Regan Nielsen - Manager, Corporate Development and IR Bradley Dodson - President & CEO Frank Steininger - SVP & CFO.

Blake Hancock - Howard Weil Stephen Gengaro - Loop Capital Benjamin Owens - RBC Capital Markets Eric Stine - Craig Hallum Capital Group.

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

Thank you and welcome to Civeo's fourth quarter and full year 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 our proxy related to the pending Noralta acquisition and other SEC filings. I will now turn the call over to Bradley..

Thank you, Regan, and thank you all for joining us on the Civeo fourth quarter earnings call. I'll begin with an overview of the fourth quarter performance before turning to our regional market highlights. Frank will follow my remarks with a detailed financial review of each segment and provide an update on the pending Noralta Lodge acquisition.

I'll close the call with first quarter guidance and a brief strategic overview, before we turn the call over for questions. During the fourth quarter, we reported revenues of $101.3 million, which is above our expectations and adjusted EBITDA of $13.3 million in line with our expectations.

The company generated $11.3 million of operating cash flow and $8.4 million of free cash flow and made debt repayments of $29 million in the fourth quarter, allowing us to continuously improve our balance sheet. Overall, in the fourth quarter, we continue to execute operationally in a difficult macroeconomic environment, while pursuing our strategy.

In late November, the company announced a definitive agreement to acquire Noralta Lodge, a premier accommodations provider in the Canadian oil sands region. This transaction will accelerate our strategic priorities to service customer-owned accommodation facilities while enhancing our quality and scope of our service offerings.

It will also generate operating cash flow and strengthen our pro forma balance sheet and lastly, allow us to enhance our work force solutions portfolio to support our customers over the life of their projects in the Canadian oil sands. We're excited about this combination, which is expected to close in the second quarter of 2018.

Frank will provide some additional color on the transaction and offer some updates on key milestones later in the call. Turning to our fourth quarter results, in our Canadian segment, revenues were essentially flat sequentially as pricing and occupancy remained stable.

On a year-over-year basis, occupancy climbed sharply as the Fort Hills project activity and other maintenance-related projects continued throughout the quarter. The resurgence in occupancy over the last 12 to 24 months in oil sands dovetails with our strategy to support our customers across the full lifecycle of their projects.

The Noralta transaction acquisition will further enhance our ability to execute on the strategic priority to serve all customer needs at our facilities and at theirs. During the fourth quarter, U.S. crude oil prices moved above $50 per barrel for the first time since mid-2015.

Higher occupancy in our Permian camps increased fabrication activity in our offshore business and limited disruptions from holiday-related downtime, our U.S. segment recognized fourth quarter revenue of $9.7 million an increase of 285% year-over-year and 50% sequentially. As our U.S.

upstream customers reset their annual budgets in over $60 a barrel environment, we anticipate improved business conditions for our strategically positioned facilities in the Permian, MidCon, Rockies and Bakken.

The prospects for strong drilling activity in the Permian appear particularly encouraging and we continue to mobilize additional assets into the region during the fourth quarter. As the year progresses, we remain focused on our operational quality and increasing our wellsite market share and EBITDA improvement for this segment.

In our Australian segment, met coal prices remained above $200 a ton and towards the end of 2017 and going into this year, hopefully setting a stage for an active 2018.

Our major customers in the region continue to generate strong free cash flow and should have the flexibility to outdate additional capital to latent capacity and expansion projects if prices remain at or near the levels.

With Chinese steel mills restocking early in the year, producers should benefit from continued strong demand at the start of the year. Thus far this has translated into increased maintenance and enhancement activity by our customers and for us and related occupancy activity.

From a macro perspective, we continued -- the continued improvement in the product price environment is an encouraging indication that our primary end markets are gradually emerging from one of the worst if not the worst downturn we've seen.

And while we continue to be opportunistically presenting both organic and inorganic growth opportunities to generate strong free cash flow, we remain committed to our core strategy of expanding our services and reach in our markets and taking our core competency of taking care of people, to other verticals and geographic markets.

Working safely and efficiently, delivering unmatched service, generating free cash flow, improving the balance sheet and driving strong operational performance across all segments will continue to remain our strategic priorities. With that, I'll turn it over to Frank for a detailed review of our financial performance..

