I gave an investment pitch at a CFA Society of Chicago roundtable today with a "Value investing in a not-so value world" topic theme, my idea was Civeo Corporation, below is the deck I used, been a great winner for me so far via a pre-spin call option that expired today. I presented a pretty bullish view for the purposes of the pitch, but I think it has decent room to the upside as they pursue a REIT conversion.
Disclosure: I own shares of CVEO, sold my shares of OIS
wow - tough day... wonder if there is some value here nowReplyDelete
Tough day indeed!Delete
Looking back I failed to fully appreciate a few things: (1) Civeo already has a fairly low tax rate, and with mostly international assets, the advantages to converting to a REIT were minimal (2) EBITDA was already falling in 2014, the oil sands are similar to the deep water plays in that they'll be some of the first to see capex cuts when the price of oil falls.
Maybe some event driven traders blew out of it today, but the guidance cut and words "materially lower" are what really caused the pain. If 2014 EBITDA is $310-320MM, how much is materially lower? 20%? 50%? That's the key question before determining how much value is here.
Still - I was surprised to see the reasons given for the 2015 guidance i.e. customer project coming to completion.. I mean was that a surprise to management? Plus, they needed to hire an army of lawyers to tell them that REIT was not a good idea given that 90% of their earnings were non-US? This one's a head scratcher.Delete
I haven't had a chance to listen to the call this morning, but I agree, they essentially said the market had bottomed in Q2, so to take down guidance "materially lower" after that puts cracks in management's competence. We might have reached peak REIT conversion, if they would have converted the reasons would have been optics over substance (yield chasers, REIT index investors), so some credit is due that they picked the most efficient tax structure even if it results in a lower multiple.Delete
After reading Professor Damodaran's post on pass through entities (link below), my enthusiasm for REIT conversions has waned and I considered selling. Luckily I sold a 1/3 of my position in the $26s, but today still hurts.
The large camp market in oilsands is looking competitive squeezed by both demand uncertainty and supply side. Another public player Horizon North cited in 2Q14 that contracts were more competitive, and their utilization rate was way lower than Civeo, indicating excess capacity. Revpar drop on lower rates rolled over contracts would really hurt EBITDA, then there is Australia which management indicated this week that could go 10% down.ReplyDelete
I am still trying to figure out what is the worse case for EBITDA 2015E. If they curtail CAPEX and buy back shares, that could help.
On REIT though, I think they were under pressure from Jana and like, the board might have to go through a formality as fiduciaries.
Good thoughts. I had a chance to listen to the call and Dodley briefly mentioned that Q4 run rate was his best guess for what 2015 might look like, based on that I come up with about $250MM EBITDA, or roughly half of the 2012 peak. But he also thought Q2 numbers were the bottom, maybe it makes sense to take another haircut off Q4's run rate to be conservative?Delete
It didn't sound like buybacks were immediately on the table, but he did buy 24,000 shares at $12.86 yesterday, pretty close to his former annual base salary at Oil States, that's a slight vote of confidence in the business.
Agreed on the REIT, that was a complete oversight on my part, just missed how the international earnings mismatched with the tax structure, by the time I realized it, I figured they would do it anyway under Jana's pressure and that would provide a pop. Curious to see if Jana sold out of their position, I guess we should know pretty soon if the file an amended 13D.
That is a good sign of insider buying. The problem is nobody knows what met coal/WTI/WCS will trade, and even if anyone knows that, they will have to know what resource companies will react to the prices to infer activities on the camps.Delete
$250M sounds reasonable. If we annualize Q4 guidance 2015E will be $270M ($205M x 33% x 4), so they are trading at 6.8X next year EBITDA, not exactly low multiple compared to Horizon North or oil service in general.
A bigger problem is how long the new contracts are renewed for if renewed at all. If they are renewed at lower rates and worse terms for 3 years, if cycle turns next year, how much will they benefit from it? Now the management is not dumb, I just start to wonder whether integrated camp is a flawed business model leveraged on commodity prices.
It is actually wise not to buy back shares now, as their debt has 3.5X EBITDA covenant (need $221M EBITDA minimum), having cash mitigates the risk of covenant breach. They gotta manage CAPEX though, which we will have to wait until 3Q call.
Greenlight has filed a 13D, owns 9.9% of the company with about half of that being acquired since the bottom fell out, pushing for the CEO to be replaced.ReplyDelete
Man, the market just does not look like a level playing field from a cynical view. Just look at the shares Greenlight sold before the reit decision announcement. I don't understand how replacing ceo helps, looks like to me it is more for adding public pressure. This however increases the probability of a reduction in CAPEX, increase in divi, and buyback.ReplyDelete
What is the playbook here, refinance and issue high yield debt, buy back shares, divi out aggressively to attract yield investors? Maybe Greenlight is right, it is better to squeeze the juice out than planting more trees for future. Only time will tell.
I don't share the cynical view, Greenlight still lost a decent chunk here, the selling was relatively minor compared to the buying right after the announcement. Also what's Jana's next move?Delete
I'm just curious why Greenlight is pushing for more leverage and a bigger dividend? With oil prices falling, and activity in the oil sands coming to a stand still, aren't we seeing the exact reason why it shouldn't lever up and pay a big dividend? Seems like those points were valid prior to the spinoff, not so much now. As for the CEO, that's a little odd too, after the initial pain of a 50% drop has worn off, I think Dodson and the board made the right decision here, just unfortunate timing with the wash out of the energy sector the last month. But maybe Dodson made assurances behind the scenes and reneged on those? It'll be interesting to see how it works out, it's likely pretty safe and cheap at these prices, as you said, time will tell. Thanks for reading and commenting.
While I realize that CVEO has been a painful name for those who were involved any time prior to yesterday, I think that it is finally at a price or near a price where if one could hold it for 2-3 years, one could make serious dough - - albeit, not without taking risk. Was wondering if you had any thoughts? Thx.
I thankfully sold the remainder of my position around $12 a share, so while it was painful, wasn't as painful of a mistake as it could have been. Listening to the call yesterday, I got the sense that Civeo is trying to get out in front of the oil and coal markets, kitchen sink it, I'd be on the alert for other commodity derivative plays that might still be holding onto rosy 2015 guidance for more potential blowups. Doubt Civeo is alone in this pain, and actually makes me pretty concerned about the Canadian economy as a whole, especially with their real estate bubble and high debt to income ratios.Delete
But regarding Civeo itself, I agree with you, could be close to a good entry point if you want to buy it and shove it in the drawer for the next 12 months and not look. Their new strategy to abandon the dividend, and instead de-lever seem right to me, Dodson made it clear that their "value creation committee" was on board. That says to me that Jana and Greenlight's lever up and pay out a dividend language in their recent filings might have been boilerplate from their original thesis, good that they've moved off that stance. It's pretty amazing that their EBITDA for 2015 will be about 1/3 of its peak, so once the cycle turns around maybe in 2016/2017 (and after they've de-levered a bit) this could be a coiled spring. I've learned I know nothing about commodities, but I'll still throw out there that the downturn in oil could end up lasting longer than people expect. I tried timing the bottom in natural gas unsuccessfully as its been lower longer than many people predicted, don't underestimate how long it takes for supply/demand dynamics to work themselves out.
Also - thanks for the AINC idea, going to post something later today on it, might have some holes in my logic/research, so please feel free to comment. It gets me more interest in some upcoming asset management spinoffs like ACAS and PSEC.