Elle Investments Research Report: CVEO

 

Company: Civeo Corporation

Symbol: CVEO

Analysis Date: 9/10/20

Analysis Price: $0.80

Price Target (PT): $1.24

Upside: 55%

Dividend: NA

Recommendation: Buy

 

CVEO: 1-Year Chart

Source: Seeking Alpha

INVESTMENT THESIS:

In the fall of 2018, CVEO was trading at over $4.00/share. A drop in energy prices caused the majority of the decline since then, with the COVID-19 sell-off bringing it under under $1.00/share. It’s true that the cash balance is very low, but management is wisely using their positive free cash flow to focus on debt reduction. This should lead to a more deserving valuation. We think CVEO is a Buy.

 

LIQUIDITY POSITION: Poor

As of 2Q20 (ended June 30), CVEO was down to only $7M in cash, with total debt of $299M. The balance sheet is very highly leveraged, but debt has come down from $357M at the end of 2019, showing management’s focus on debt reduction.

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.

Debt levels are moving in the right direction, and they remain FCF positive. But the low valuation indicates that the highly leveraged balance sheet is still a concern for investors.

COMMERCIAL PROSPECTS: Good

CVEO’s three reportable operating segments are: Canada, Australia, and the US.

The company provides lodging and catering services to the natural resource extraction industries in each of these territories. Because of this business model, CVEO’s revenues are heavily correlated to energy prices.

During 2019, they recorded adjusted EBITDA of $108M, and provided 2020 guidance of $104M. However, due to COVID-19, this has now been withdrawn. As of July 29, they expect adjusted EBITDA of only $83M, which includes a one-time $7M gain from items in the Canadian territory (discussed on the earnings call).

To be conservative, we assume $76M is the new normal adjusted EBITDA. Depreciation and amortization expense was $124M in 2019, but to more accurately reflect actual cash expenses, we use 2020 initial capex guidance of $20M.

The savings from the lower outstanding debt balance (assuming debt is continued to be paid down) will be roughly offset by the slight increase in the interest rate spread. We therefore annualize 2Q20 interest expense of $3.9M and use $16M as our annual interest expense.

Our remaining assumptions include a tax rate of 21% and the conversion of all Preferred Shares into common shares, which will add about 29M shares to the diluted share count but will eliminate the $1M spent each year on the Preferred Shares dividend. We arrive at earnings to common shareholders of $31M (net of non-controlling interests). This gives us a very attractive forward P/E of about 5x. We expect a reversion to a more normal P/E in the 8x to 10x range.

CONCLUSION:

We think CVEO has been overly punished because of its highly-leveraged balance sheet. Management has done a good job focusing on debt reduction, and using some very conservative assumptions, we get an attractive valuation. Also, there have been several insider buys since March 6 at prices ranging from $0.63/share to $1.08/share, and most were for amounts over $100k. The low cash balance keeps this from being a top pick, but we think it’s definitely worth a small bet. We think CVEO is a Buy.

Note: Additional commentary from Elle Investments can be found at http://elle-investments.com. We welcome your feedback. Additionally, we are thinking of launching a subscription service that would offer early access to our research, along with some other features that investors might find useful (i.e. general portfolio management strategies, live blog updates highlighting our reaction to breaking news, etc.). If you would be interested in subscribing to such a service, please let us know.

 

Published By: Elle Investments Research Team

Phone: (914) 715-8066

Email: info@elle-investments.com

Disclaimer: The Elle Investments portfolio is managed utilizing a “quantamental” approach where each position, while based on Fundamental Analysis, is sized as part of a larger quantitative portfolio. The commentary presented here is for research purposes only and is not to be taken as investment advice. Readers are expected to perform their own due diligence and/or hire an investment professional prior to entering/exiting positions. Published research ideas are related to the specific market price and publicly available information at the time of research submission/publication. Elle Investments will enter/exit positions without notice.