In the second quarter, we won four accommodations contracts for Canadian pipeline projects. These contracts are expected to generate revenue of approximately C$20 million and are a testament to our focus on operations and best-in-class service levels through the challenging macro conditions.

During the second quarter, crude oil prices retreated into the low 40s, primarily as a result of renewed supply growth concerns, but appear to have stabilized in recent weeks. Despite the recent volatility in the oil prices during the quarter, business conditions in the U.S.

[white type] [ph] oil plays continue to demonstrate resilience and are noticeably improved since 2016 activity levels. [Indiscernible] in our Permian Basin Lodge compelled us to redeploy additional capacity to the region in the second quarter as drilling and completion activity continues to be robust.

Utilization also continued to improve in our Bakken facility in the second quarter, enabling us to improve the financial performance, and we've begun providing wellsite services in the Mid-Con and the Permian region.

During the quarter, the business environment in Australia was relatively steady, despite some short-term commodity price movements and activity dislocations related to the lingering impact of Cyclone Debbie.

Our casual occupancy continued to improve, primarily due to higher year-over-year met coal prices, lithium mining activity, and increased customer maintenance activity.

While we are encouraged by relatively stable activity across our core end markets, we continue to diligently position our business for success in a subdued global commodity price environment.

Given the challenging market conditions, we remain focused on our strategic priorities of judicious deployment of capital, minimizing costs, continuous operational efficiencies, while providing best-in-class customer service.

An example of this strategy, we were pleased to roll out our a la carte food ordering system across more of our Canadian lodges during the quarter. We believe our commitment to enhancing service quality for our customers is a sustainable competitive differentiator.

As we transition from what has been a historic downturn, this commitment combined with unwavering focus on execution, vigilant cost management, capital efficiency, and balance sheet improvement, positions us well for the next up-cycle. With that, I'd like to turn it over to Frank for a detailed review of our financial performance.

Frank?.

Thank you, Bradley, and good morning everyone. Today, we reported total revenues of $92 million, with a net loss on a GAAP basis of $14.8 million, or $0.11 per diluted share. During the second quarter of 2017, the Company generated adjusted EBITDA of $18.6 million, operational cash flows of $4.6 million, and free cash flow of $3 million.

I will now walk through our segment-level performance, beginning with our Canadian segment, and I will be comparing our sequential performance, that is second quarter of 2017 to first quarter of 2017. Revenues from our Canadian segment were $57.7 million, which were down 5% from the first quarter of 2017.

Adjusted EBITDA increased by 11% sequentially to $14.7 million, primarily due to cost containment initiatives along with increased average occupancy in our lodges.

Our adjusted EBITDA margin in the quarter was 26%, versus 22% in the first quarter, as higher-than-expected labor costs in the first quarter of 2017 retreated back to more normal levels in the second quarter. During the second quarter, average occupancy in our Canadian lodges was 81% versus 72% in the prior quarter.

This was driven by higher occupancy in construction projects and shutdown/turnaround related work, and is also attributable to a decrease in the number of rentable rooms from approximately 8,900 rooms in the prior quarter to approximately 8,100 rooms this quarter. Our average daily rate in U.S.

dollars was $89 versus $97 in the first quarter, driven largely by the McClelland Lake Lodge contract renewal. We have seen continued softness in our mobile, open camp, and product revenues in Canada this quarter, but as Bradley mentioned, we have experienced recent wins for mobile camps that will benefit future quarters.

In Australia, during the second quarter we recorded revenues of $28.6 million, which were up approximately 6% relative to the first quarter. Adjusted EBITDA of $10.8 million was up roughly 2% when compared to our first quarter results.

Our performance in this segment was driven by increased occupancy due to an uptick in shorter term work in the mining sector. The average daily room rate for our Australian villages was down slightly to $80 in the second quarter versus $81 in the first quarter.

Village occupancy increased sequentially by 3% to 43% and our adjusted EBITDA margin in Australia was 38% versus 39% in the first quarter of 2017. Now moving to the U.S., revenues for the second quarter improved to $5.7 million versus $3.9 million in the first quarter.

