My original thesis on CVEO stock was pretty simple:
- This is a business that has been impacted both by a commodity downturn and COVID (hit occupancy).
- With where things are, I think their earnings should improve over time
- I also think the US will likely improve as we still are underinvesting back in O&G and E&Ps are only disciplined for so long…. but that’s just upside
- I think where commodity prices are at this point will also mean producers will eventually be willing to commit to new projects and that will drive demand for CVEO’s lodging and hospitality services.
- CVEO’s balance sheet is in great shape, limited BK risk, and generating solid FCF
However! You don’t need to bank on much. You just need to think things won’t get too worse given the company generates good FCF. And there was evidence things would at least level out.
I was pleased to see CVEO report Q2’21 EBITDA in-line with estimates ($32MM), generated good FCF again (~$14MM) which all went to pay down debt. The company is 2.0x levered now.
How are things moving from a trajectory standpoint? Sorry I’m ripping a bunch of comments from the call:
We are encouraged by the decline in COVID-19 cases in Canada and hope this trend allows our customers to continue to normalized operations.
The British Columbia health order, which temporarily limited occupancy at all industrial projects in the province, including our Sitka lodge, was lifted late in the second quarter. Now that, that order has been lifted, we have seen an uplift in occupancy as our customer works to catch up on their project time line. These expectations are in line with the EBITDA guidance that we are maintaining from the last quarter. Yes, we’ve seen much better turnaround activity.
Second quarter was in line with expectations despite the fact that we had one customer push some of their activity from Q2 to Q3. But it appears that that activity will come through. But turnaround activity in Canada is clearly much improved year-over-year.
For the full year, we’re still expecting Canadian billed rooms to be approximately 2.3 million billed rooms, a little over that compared to 2.1 million billed rooms last year. That improvement is both operational as well as better turnaround activity over year. Going into the third quarter, we’ve seen better occupancy for most of the second quarter, we averaged about 5,000 Canadian guests a day, and now we’re averaging a little bit over 6,000. So things are improving, but certainly not to where we were pre-pandemic.
In Australia, we anticipate that the prolonged travel restrictions related to the COVID-19 pandemic will continue to pressure our performance in the region with increased labor costs anticipated to be a factor that we can continue to — that will continue to impact our margins.
The outlook for metallurgical coal markets in Australia for 2021 has continued to be impacted by the Chinese trade policy. So increased interest in Australian met coal outside of China has built some of the negative impacts.
Ok so Australia still has a lot of caution… however, if China wants to help dampen commodity prices, like it is trying to do, then they probably want to end a silly trade dispute.
We expect a supportive commodity price environment to remain for the rest of the year with met coal currently trading above $200 per ton. The met coal prices are at much healthier levels than we had last provided revenue and EBITDA guidance.
We have chosen not to increase our expectations for the back half of the year for the Australian segment. Our customers continue to be hesitant to increase activity in light of the lingering China-Australia trade dispute.
Our current guidance does not assume a material improvement or degradation in the Australian-Chinese trade dispute, nor does it assume a material improvement or degradation in labor costs.
Importantly, they increased the FCF guide again… now $68MM at mid-point. So even though shares have moved up, we’re still talking about a 22% FCF yield on CVEO stock.
I kind of hate it when people say, “look I get the pitch, but what is the catalyst??”
You can imagine a scenario where the company has basically no debt and if the FCF yield is still this high… well, companies have a way of solving that problem. That is the catalyst.
Here’s what they said on the call about a buyback – quite a change in tune from just all debt reduction commentary:
Stephen Michael Ferazani Sidoti & Company, LLC – Research Analyst
Great. Great. If I could just get one more in. You noted lower CapEx now expected. You’re down to 2x leverage, sounds like reasonable free cash flow this year. Any other thoughts on uses of cash given that leverage is probably down to an area you’re comfortable with?
Bradley J. Dodson Civeo Corporation – CEO, President & Director
It’s getting there. I think for our business, our target is to get to 1.5x levered. That being said, to your point, capital allocation decisions, have a little bit more freedom now and we will be assessing whether or not a share repurchase program is prudent, but that is on the to-do list for Q3.
I just really like the right tail on CVEO stock… I certainly make no bets on where commodities will go. But I am at least aware of where they are and where we likely are in the cycle (we’ve had a good 5 years of a downturn, now things have turned up). The stock is a 22% yield on pretty conservative numbers with the US also not contributing at all.
Lastly, you’ll recall part of the thesis was about a “forced seller.” I felt like his indiscriminate selling was pushing the stock down despite positive trajectory in the business. Isn’t it funny how his last reported sale was April 9th and now CVEO stock is moving higher?