Civeo Corp 10-K

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act that are based on management’s current expectations, estimates and projections about our business operations. Please read “Cautionary Statement Regarding Forward Looking Statements.” Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of numerous factors, including the known material factors set forth in Item 1A. “Risk Factors” of this annual report. You should read the following discussion and analysis together with our consolidated financial statements and the notes to those statements in Item 8 of this annual report. This section of this annual report generally discusses key operating and financial data as of and for the years ended 2021 and 2020 and provides year-over-year comparisons for such periods. For a similar discussion and year-over-year comparisons to our 2019 results, refer to "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 26, 2021. Description of the Business We provide hospitality services to the natural resources industry in Canada, Australia and the U.S. We provide a full suite of hospitality services for our guests, including lodging, catering and food service, housekeeping and maintenance at accommodation facilities that we or our customers own. In many cases, we provide services that support the day-to-day operations of accommodation facilities, such as laundry, facility management and maintenance, water and wastewater treatment, power generation, communication systems, security and logistics. We also offer development activities for workforce accommodation facilities, including site selection, permitting, engineering and design, manufacturing management and site construction, along with providing hospitality services once the facility is constructed. We primarily operate in some of the world’s most active oil, metallurgical (met) coal, liquefied natural gas (LNG) and iron ore producing regions, and our customers include major and independent oil companies, mining companies, engineering companies and oilfield and mining service companies. We operate in three principal reporting business segments – Canada, Australia and the U.S. Reverse Share Split On November 19, 2020, we effected a reverse share split where each twelve issued and outstanding common shares were converted into one common share (Reverse Share Split). Our common shares began trading on a reverse share split adjusted basis on November 19, 2020. All common share and per common share data included in this annual report have been retroactively adjusted to reflect the Reverse Share Split. See Note 1 - Description of Business and Basis of Presentation to the notes to the consolidated financial statements in Item 8 of this annual report for further discussion regarding the Reverse Share Split. Basis of Presentation Unless otherwise stated or the context otherwise indicates: (i) all references in these consolidated financial statements to “Civeo,” “us,” “our” or “we” refer to Civeo Corporation and its consolidated subsidiaries; and (ii) all references in this annual report to “dollars” or “$” are to U.S. dollars. Overview and Macroeconomic Environment We provide hospitality services to the natural resources industry in Canada, Australia and the U.S. Demand for our services can be attributed to two phases of our customers’ projects: (1) the development or construction phase; and (2) the operations or production phase. Historically, initial demand for our hospitality services has been driven by our customers’ capital spending programs related to the construction and development of natural resource projects and associated infrastructure, as well as the exploration for oil and natural gas. Long-term demand for our services has been driven by natural resource production, maintenance and operation of those facilities as well as expansion of those sites. In general, industry capital spending programs are based on the outlook for commodity prices, economic growth, global commodity supply/demand dynamics and estimates of resource production. As a result, demand for our hospitality services is largely sensitive to expected commodity prices, principally related to oil, met coal, LNG and iron ore. Other factors that can affect our business and financial results include the general global economic environment and regulatory changes in Canada, Australia, the U.S. and other markets, including governmental measures introduced to fight climate change or to help slow the spread or mitigate the impact of COVID-19. 