The revenue increase was primarily attributable to strong performance in our West Permian and Killdeer lodges. We also saw improvement in our wellsite business as a result of increased drilling activity in the Bakken, Rockies and Texas markets. During the quarter, we recorded an adjusted EBITDA loss of $1.1 million in the U.S.

versus $1.3 million in the first quarter, primarily driven by top line improvement across the region. Now some comments on capital expenditures and our current liquidity position.

On a consolidated basis, we invested $2.2 million in CapEx in the second quarter, down 45% sequentially, primarily for routine maintenance purposes and improvements to our customer service levels.

We are lowering our capital expenditure guidance for the full year to be in a range of $12 million to $15 million, which excludes any expenditures for unannounced projects or uncommitted projects, the spending for which is contingent upon us obtaining customer contracts.

During the second quarter of 2017, we made $4 million in debt reduction payments. However, you will notice that our total debt outstanding at the end of the second quarter was $320.2 million, an increase of $3.7 million from the end of the first quarter. The increase was attributable to the Canadian dollar strengthening versus the U.S.

dollar toward the end of the quarter and therefore increasing our Canadian dollar denominated debt. As of June 30, we have $117.5 million of available capacity on our revolving credit facility, and total liquidity of approximately $144.8 million.

We are continuing to focus in generating free cash flow from the business, while reducing our debt through the remainder of 2017. I will now turn the call back over to Bradley, who will provide some closing comments and talk about our guidance.

Bradley?.

Thank you, Frank. So talking about our outlook for the balance of the year, starting with Canada, in Canada for the third quarter we expect modestly lower turnaround work, which will impact lodge occupancy and revenue, partially offset by strengthening Canadian dollar.

We are actively pursuing pipeline and additional turnaround work to bolster the third and fourth quarter outlook. For the third quarter, we are assuming a Canadian dollar exchange rate of 0.79 and we anticipate segment revenue of $57 million to $61 million and adjusted EBITDA of $13 million to $15 million for the third quarter of 2017.

These expectations are based on 8,000 rentable rooms. We expect lodge occupancy to be between 76% and 80%, with a room rate between C$115 and C$117 per night. We are raising our revenue guidance for the full year in Canada, primarily on the second quarter performance and the current outlook for the third quarter.

As we mentioned earlier, activity in the fourth quarter remains uncertain as we seek additional pipeline and winner activity to fill the lodges for the fourth quarter. For the full year in Canada, we are assuming a Canadian dollar exchange rate of 0.77 to the U.S.

dollar and we're guiding to revenue of $228 million to $232 million and we expect full-year adjusted EBITDA from Canada to be in the range of $48 million to $51 million. This assumes full year rentable rooms with 8,300 with large occupancy between 72% and 73% and a room rate of approximately C$120 per night for the full year of 2017.

Moving to Australia, the macro environment appears to be stabilizing. Met coal prices have been volatile this year, but appear to be settling in at levels that should be constructive to increased activity levels. With this volatility however, our customers continue to take a cautious approach to spending and therefore demand for accommodations.

As such, we are expecting incremental demand for rooms to be contracted on a shorter-term basis and we have included this demand in our outlook for the second half of 2017.

For the third quarter in Australia, we're assuming an Australian dollar exchange rate of 0.78 and we are guiding to segment revenues of 25 million to 27 million and adjusted EBITDA of $9 million to $10 million for the third quarter of 2017. These expectations are based on 8,800 rentable rooms.

We expect village occupancy to be between 43% and 45% with a room rate between AU$93 and AU$95 per night. For the full year in Australia, we're assuming an Australian dollar exchange rate of 0.77 to the U.S. dollar.

We anticipate revenue of 105 million to 108 million for the full year and we expect full-year adjusted EBITDA from the Australian segment to be in the range of $40 million to $42 million.

This assumes full year rentable rooms of 8,800 with village occupancy between 43% and 44% and at room rate of approximately AU$101 per night for the full year of 2017.

On a consolidated basis for the third quarter, we expect revenues to be in the range of $89 million and $95 million and adjusted EBITDA to be in the range of $16 million to $18.5 million.

For the full year, we are raising revenue guidance to be in the range of $354 million to $363 million and raising adjusted EBITDA guidance for the full year to a range of $61 million to $66 million.