Thank you, Bradley and good morning, everyone. I will start with a review of the fourth quarter results before moving to full-year 2017 financial performance. Today, we reported total revenues of $101.3 million with a net loss on a GAAP basis of $47.6 million or $0.36 per diluted share.

During the fourth quarter of 2017, the company generated adjusted EBITDA of $13.3 million, operating cash flow of $11.3 million and free cash flow of $8.4 million. I will begin with a review of our Canadian segment performance on a quarter-over-quarter basis.

Revenues from our Canadian segment were $63.6 million, down slightly from the $63.8 million in the third quarter of this year. Revenues for the quarter were impacted by modest decreases in average daily rates, partially offset by an increase in Lodge occupancy.

Adjusted EBITDA in this segment was $11.4 million, down sequentially from $15.6 million driven by startup costs for a new mobile camp project and inventory write-down related to our held for sale Canadian manufacturing plant, the Sitka contract rolling off and seasonal occupancy decrease at our McClelland Lake Lodge.

During the fourth quarter, average occupancy in the Canadian lodges was 79%, down 2% sequentially, but continue to benefit from ongoing construction projects and turnaround-related work in Canada. Our average daily rate for the Canadian segment in U.S.

dollars was $90 versus $92 in the third quarter as continued short-term high rate room demand was offset primarily by lower rates at our Southern Oil Sands lodges. Turning to Australia, during the fourth quarter we recorded revenues of $28.1 million up slightly from $27.5 million in the third quarter.

Adjusted EBITDA up $10.3 million increased sequentially from $9.7 million. We are encouraged by our performance in the Australian segment and have seen some positive macro tailwinds, this should help drive the segment forward in 2018, including the stabilization of met coal prices.

We were pleased to deliver strong results up sequentially, despite expected financial impacts associated with the holiday season. The average daily room rate for our Australian villages fell to $79 in the fourth quarter compared with $81 in the third quarter.

Village occupancy increased 2% in the quarter to 44% and our adjusted EBITDA margin in Australia expanded approximately 200 basis points to 37%. Now moving to the U.S., revenues for the fourth quarter increased $3.6 million sequentially to $9.7 million. The revenue increase was driven by increased fabrication activity in our offshore business.

During the quarter, we recorded an adjusted EBITDA loss of $1.2 million in the U.S. versus $1.9 million in the third quarter, primarily driven by improvement in wellsite utilization and increased revenue as a result of the increased offshore activity.

For the full year ended December 31, 2017, the company reported revenues of $382.3 million, a net loss of $105.7 million or $0.82 per share, as well $56.8 million in operating cash flow, $47.5 million in free cash flow and $63.2 million in adjusted EBITDA.

These results compared to full-year 2016 results with reported revenue of $397.2 million, a net loss of $96.4 million or $0.90 per share during the prior period -- prior year period, the company generated $62.2 million in operating cash flow, $48.2 million in free cash flow and $86.7 million in adjusted EBITDA.

Now I will comment on capital expenditures and our current liquidity position, during the fourth quarter, we invested $3.2 million up $2 million sequentially. The increase was primarily driven by maintenance-related capital expenditures and investments in various growth opportunities.

In the fourth quarter of 2017, we made $29 million in debt reduction payments for a total of $81 million in total debt repayments for the year. Total debt was $298 million at the end -- at December 31, 2017 down from $357 million at the end of 2016 and that includes an increase of $21 million from foreign exchange adjustments.

As of December 31, 2017, we had $107.4 million of available capacity on our revolving credit facility and cash on hand of $32.6 million for total liquidity of approximately $140 million.

Heading into 2018, we remain focused on generating free cash flow and de-levering our balance sheet while continuing to provide best-in-class service quality for our customers. Turning now -- before turning the call back to Bradley, I'd like to take a moment to comment on the recently announced acquisition of Noralta Lodge.

We continue to focus on three major transaction-related work streams as we push forward to the closing of the transaction in the second quarter of 2018. First, as previously announced, we have obtained the required Canadian regulatory approvals to move forward with the transaction.