47 Our business is predominantly located in northern Alberta, Canada; British Columbia, Canada; Queensland, Australia; and Western Australia. We derive most of our business from natural resource companies who are developing and producing oil sands, met coal, LNG and iron ore resources and, to a lesser extent, other hydrocarbon and mineral resources. Approximately 65% of our revenue is generated by our lodges in Canada and our villages in Australia. Where traditional accommodations and infrastructure are insufficient, inaccessible or cost ineffective, our lodge and village facilities provide comprehensive hospitality services similar to those found in an urban hotel. We typically contract our facilities to our customers on a fee-per-person-per-day basis that covers lodging and meals and is based on the duration of customer needs, which can range from several weeks to several years. The remainder of our revenue is largely generated by our hospitality services at customer-owned locations in Canada and Australia, mobile assets in Canada and the U.S and our lodges in the U.S. Generally, our core Canadian oil sands and Australian mining customers make significant capital investments to develop their prospects, which have estimated reserve lives ranging from ten years to in excess of 30 years. Consequently, these investments are primarily dependent on those customers’ long-term views of commodity demand and prices. The spread of COVID-19 and the response thereto have negatively impacted the global economy. The actions taken by governments and the private-sector to mitigate the spread of COVID-19 and the risk of infection, including government-imposed or voluntary social distancing and quarantining, reduced travel and remote work policies, evolved with the introduction of vaccination efforts in 2021, and may continue to evolve as the surfacing of virus variants has added a degree of uncertainty to the continuing global impact. Since the COVID-19 pandemic began, we have been impacted by increased staff costs as a result of hospitality labor shortages in Australia. This has been exacerbated by state and international border closures due to COVID-19. Border closures have affected the number of staff available, which has subsequently led to an increased reliance on more expensive temporary labor hire resources. Additionally, global oil prices dropped to historically low levels in March and April 2020 due to severely reduced global oil demand, high global crude inventory levels, uncertainty around timing and slope of worldwide economic recovery after COVID-19 related economic shut-downs and effectiveness of production cuts by major oil producing countries, such as Saudi Arabia, Russia and the U.S. In mid-April 2020, OPEC+ (the combination of historical OPEC members and other significant oil producers, such as Russia) announced production cuts of up to approximately 10 million barrels per day. Global oil demand has recovered throughout 2021 and into 2022 as COVID-19 lockdowns have begun to be lifted and other fossil fuels are experiencing supply shortages. Oil supply did not keep up with the increase in demand in 2021, which was exacerbated by the impacts of Hurricane Ida in the Gulf of Mexico in the summer of 2021 and publicly-traded oil producers prioritizing returns of capital to shareholders over deploying capital to expand production capacity, resulting in falling inventories and a significant increase in oil prices. In July 2021, OPEC+ agreed to phase out 5.8 million barrels per day of oil production cuts by September 2022. In October 2021, OPEC+ declined requests from the Biden administration to accelerate production to help mitigate the growing deficit between oil supply and demand and address short-term fluctuations in the market. Despite the continued increase in oil prices in early 2022 and pressure from consuming countries, OPEC+ announced in early February that they will maintain their current production increase targets. We continue to closely monitor the COVID-19 situation and have taken measures to help ensure the health and well-being of our employees, guests and contractors, including screening of individuals that enter our facilities, social distancing practices, enhanced cleaning and deep sanitization, the suspension of nonessential employee travel and implementation of work-from-home policies, where applicable. Alberta, Canada . In Canada, Western Canadian Select (WCS) crude is the benchmark price for our oil sands customers. Pricing for WCS is driven by several factors, including the underlying price for West Texas Intermediate (WTI) crude, the availability of transportation infrastructure (consisting of pipelines and crude by railcar) and governmental regulation. Historically, WCS has traded at a discount to WTI, creating a “WCS Differential,” due to transportation costs and capacity restrictions to move