To conclude, with the unprecedented downturn continuing to impact our industry, we remain focused on our core priorities of generating free cash flow, reducing debt, minimizing costs, and pursuing strategic growth opportunities. Since this downturn began, we've made significant improvements to our business, while strengthening our capital structure.

We are confident that Civeo is well-positioned to capitalize on additional opportunities as the market conditions improve. With that, that concludes our prepared comments and we'll begin the question-and-answer part of the call..

[Operator Instructions] We'll go to Blake Hancock with Howard Weil..

Bradley, maybe first, can we talk about the opportunity set here, specifically in Canada? We all kind of I guess are paying attention to kind of Trans Mountain first, and then Enbridge.

Can you maybe talk about your expectations there, timing, and I think their room count is kind of in maybe 4,000 or so combined, where are you positioned the best and just how to think about the next kind of 18 months on those projects?.

I'd be happy to. On both of those projects, both Trans Mountain and Line 3, our efforts to date have been working very closely with the customer on the opportunities as well as with our First Nations partners to position us as best we can as those opportunities hopefully go to a full RFP or request for proposal.

I expect that process will take the better part of the next 12 months to come to fruition, with the hope that they do come to a positive fruition and those projects move forward.

In rough numbers, I expect that those projects will be – and what we can win on that work, will be in the $30 million to $40 million each as projects, and we work very diligently, our sales team has worked tirelessly positioning us as well as our First Nations team as well as we can be should those projects move forward..

That's great. And then it seems like you've kind of highlighted the inorganic in like your prepared comments on growth. I know one of your peers has recently bought an owner-operated facility in Canada.

Is that kind of what we are looking for or are we looking to do more on just the catering and management itself? And maybe also if you could quantify the size of any sort of deal you might be, or opportunity you might be looking at?.

Sure. Our strategy on the inorganic side has really been two-pronged. One, we have a couple of slides in our Investor Presentation that highlight this.

Historically, in both of our core markets of Canada and Australia, the total volume of workforce accommodations has been split about 50-50 between the customers owning 50% of the capacity and then the third parties, with ourselves leading those markets, on about 50% of available rooms.

What we are trying to do is access that 50% that's customer-owned. We continue to believe that managing, owning and managing workforce accommodations is a non-core operation for our customers. Certainly this prolonged downturn has infused some creativity and new thought into how people approach the business.

That was the positive outcome that, as you mentioned, one of our competitors is managing some customer-owned camps. We expect or we hope that that trend will continue and we are focused on doing that for our customers. So that's prong one.

Prong two, as you mentioned, is looking at catering only, which is really akin to managing customer-owned camps at the end of the day, and we are pursuing several opportunities there. Most of them are going to be within our current end markets, either geographically or in the energy industry.

Order of magnitude, typically those are $20 million to $30 million revenue businesses. I think it's important to highlight that catering only business is a lower margin business, but it's completely capital light and the only capital deployed is working capital.

So while the margins will be lower than our historical lodge margins, the returns can be very attractive. And that's been the focus for the team for the better part of this year..

That's great. Thank you, guys. I'll turn it back..

We'll go next to Stephen Gengaro with Loop Capital..

Two questions on the guidance, I think the first just being, your 4Q expectations seem to suggest a decline if I'm using midpoint, is that just because of visibility at this point? I mean when you are sort of thinking about fourth quarter, I mean I know you're not guiding 4Q, but you kind of internally are..

No, we are. We knew the math would be done. So, it does imply a guidance that's lower for the fourth quarter, and you've hit on it, I would summarize it as follows. There will be some seasonality, particularly in December from the holiday season, typically customers will go home for the holidays and that means lower lodge occupancy.

We haven't seen it quite as much in Australia lately but it is possible. I think the second piece of it is, as we go into the fourth quarter, what are going to be the demand levels from McClelland Lake as our customer there is moving towards first oil. That's somewhat of an uncertainty.

And then lastly, in Canada, it is what's going to happen on the southern part of the play, which is specifically in our Anzac, Conklin and Mariana assets.