The second major milestone towards completing this transaction is the shareholder vote and meeting, which we have scheduled for March 28, 2018. Lastly, we are currently working with our bank group to put into place an extension to our current credit facility that will become effective when we close the Noralta transaction.

All of this is underway -- as all of this is underway, we have begun integration planning such that we are ready to hit the ground running upon closing of the transaction.

As discussed on the announcement of the acquisition call, we expect to be able to generate annual synergies of CAD10 million by 2019 and have begun the process of identifying these synergies and laying our plans to share best practices across the new combined enhanced company.

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. I'll now outline our guidance for the first quarter of 2018 and our outlook for the business. I'd like to note that below guidance does not include the impact of the acquisition of Noralta. We are pleased to announce the extension of the Fort Hills, McClelland Lake Lodge contract through the end of 2018.

As we begin the year, we expect comparable margins to the fourth quarter, resulting from lower rates on the extended contract at McClelland Lake and lower margin catering the mobile camp work.

However, we expect the first quarter -- late first quarter to benefit from the turnaround work at it starts to ramp up for the second quarter and this relates to Canada. So, for the first half of 2018, looks to have to see some activity improvement.

In fact, we expect our Canadian segment should see some quarterly sequential improvement for each quarter of 2018 seeing an improvement in mobile camp work in the second half of 2018.

For the first quarter, we're assuming our Canadian dollar exchange rate of 0.8 and we anticipate segment revenue of $63 million to $65 million and adjusted EBITDA of $9.5 million to $10.5 million for the first quarter of 2018.

These expectations are based on 8600 rentable rooms and we expect lodge occupancy to be between 72% and 74% with an average room rate of approximately in Canadian dollars $113 per night. Moving to Australia, the macroeconomic environment continues to provide justification for cautious optimism.

Although met coal prices currently reside above $200 a ton, customer capital spending cautious to be cautious as they assess the global supply demand balance, the sustainability of the robust Chinese demand and a seasonal impact with steel production restrictions in China.

As such, the outlook for incremental room demand remains relatively opaque and we continue to operate under the assumption that rooms will be contracted on a short-term basis.

As a result, for the first quarter of 2018, we're assuming an Australian dollar exchange rate of 0.79 and we're guiding to segment revenue of $30 million to $32 million that's in US dollars and adjusted EBITDA of $10 million to $11 million for the first quarter of 2018.

These expectations are based on 8800 rentable rooms and Lodge occupancy between 44% and 46% with a room rate of approximately in Australian dollars AUD109 per night. On a consolidated basis for the first quarter, we expect revenue to be in the range of $100 million to $105 million and adjusted EBITDA in the range between $11 million and $13 million.

For the full year of 2018, we expect standalone again without the Noralta transaction, adjusted EBITDA to be flat to up compared with the full-year results of 2017. We will be in a position to share a more fully detailed full-year outlook for 2018 upon the closing of the Noralta transaction.

2017 was a critical year and a critical transition for Civeo.

We made substantial progress in our effort to de risk the balance sheet, enhance and expand the scope of our service offerings, pursue growth opportunities and position the business for sustainable success in 2018 and beyond, with commodity prices observing signs of sustained recovery, we're excited about the prospects of implementing our strategy in a more constructive customer spending environment.

With that, I'll turn the call back to Savannah and ask for the question-and-answer session to begin..

Thank you. [Operator instructions] And we will take our first question from Blake Hancock from Howard Weil. Please go ahead..

Thanks. Good morning, guys..

Good morning, Blake..

Bradley, can we start on the Canadian segment and maybe two parts here, A, kind of talk about the turnaround work and make sure I understood correctly the revenue progression throughout 2018 is up sequentially? Can you also maybe talk about so the turnaround work and how that feed into maybe in a margin improvement over the course of the year or how we should be thinking about that?.

Sure. Well as you know, like the turnaround work in Canada, which is maintenance work that's typically done annually by the oil sands operators, the critical time to do that is the summer months. We currently have what looks to be a very strong turnaround activity particularly in the second quarter and going into the third quarter.

So, for right now as you think that the revenue progression for Canada will be strongest in the second quarter before we start to see it a even stronger fourth quarter and third quarter right now because it's a little unclear how much of the turnaround work will bleed into the third quarter.