Canadian heavy oil production to refineries, primarily along the U.S. Gulf Coast. The WCS Differential has varied depending on the extent of transportation capacity availability. Certain expansionary oil pipeline projects have the potential to both drive incremental demand for mobile assets and to improve take-away capacity for Canadian oil sands producers over the longer term. The Enbridge Line 3 replacement project was completed at the end of 2021 and the Trans Mountain Pipeline (TMX) is currently under construction and approximately 45% complete. The Canadian federal government acquired the TMX pipeline in 2018, approved the expansion of the project and is currently working through a revised construction timeline to adjust for recent delays related to legal challenges, the COVID-19 pandemic, flooding along certain sections of the pipeline corridor and seasonal wildfires. TMX construction has been delayed multiple times recently, and there is a risk that there are more delays to come. Recent legal issues with the Canadian government and First Nation groups have been resolved for the time being and construction has resumed. WCS prices in the fourth quarter of 2021 averaged $60.84 per barrel compared to an average of $31.34 in the fourth quarter of 2020. The WCS Differential decreased from $15.35 per barrel at the end of the fourth quarter of 2020 to $14.12 at the end of the fourth quarter 2021. In 2018, the Government of Alberta announced it would mandate temporary curtailments of the province’s oil production. However, monthly production limits were put on hold in December 2020 until further notice, 48 allowing operators to produce freely at their discretion while the government monitors production and inventory levels. Should forecasts show storage inventories approaching maximum capacity, the government may reintroduce production limits. As of February 22, 2022, the WTI price was $92.35 and the WCS price was $79.12, resulting in a WCS Differential of $13.23. Together with the initial spread of COVID-19, the depressed price levels of both WTI and WCS materially impacted 2020 maintenance and production spending and activity by Canadian operators and, therefore, demand for our hospitality services. Customers began increasing production activity in the fourth quarter of 2020 and throughout 2021. Continued uncertainty, including about the impact of COVID-19, and commodity price volatility and regulatory complications could cause our Canadian oil sands and pipeline customers to reduce production, delay expansionary and maintenance spending and defer additional investments in their oil sands assets. Additionally, if oil prices do not stabilize, the resulting impact could continue to negatively affect the value of our long-lived assets. British Columbia, Canada . Our Sitka Lodge supports the LNG Canada project and related pipeline projects (see discussion below). From a macroeconomic standpoint, LNG demand continued to grow despite the COVID-19 pandemic, reinforcing the need for the global LNG industry to expand access to natural gas. Evolving government energy policies around the world have amplified support for cleaner energy supply, creating more opportunities for natural gas and LNG. Accordingly, the current view is additional investment in LNG supply will be needed to meet the expected long-term LNG demand growth. Currently, Western Canada does not have any operational LNG export facilities. LNG Canada (LNGC), a joint venture among Shell Canada Energy, an affiliate of Royal Dutch Shell plc (40 percent), and affiliates of PETRONAS, through its wholly-owned entity, North Montney LNG Limited Partnership (25 percent), PetroChina (15 percent), Mitsubishi Corporation (15 percent) and Korea Gas Corporation (5 percent), is currently constructing a liquefaction and export facility in Kitimat, British Columbia (Kitimat LNG Facility). British Columbia LNG activity and related pipeline projects are a material driver of activity for our Sitka Lodge, as well as for our mobile assets, which are contracted to serve several portions of the related pipeline construction activity. The actual timing of when revenue is realized from the Coastal GasLink pipeline (CGL) and Sitka Lodge contracts could be impacted by any delays in the construction of the Kitimat LNG Facility or the pipeline, such as protest blockades and the COVID-19 pandemic. Our current expectation is that our contracted commitments associated with the CGL pipeline project will be completed in early 2023. In late March 2020, LNGC announced steps being taken to reduce the spread of COVID-19, including reduction of the workforce at the project site to essential personnel only. In late