Those have historically had stronger revenue and earnings streams during the fourth quarter and first quarter and effectively winner work, whether that would be pipeline or SAGD drilling, and right now that's typically contracted much closer to the date of first occupancy. So, we do have a lower implied guidance for the fourth quarter.

We are looking forward to filling those lodges and hopefully be in a position as we go into the third quarter earnings call to update that and raise that..

Great, that's helpful color.

And then my second question just centers around this kind of ongoing activity in the oil sands for certain existing projects and kind of big movements and concerns about oil prices, and obviously a massive new project will take much higher prices, but any concerns about disruptions at certain crude price points or the operating cost such that you've obviously got front costs so high that they kind of operate through this volatility, was there any worry there?.

I think from an operational basis, there is not a worry. Their cash costs for ongoing operations are well below the prices that we currently see in the market. So, I think existing activity levels should be sustained with oil prices here or even modestly lower than here as the cash cost on a Canadian dollar basis are in the low to mid 20s.

Our customer base has been vigilant, as we have, in this downturn in managing costs lower, and so I do think there is a materially different cost basis in the oil sands region today than there was four years ago.

That coupled with a lower Canadian dollar exchange rate also helps our customers, similar to what we have seen in Australia where lower Australian dollar exchange rate coupled with reductions in the cost structure there have made met coal miners much more competitive in this environment than they were four years ago..

Okay, great. Thank you..

We'll go next to Mike Malouf with Craig-Hallum Capital Group..

Can I get just a little bit more color on Australia? As we look at the price, obviously been volatile for the last nine months but it has stayed above that sort of $150 for about nine months now after breaking through that in 2016, and I'm just wondering, I know that the short-term work seems to be increasing, what kind of recent indications are you seeing with regards to strength there, and as you look into 2018, can you give us at least any kind of feeling on how that's going to shape out?.

Sure. The met coal prices have stayed above 150. The spot price is now closer to 178 per ton, and that's in U.S. dollars. I would say that our Bowen Basin customers had a cost basis, operating cost basis fully loaded for royalties and transportation in the $50 to $60 per ton range.

Obviously it depends on the mine, the quality of mine, and customer to customer, but that's a lot of cash flow between $178 price and our costs that are in $50 to $60 range. So it has been constructive to activity levels throughout really starting in the fourth quarter of 2016 as met coal prices started to recover.

We have seen an increase in activity levels as customers are getting back to doing maintenance work that had been deferred for some time as they tried to manage through that downturn themselves.

If you look at what met coal prices have done going from 90 to 300 in the fourth quarter of last year, back down to 140, then back up to 300, now as you mentioned settling in the $150 to $175 range, if you will, it is needless to say, been a quite volatile period.

Customers are getting back to work, but with that kind of volatility, it's hard to blame them for taking a cautious approach to really committing to additional projects. Now we did see one of our customers commit to a $200 million expansion of a conveyor system.

That has been conducive to higher occupancy for the regions around Dysart and Moranbah and has helped us as well.

But I would say that right now it's hard to have a lot of conviction really commentable on materially higher occupancy levels because what we're seeing is we'll pick up an extra 50 or 100 rooms for a month or two as a customer works on a specific either enhancement project or maintenance project, and that's been good and it typically is at higher rates, but not enough where we can really say we're getting extra 400 rooms for the next two or three years.

It's just not what we're seeing in the market right now..

And with the prices stayed above this level or sort of flat with this level through the end of the year, would you be surprised if you didn't see those sort of larger room demand coming through by the end of the year?.

I don't know if I would be surprised if it didn't happen, I would think that as we move through to the end of the year, and particularly as our customers go through similar budgeting process that we will go through, we'll certainly have more visibility.

The good news is that our customers are effectively producing at all-out rates or nameplate production levels after the cyclone. So for them to raise production, they will need to put more money to work, and for us putting more money into work typically means putting more people on the ground, which hopefully they can be staying with us..

Got it.

And then just one other question, can you talk a little bit about plans or strategy around the debt and if there's been any change around or any progress around that?.

I think as we sit here looking at it today, our credit agreement comes to – expires in May of 2019. Our current activity has been generating free cash flow, making debt payments as we move along. We have opened up our discussions with our lead bank as to what the new credit agreement will look like, and so that process is kicking off.