It's a little bit opaque, but overall, expect a positive progression of EBITDA and EBITDA margins for the Canadian segment throughout the year.

As we noted on the call, I think the real question mark is on the mobile camp side of things and how that progresses in terms of right now looks like the second half is going to be relatively strong but is uncontracted. So, we're optimistic but we still need to get that work awarded..

That's great. Thank you.

And then hate to kind of jump ahead but Noralta is around the corner here closing, it's going to be beneficial on nearly doubling EBITDA here, but are we done with the M&A side, is there more you want to do, are there other aspects from the catering or something like that or you'd like to be bigger?.

There is and the Noralta transaction we believe is quite transformational in terms of what we can offer the customer. The combined portfolio of locations of Noralta and Civeo is such that now we can serve all of our customer's needs. It also fills the strategic direction of continuing to service more of the customer-owned rooms as Noralta does that.

We also do it for one of our major customers, but really demonstrating to the oil sands customers that the accommodations piece of what they needed to do every day is something that is easily outsourced to people who -- frankly, it's our core competency, it's what we do. We take care of people.

We make sure we're doing it safely, that the food is safe and the bed is clean and the people are well rested. So, if we continue to demonstrate that, we think that there's an organic way to build off of the Noralta transaction and serving our customers.

Then outside of that, we are trying to expand our catering work, not only within our current verticals, but outside of our current verticals. As we've mentioned on previous calls organically we've had some success in serving some educational institutions in Canada.

We're also catering as I mentioned a major oil sands operators location and we just won a contract to do it in Australia as well for a mining company. So, we're making progress there and we're looking for an acquisition or two to expand into that area.

We know we can do the operations and think that we -- what an acquisition would provide us is the resume and the customer base that's already built and non-energy verticals to take care of things like educational facilities, hospitals, retirement homes, industrial facilities, nonenergy industrial facilities, but at the end of the day, it's the same thing that we do for our customers in our current market.

So, we are pursuing that..

That's great.

And Frank, I am squeeze in one for you here if I missed it, I apologize, can you give us an idea of 2018 CapEx for you guys as a standalone and what sort of I guess maybe just for 1Q what we should be thinking for like an SG&A run rate?.

Well, I think from our standpoint, we've budgeted approximately between what have we put in the….

$15 million to $20 million..

Our budget is about between $15 million to $20 million on a standalone basis for 2018 without Noralta right, on a standalone basis. So, from our standpoint. I think that most of that again is probably maintenance CapEx related. So, we feel comfortable with that rate. We finished the year just over $11 million in CapEx for the year..

I think that versus 2017, there are some tentative growth projects in our CapEx number. I do think the maintenance number in that kind of $10 million to $15 million number is a good number.

That's not changing year-over-year, but we have put into the budget on a standalone basis some speculative growth projects that again as those of you who follow us for a long time know what will be contingent on getting customer commitment to support that investment..

And then I think on your SG&A question about $50 million a quarter..

Perfect. Thank you, guys..

That's consolidated..

And we'll take our next question from Stephen Gengaro from Loop Capital..

Thanks. Good morning, guys.

Couple of things, but just to follow-up on just briefly, it sounds like you said EBITDA margin progression throughout the year in Canada with the second quarter revenue being higher than third before the fourth quarter rises from there as based on what you see now, is that what you said or am I reading into that?.

No, that's right, Stephen. I do think that margin should generally have an upper trend throughout the year. Right now, as we look at the third quarter and we're talking about specifically Canada, we don't have -- we have optimism, but not enough to really put it in the forecast yet for the third quarter.

So, I think third quarter will be fine, but I do think second quarter will be a sequential improvement over the first and then right now I think the fourth quarter will be better than the second..

Okay. Okay. The margins that you guided to in the first quarter and Canada are on the low side of where would've expected. I know that there are some noise in the fourth quarter that maybe just contributing to that a bit.

I think you said that, but then it seems like based on the turnaround work and the confidence in the second quarter, the second quarter should be a pretty big ramp, is that fair?.