December 2020, British Columbia’s public health officer issued a health order limiting workforce size at all large industrial projects across the province, including LNGC. These actions resulted in reduced occupancy at our Sitka Lodge beginning in the second quarter of 2020. British Columbia's public health order was phased out in the second quarter of 2021. It was replaced with less restrictive requirements focused on monitoring, allowing workforces to return to their optimal sizes, which increased occupancy in the second half of 2021 at our Sitka lodge. Australia. In Australia, 82% of our rooms are located in the Bowen Basin of Queensland, Australia and primarily serve met coal mines in that region. Met coal pricing and production growth in the Bowen Basin region is predominantly influenced by the levels of global steel production, which increased by 3.6% during 2021 compared to 2020. As of February 22, 2022, met coal spot prices were $441.65 per metric tonne. Long-term demand for steel is expected to be driven by global infrastructure spending and increased steel consumption per capita in developing economies, such as China and India, whose current consumption per capita is a fraction of developed countries. The Chinese embargo on Australian coal continues, without any resolution foreseeable in the near term. However, Australian met coal producers have found new markets, including India and Europe, for their premium product. This has led to a rebalancing of the market globally, with China relying on domestic production along with much higher volumes of imports of U.S., Canadian and Mongolian met coal in 2021. With the backdrop of continuing strong steel demand and met coal supply constraints, the spot price for met coal surged to record highs of over $400 in October 2021 and remains at this level. Analysts expect elevated met coal prices to persist in the short-term, while steel demand and prices remain strong and until met coal supply issues are resolved. If the trade impasse with China remains unresolved, there remains a possibility of further volatility in the short to medium term. Civeo's activity in Western Australia is driven primarily by iron ore production, which is a key steel-making ingredient. As of February 22, 2022, iron ore spot prices were $122.23 per metric tonne. Our integrated services business provides catering and managed services to the mining industry in Western Australia. We have contracts to manage customer-owned villages in Western Australia which primarily support iron ore mines in addition to gold, lithium and nickel mines. We believe iron ore prices are currently at a level that may contribute to increased activity over the long term if our customers view these price levels as sustainable. U.S. Our U.S. business supports oil shale drilling and completion activity and is primarily tied to WTI oil prices in the U.S. shale formations in the Permian Basin, the Mid-Continent, the Bakken and the Rockies. During 2019, the U.S. oil rig count 49 and associated completion activity decreased due to the oil price decline in late 2018 and early 2019 coupled with other market dynamics negatively impacting exploration and production (E&P) spending, finishing the year at 677 rigs. In 2020, the U.S. oil rig count and associated completion activity further decreased due to the global oil price decline discussed above. Only 267 oil rigs were active at the end of 2020. As oil prices began to recover in 2021, oil rig count and drilling activity recovered somewhat, with 480 oil rigs active at the end of 2021. The Permian Basin remains the most active U.S. unconventional play, representing 61% of the oil rigs active in the U.S. at the end of 2021. The lower U.S. rig count and decline in oil prices resulted in decreased U.S. oil production from an average of 11.3 million barrels per day in 2020 to an average of 11.1 million barrels per day in 2021. As of February 25, 2022, there were 522 active oil rigs in the U.S. (as measured by Bakerhughes.com). With the recent volatility in oil prices and a resulting reduction in spending by E&P companies, we have exited the Bakken and reduced our presence in the Rockies regions for our U.S. mobile assets. Those assets were either sold or transported to our Permian Basin and Mid-Continent district locations. U.S. oil shale drilling and completion activity will continue to be dependent on sustained higher WTI oil prices, pipeline capacity and sufficient capital to support E&P drilling and completion plans. In addition, consolidation among our E&P customer base in the U.S. has historically created short-term spending and activity dislocations. Should the current trend of industry consolidation