More to talk about it later as we kind of move through the process, but clearly it's on top of my radar screen now as we kind of move forward through the rest of 2017..

Great, thanks a lot for the help, appreciate it..

We'll go to Ben Owens with RBC Capital Markets..

So on the four contracts you announced in Canada for the pipeline, I'm just curious, what's the implied room count for those awards, and also how much of that revenue do you think you've recognized in 2017 and how much do you think goes into 2018?.

So across the four contracts, I would say it's a little bit above 750 total rooms.

Again, just so everyone is clear, the aggregate contract value we gave in Canadian dollars, that was C$20 million of estimated total contract value, and I expect somewhere around C$8 million will fall into the second half of 2017, so another C$12 million again going into 2018..

Okay, great, that's helpful. And then speaking about Canada, one of your important customers up there, Suncor, early this week I think they announced that they were going to increase their CapEx budget for this year, and part of that was some accelerated spend on Fort Hills.

Just curious on what's your read on the potential pull-through impact for lodge occupancy for you guys in that region and is there any opportunity to pick up some additional work in the fourth quarter relative to what's in forecast?.

We have baked that in. Obviously we are very close to that project and that customer. They have effectively 100% of the occupancy at McClelland and we have been also surveying overflow needs at our Beaver River/Athabasca complex. So, we have been experiencing that here in the middle part of the year. We expect that to continue into the third quarter.

And as I referenced earlier, that is part of the unknown in the fourth quarter, is they are pushing towards first oil and we are here to support them. It is unclear right now what their needs will be. We know that there will be needs in the fourth quarter, but we've baked in some conservatism as it relates to that in the fourth quarter..

Okay, that makes sense. And then last question for me, on the U.S. business, is breakeven EBITDA still the target kind of by year-end, and in order to hit that, would you need a material move higher in the U.S.

rig count?.

It is still the goal. We are lagging a little bit on our expectations, implying our guidance is about $1 million loss in the third quarter and then less than that in the fourth quarter, but not getting to our target of breakeven.

Now, we have some projects that we are currently bidding on, on the offshore side, fabrication projects that could help us get closer.

I don't know right now, depending on how those projects – the shipping dates for those projects, whether or not we'll be able to get completely to breakeven in the fourth quarter, but I really do think that the team is capturing work, and getting these projects, it would be positive and will get us I think fairly close to breakeven in the fourth quarter.

We were pleased to open yards in the Permian and the Mid-Con to provide our wellsite units. Those operations are ticking up. Obviously those two markets make up I think about 50% of the U.S.

rig count, and that's something that we are moving existing assets out of the Bakken, the Rockies, and that's contributed to increased cost in the short term, but we'll benefit as we kind of move to the back half of 2017 and into 2018..

Correct. So I think when we put some pieces in place to start moving in that direction, as Frank mentioned, we have some startup costs for those two markets, but as we start to garner more work there, we should be moving in the right direction. Occupancy of the existing two open lodges has been very good.

We added 40 beds to West Permian Lodge in the second quarter. I wanted to come out and visit, and our Head of U.S. Operations said, we'll have to get you a hotel room because we've got no rooms at West Permian for you. So, those are moving in the right directions.

Pricing in the Permian is better than what we are seeing in our other markets, but not back to where – obviously back to where it was, but it is moving in a positive direction. So I think we've got the pieces in place.

Unfortunately it's taken a little bit longer than we anticipated and with some startup costs in the two new markets, I don't know that we'll completely get there by the fourth quarter, but we could, we're going to get close..

How much did you spend on startup cost and relocation in the second quarter?.

In the order of magnitude of $150,000..

Okay, great. That's it for me. I'll hand it back. Thanks guys..

And with no additional questions, I'd like to turn the call back to Bradley Dodson for any additional or closing comments..

Thank you. Thank you all for joining us on the second quarter conference call. We appreciate the interest in following Civeo and we look forward to speaking to you on the third quarter call and hopefully with further good news. And that ends our conference..

Thank you, sir. Again, it does conclude the call for today. We do appreciate your participation. You may disconnect at this time..