I think the second quarter will ramp. I think right now quite frankly what we need to focus on and are focused on is making sure we can ramp up for the second quarter efficiently. So, I do think, the second quarter will be improved and now then the onus is on us to really make sure we do it efficiently. So, we can enjoy as much margin as possible..

Okay And then you mentioned the Fort Hills contract extension, Is that for all of the phone rooms today? And then there has been a lot of talk and I don't it's coming directly on what's going on with the customer, but there is a lot talk about delays and its start up on crude.

Is that for -- close to the full occupancy that you had or is that a different extension?.

It will be for the full facility. It will continue to be dedicated to the Fort Hills project..

Thank you. And then just one final for me and I'll get back in line, is the U.S. profitability you talked a little bit about it on the prepared remarks, as we think about the U.S.

EBITDA margin potential, could we see that number deal back to breakeven in the course of 2018?.

We do.

The team I think has done a very good job of managing the costs and what we saw and we didn't hit where we wanted to be last year, but that was quite frankly strategic and that we did move a fair amount of units down from the Bakken to Rockies into the MidCon, and what we call our wellsite units into the MidCon and the Permian and those moving costs run through as expense to the P&L.

But we're starting to see good utilization of the wellsite units improving utilization of the wellsite units sequentially and we're seeing good occupancy levels both at the Pecos open camp as well as Killdeer open camp.

Our offshore business had a good backlog build in terms of fabrication work and that we're cautiously optimistic as relates to improved rental work offshore. So that a long-awaited way that I actually I've just said, we do expect to be positive EBITDA for the year in the U.S. Stephen, but that's the color around it..

All right.

Great, and just very quick and I forgot to ask Frank, the DNA dropped in the quarter, is that $29 million-$30 million good rate for 1Q?.

Let me just see, yes, yes..

Great. Thank you..

And our next question comes from Benjamin Owens with RBC..

Hey. Good morning, guys..

Good morning, Ben..

So, I know you haven't given specific revenue or EBITDA guidance for full year 2018, but based on the dictation that EBITDA is going to be flat to up for the full year, I was curious if you could provide how much of the revenue that drives that flat to up expectation, is currently under contract?.

Well Frank is getting the specifics, I would say that right now if we look at it, that a good contract position in Canada between the Imperial Kearl contract, the Fort Hills contract at McClelland, the second quarter we feel good in terms of contracted revenues.

First, I think, contracted revenues at Beaver River/Athabasca, the contracted levels in Australia I would say are in good place and as we talked about in the prepared comments, what we are seeing in Australia is a fair amount of turnaround work, maintenance work, things that quite frankly had been deferred during the downturn and we're starting to see a pickup shorter-term work.

So, I do expect and I think this is a fairly consistent theme from prior calls, we are getting a good base level of contracted work, but generally speaking particularly in Australia, our customers are actually having their occupancy well above the base level of contracted work.

So, they're exceeding their minimums, more succinctly said and so we expect that to continue.

What we're optimistic about particularly later in the year as we start to see some major we call them enhancement projects or more capital expenditures starting to move forward in Australia where we could see something meaningful in terms of occupancy increases as we go into 2019.

And then lastly, something that we haven't talked about, we continue to focus in on the British Columbia LNG opportunity. We have our Sitka location. It's well positioned to serve the LNG Canada project and we continue to pursue and look forward hopefully to a positive FID on that..

One second, I'll give you some percentage, sorry Ben..

Yeah sure thing. And just follow-up to that, oh go ahead Frank..

So, from a Canadian standpoint talking about 57% between 55% to 60% of our revenue is contracted. And then in Australia you're about between about 40% to 45%, which is consistent year-on-year basically..

And I might actually take the opportunity to comment a little bit on that, again as we look to expand our catering-only work, I wouldn't consider -- we will consider that to be contracted, we will have a contract in place with operators for instance we're caring a 400-room location and managing the facility.

In the oil Sands region, we do expect that to generate about $5 million to $7 million of revenues a year and it is contracted, but I wouldn't fall into that contracted fees. In addition, catering-only is a very profitable business, however at lower margins.