continue, we may see activity, utilization and occupancy declines in the near term. Recent Commodity Prices. Recent WTI crude, WCS crude, met coal and iron ore pricing trends are as follows: Average Price (1) Quarter ended WTI Crude (per bbl) WCS Crude (per bbl) Hard Coking Coal (Met Coal) (per tonne) Iron Ore (per tonne) First Quarter through February 22, 2022 $ 86.60 $ 73.00 $ 414.38 $ 123.65 12/31/2021 77.31 60.84 371.95 104.88 9/30/2021 70.54 57.58 258.41 164.90 6/30/2021 66.19 53.27 136.44 195.97 3/31/2021 58.13 46.28 127.95 159.83 12/31/2020 42.63 31.34 109.37 128.24 9/30/2020 40.90 31.15 113.30 116.10 6/30/2020 27.95 19.73 120.27 89.53 3/31/2020 45.38 27.92 156.17 83.57 12/30/2019 56.85 37.94 141.39 85.13 9/30/2019 56.40 43.88 160.25 101.41 6/30/2019 59.89 47.39 204.78 94.62 3/31/2019 54.87 44.49 203.30 79.26 12/31/2018 59.32 25.66 223.02 70.13 (1) Source: WTI crude prices are from U.S. Energy Information Administration (EIA), WCS crude prices and iron ore prices are from Bloomberg and hard coking coal prices are from IHS Markit. Foreign Currency Exchange Rates. Exchange rates between the U.S. dollar and each of the Canadian dollar and the Australian dollar influence our U.S. dollar reported financial results. Our business has historically derived the vast majority of its revenues and operating income (loss) in Canada and Australia. These revenues and profits/losses are translated into U.S. dollars for U.S. GAAP financial reporting purposes. The following tables summarize the fluctuations in the exchange rates between the U.S. dollar and each of the Canadian dollar and the Australian dollar: Year Ended December 31, 2021 2020 Change Percentage Average Canadian dollar to U.S. dollar $0.798 $0.746 0.052 7.0% Average Australian dollar to U.S. dollar $0.752 $0.691 0.061 8.8% As of December 31, 2021 2020 Change Percentage Canadian dollar to U.S. dollar $0.789 $0.785 0.004 0.5% Australian dollar to U.S. dollar $0.726 $0.773 (0.047) (6.1)% 50 These fluctuations of the Canadian and Australian dollars have had and will continue to have an impact on the translation of earnings generated from our Canadian and Australian subsidiaries and, therefore, our financial results. Capital Expenditures. We continue to monitor the COVID-19 global pandemic and the responses thereto, the global economy, the price of and demand for crude oil, met coal, LNG and iron ore and the resultant impact on the capital spending plans of our customers in order to plan our business activities. We currently expect that our 2022 capital expenditures will be in the range of approximately $20 million to $25 million, compared to 2021 capital expenditures of $15.6 million. We may adjust our capital expenditure plans in the future as we continue to monitor customer activity and the impact of COVID-19. See “Liquidity and Capital Resources ” below for further discussion of 2022 and 2021 capital expenditures. Results of Operations Unless otherwise indicated, discussion of results for the year ended December 31, 2021 is based on a comparison with the corresponding period of 2020. Results of Operations – Year Ended December 31, 2021 Compared to Year Ended December 31, 2020 Year Ended December 31, 2021 2020 Change ($ in thousands) Revenues Canada $ 321,378 $ 269,649 $ 51,729 Australia 251,074 234,542 16,532 U.S. 22,011 25,538 (3,527) Total revenues 594,463 529,729 64,734 Costs and expenses Cost of sales and services Canada 235,419 209,283 26,136 Australia 179,142 144,709 34,433 U.S. 21,901 28,096 (6,195) Total cost of sales and services 436,462 382,088 54,374 Selling, general and administrative expenses 60,600 53,656 6,944 Depreciation and amortization expense 83,101 96,547 (13,446) Impairment expense 7,935 144,120 (136,185) Other operating expense 313 506 (193) Total costs and expenses 588,411 676,917 (88,506) Operating income (loss) 6,052 (147,188) 153,240 Interest (expense) and income, net (13,378) (17,050) 3,672 Other income 13,199 20,823 (7,624) Income (loss) before income taxes 5,873 (143,415) 149,288 Income tax (expense) benefit (3,376) 10,635 (14,011) Net income (loss) 2,497 (132,780) 135,277 Less: Net income attributable to noncontrolling interest 1,147 1,470 (323) Net income (loss) attributable to Civeo Corporation 1,350 (134,250) 135,600 Less: Dividends attributable to Class A preferred shares 1,925 1,887 38 Net loss attributable to Civeo common shareholders $ (575) $ (136,137) $ 135,562 We reported net loss attributable to Civeo for 2021 of $0.6 million, or $0.04 per diluted share. As further discussed below, net loss included a $7.9 million pre-tax loss resulting from the impairment of fixed assets included in Impairment expense. We reported net loss attributable to