This housing provider is expected to grow at a rate of 45.5% next year.
Civeo Corporation (CVEO)
From The Turnaround Letter
Civeo Corporation (CVEO) builds, owns and operates housing for energy and mining workers in locations too remote for conventional accommodations. The company was spun off from Oil States International in May 2014. Civeo currently owns 30 lodges and villages comprising nearly 32,000 rooms. About 64% of revenues are generated in Canada near oil sands and LNG projects. Another 26% comes from locations near metallurgical coal mines in Australia, with the remaining 10% sourced from the United States. Its customers are generally major multi-national companies that provide strong contracts that reduce Civeo’s risks.
Investors have been quick to penalize Civeo ever since its highly disappointing IPO in 2014 at the peak of oil prices. The shares fell 82% that year after posting sharply declining results, exacerbated by management’s controversial decision to not convert into a real estate investment trust (REIT). Improved profits, Civeo’s sensible Noralta and Lake Charles acquisitions earlier in 2018 and some flexibility from its lenders drove a sharp rebound earlier this year leading to our sell recommendation. However, the recent drop in oil prices along with some operating issues and highly risk-averse investor sentiment (probably coupled with year-end tax-loss selling) have pushed CVEO shares down (again) to near-record lows.
While weak oil prices do not help Civeo’s outlook, its business is more durable than it might appear. Many of its customers have made long-term commitments to large-scale projects for extracting hydrocarbons and minerals. These projects are less-sensitive to short-term commodity price volatility. Civeo’s Canadian operations serve massive oil sands facilities along with natural gas-related pipelines and export facilities. Conditions in Australia are improving as prices for metallurgical coal stay close to $200/ton. Even in the U.S. where oil production can be turned off more quickly, the company has relocated much of its mobile accommodations fleet to the more attractive Permian and Mid-Continental regions.
Civeo is well-positioned to benefit from a recovery in oil prices as well as stability in natural gas and coal prices. With many of its costs fixed, incremental increases in room demand translate into higher profits. Civeo’s assets remain competitive and relevant, reflected in its receiving commitments for new rooms for Canadian LNG operations, its rising occupancy rates in Australia and higher revenues in the United States.
The company is very focused on fixing its recent operating problems, and many other things are going in the right direction. Civeo remains on track to achieve the targeted C$10 million in annualized savings from the Noralta acquisition while maintaining overall tight cost controls. Confidence from its lenders has given the company more flexibility to fund capital outlays related to its recent contract wins. Civeo continues to generate positive cash flow from its operations.
While Civeo shares offer considerable upside potential, they are not without risk. Its financial results and share price remain vulnerable to volatile and unpredictable commodity prices as well as global economic conditions – all magnified by elevated debt levels on its balance sheet. However, we believe that the return potential of Civeo shares, particularly given the currently deep negative sentiment, more than outweighs these risks. We recommend the PURCHASE of shares of Civeo (CVEO) up to 2.
George Putnam III, The Turnaround Letter, www.turnaroundletter.com, 617-573-9550, January 2019