No capital is deployed, but typically those are going to be 5% to 8% margins that's going to impact the overall margin profile of the company and as we grow that business, we'll certainly highlight that, so that people can recognize here is the capital intensive piece, the lodges in villages, U.S.

business, it has a certain margin profile and then certainly, the catering-only work will have a different profile, but again very different capital profile as well. Frank anything you want to….

Okay. That's great. That's really helpful. That answers my question. Just last one for me, just to follow-up on Stephen's question on the U.S. you have talked about move cost impacting profitability in the fourth quarter I think the third quarter too.

Could you guys give us the actual cost for new cost and low cost in the fourth quarter?.

Fourth quarter is about $1 million. About a $1 million in the fourth quarter..

Okay. Great. All right, thanks guys. I'll turn it back..

And we'll take our next question from Mike Malouf from Craig-Hallum Capital Group. Please go ahead..

Hi guys, this is Eric on for Mike. Thanks for taking my questions. So, I understand that there's some opaqueness in Australia, but given the rebound in U.S.

EBITDA that you mentioned and some of the sequential improvement in Canada, can you talk to how much of your flat-to-slightly up EBITDA guidance, how much Australia impacts there?.

I think Australia will be -- I think we would like to get just the first quarter is called for just specific full year guidance. In terms of Australia, it should be up 10% to 15% year-over-year..

Okay. Awesome.

And then could you also just talk some about how you are looking at debt throughout 2018 and maybe some of your plans there regarding any refinancing?.

Yeah sure.

Just to be clear, as we kind of get through the Noralta transaction, under our current credit agreement, we can fund the cash portion of the consideration related to the Noralta acquisition, just under our current credit agreement, but what we've decided, what we've been working on is basically as you know our credit agreement expires in May of 2019.

So, we've been working with our bank group to basically get work through an extension of that current termination or expiration date for about from anywhere from 12 to 18 months. So that's the current plan. That's the current discussions we're having with our banking group.

So that would give us some time, some runway to basically then look at other opportunities to term out some of our longer -- some of our debt in let's say maybe some high-yield bond type offering or some other type of transaction.

So, I think right now as you can see and as we will continue to do in 2018, we will generate free cash flow and continue to pay down our debt balances, but I think the first step that we're working through right now is to get the extension and then from there, we'll look at other opportunities to term out a portion of our debt balance..

Okay. Great. Thank you..

And we'll take a follow-up from Stephen Gengaro from Loop Capital..

Thanks.

Just quickly, when we think about the activity you're seeing in Australia, I know you mentioned on the call and obviously the macro is positive, have you seen customers react yet as far as the potential for expansions of existing production etcetera or is it all still sort of turnaround maintenance related and hopefully this expectation based on fundamentals and strong cash flow they may be ramp work a bit, have you seen any or positive signs or is it still sort of on the come?.

It's been positive for sure and in case that it has been positive, it is positive, but again to your question, it's more on the maintenance side of things where we'll get some turnaround work, some maintenance work in Australia that might last 30, 60, 90 days, which is very helpful in terms of obviously generating revenues and positive EBITDA there.

But they haven't yet cut loose with anything major in terms of either reopening a previously mothballed mine or looking for material expansion projects.

We saw one last year, which we, I can't remember which earnings call it was on, I think first or second quarter, when we saw one of our major customers do a modest expansion of one of their locations that did help Moranbah and Dysart last year, but that wasn't a multibillion-dollar extension I believe, that order of magnitude was this couple $100 million if I remember correctly.

So, there are projects on the horizon. Where we stand today I think the likely, I think the desired outcome would be we hear something positive in terms of the green light to move forward but likely it won't have a material impact on occupancy until late in this year, going into next year..

Okay. Great. Thank you, guys..

Thank you, Stephen..

And with no further questions, I would like to turn the call back to Bradley for closing comments..

Well, thank you all. I appreciate you joining us on the call today.

Finishing off the year in line with what 2017, in line with what we're expecting and look forward to an improving environment in 2018 and we are incredibly excited about the opportunity to close the Noralta transaction and what that means for both in terms of our Canadian operations as well as financially for our shareholders and then as one of questions mentioned, move forward to not stop there, but look at both organic and inorganic ways to continue to grow the business.

Thank you, all..

And this concludes today's conference. Thank you for your participation and you may now disconnect..