Want some critiques on my thesisSubscribe
Here it is:
CVEO is an underfollowed spinoff, which recently fell 50+% on a refusal to convert to a REIT. Civeo provides workforce accommodations, mainly in the oil sands in Canada, coal mines in Australia(They have a tiny operation in the US as well). Civeo is a strong cash flow generator and benefits from multi year contracts. The key point however is the depressed valuation at which Civeo trades currently. Civeo currently trades at around 5.75x run-rate EBITDA, a low valuation already, but even more so when you consider the strength of the business. There are some cyclical factors which will also depress earnings for a while, and will slowly rerate back to normal, driving earnings growth.
Civeo has operations in Canada, Australia, and the US. The company develops, owns and operates villages and mobile camps for oil, gas, coal and other mineral resource extraction sites. Civeo is less sensitive to commodity price fluctuations due to forming 1-3 year contracts to take away some of the volatility associated with commodity exposure. The model basically takes away the downside volatility associated with swings in commodity prices as the hotels are contracted out on 1-3 year basis, and new developments are backed by longer contracts to derisk the new building. On an unrelated note, the terms lodgings and work camps sound really spartan and hovel-y, but the facilities are really nice actually and have tons of furnishings. I personally would not mind living in one, going by the pictures.
Canada: Civeo operates approximately 13,000 rooms in Canada, driving 69% of their revenue and 63% of their EBITDA from the region. Canadian lodgings are mostly due to the oil sands, and will grow along with increasing investment in the area.
Australia: Civeo operates approximately 9000 rooms in Australia, driving 24% of their revenue and 33% of their EBITDA. Australia has a wider variety of projects compared to Canada, and has gold and LNG but mostly coal projects.
US: Not really much to say, the US makes up too small of a section of Civeo’s operations to be given too much thought.
Coal: Coal prices are at an all time low in the world, and many producers are currently unprofitable. Australian producers sit at the lower end of the cost curve, however, and many analysts have called the bottom of metallurgical coal prices, and project a 30-50% increase over the coming years. So there is definitely a macro tailwind in place to set floor in how badly the operating conditions can deteriorate. Most of the decreased earnings are from some losses in Australia, and should normalize if prices rise again.
Oil: This shows that the expansion pipeline is quite large, and this shows that the employment pipeline is quite large as well, providing favorable growth outlooks for Civeo’s Canada operations. Oil sands are also extremely long term projects, and should be operational for generations, as opposed to short term tight oil projects. There are also many pipelines that are under construction to bring the heavy crude that comes from the oil sands to refineries, which should tighten the spread between Western Canada Select, and WTI. Also, contrary to many street expectations, oil sands actually have a lower breakeven than many US plays like the Niobrara, Permian, and Eagle Ford, which should lower even further when transportation bottlenecks are resolved and the spread tightens(Mexican heavy oil trades at only a tiny slight discount to WTI due to better transportation). Oil is a commodity though, and it will always be impossible to truly forecast the price with any measurable degree of certainty.
Civeo has land banked a lot of land, and has the potential to add over 15000 rooms. This allows Civeo to gain an early mover advantage and Due to not converting to a REIT, Civeo has greater operational flexibility and can fully realize the potential associated with a market like the one it operates in.
Civeo also has the potential to expand its leverage by a little. It currently sports a 1.5x Net Debt/EBITDA ratio, and even adjusting for the fact that it is a cyclical commodity influenced company, it can expand this to 3-4x EBITDA. Other alternative REIT-like comparables like prisons certainly have a lot of political risk, but sport a much higher leverage ratio.
Also due to the fact that CVEO has very high fixed costs, any increase in occupancy would basically flow straight to the bottom line. In 2012, EBITDA was at 500M due to higher occupancy rates from higher mineral prices.
Civeo also has the potential to pay out a much higher dividend, as it currently only pays out approximately $55M a year. This could be easily doubled or even tripled, although management has not given clear confirmation of this(they have made statements about better capital allocation though). This may also cut into Civeo’s growth plans, however, there is a good argument to be made to raise the dividend to put it more in line with REIT comps.
The main factor in this situation is Barry Rosenstein’s Jana Partners. Jana holds approximately 12% of CVEO right now, and was obviously hurt extremely badly by the recent 50%(!) drop. Greenlight Capital also entered into a position(10%) of similar size, and they will also likely be unhappy. So ultimately, there are 22% of very smart, very motivated, angry investors who want to get their money back, and have the capability and credibility to do it. Civeo is working with both of them to create value and we all know Jana and Greenlight are pretty smart.
2Q14 EBITDA was approximately $70M, and management has guided similarly for 3Q14. Due to the cyclical factors covered above, this should not stay permanently, and I would like to say once again that in 2Q13 when commodity prices were better, EBITDA was $130M. This opportunity should eventually drift back up to 13-16x, as given by public alternative REIT comps CXW, CBOS, and GEO, and hotels(not the best comparables but only non-reit ones) CHH and STAY. Possibly, maybe lower due to the still present levels of commodity exposure and probably higher maintainence capex due to the lodges being in harsh weather, however, CXW and GEO have a lot of political risk as well, and they trade well.
I also expand on some comments in a discussion on reddit:
So anything wrong? Holes in the argument? Things I forgot to take into account? etc? I admit I'm just learning.