Civeo for 2020 of $136.1 million, or $9.64 per diluted share. As further discussed below, net loss included (i) a $93.6 million pre-tax loss resulting from the impairment of goodwill in our Canada segment included in Impairment expense, (ii) a $38.1 million pre-tax loss resulting from the impairment of long-lived assets in our Canada segment included in Impairment expense and (iii) a $12.4 million pre-tax loss resulting from the impairment of long-lived assets in our U.S. segment included in Impairment expense. Net loss was partially offset by $4.7 million pre-tax income 51 associated with the settlement of a representations and warranties claim related to the Noralta Acquisition included in our Canada segment in Other income. Revenues. Consolidated revenues increased $64.7 million, or 12%, in 2021 compared to 2020. This increase was primarily due to (i) higher billed rooms at our Canadian oil sands lodges related to turnaround activities by a number of customers, (ii) increased mobile asset activity from pipeline projects in Canada, (iii) increased occupancy at our Australian integrated services villages and (iv) a stronger Australian and Canadian dollar relative to the U.S. dollar in 2021 compared to 2020. These items were partially offset by (i) lower revenue at our Sitka Lodge related to the COVID-19 pandemic and the British Columbia health order affecting activity in the first half of the year, (ii) reduced food service activity in Canada, (iii) decreased activity at our Bowen Basin villages and Western Australia villages and (iv) decreased activity at our U.S. wellsite and offshore businesses. See the discussion of segment results of operations below for further information. Cost of Sales and Services. Our consolidated cost of sales and services increased $54.4 million, or 14%, in 2021 compared to 2020. This increase was primarily due to (i) greater activity at our Canadian oil sands lodges related to turnaround activities by a number of customers, (ii) increased mobile asset activity from pipeline projects in Canada, (iii) increased occupancy at our Australian integrated services villages and increased cost of temporary labor due to ongoing labor shortages in Australia and (iv) a stronger Australian and Canadian dollar relative to the U.S. dollar in 2021 compared to 2020. These items were partially offset by (i) reduced activity at our Sitka Lodge related to the COVID-19 pandemic and the British Columbia health order affecting activity in the first half of the year, (ii) reduced food service activity in Canada, as an overflow site supporting a LNG-related project in 2020 is no longer required, (iii) decreased activity at our Bowen Basin villages and Western Australia villages and (iv) lower activity at our U.S. wellsite and offshore businesses. See the discussion of segment results of operations below for further information. Selling, General and Administrative Expenses. SG&A expense increased $6.9 million, or 13%, in 2021 compared to 2020. This increase was primarily due to higher compensation expense, incentive compensation costs and share-based compensation expense, partially offset by lower professional fees. In addition, SG&A expense increased approximately $2.3 million due to a stronger Australian and Canadian dollar relative to the U.S. dollar in 2021 compared to 2020. The higher compensation expense year-over-year in 2021 was partially due to the cost containment efforts put in place during 2020 for our North American operations during the initial phase of the COVID-19. The increase in share-based compensation was due to an increase in our stock price during 2021 compared to 2020. Depreciation and Amortization Expense. Depreciation and amortization expense decreased $13.4 million, or 14%, in 2021 compared to 2020. The decrease was primarily due to (i) certain assets and intangibles becoming fully depreciated during 2020, (ii) the impairment of certain long-lived assets in Canada and the U.S. during the first quarter of 2020 and (iii) the extension of the remaining life of certain long-lived assets in the U.S. during the third quarter of 2020. These items were partially offset by a stronger Australian and Canadian dollar relative to the U.S. dollar in 2021 compared to 2020. Impairment Expense. We recorded pre-tax impairment expense of $7.9 million in 2021 associated with long-lived assets in our Australian reporting unit. Impairment expense of $144.1 million in 2020 included the following items: • Pre-tax impairment expense of $93.6 million related to the impairment of goodwill in our Canadian reporting unit. • Pre-tax impairment expense of $38.1 million associated with long-lived assets in our Canadian segment. • Pre-tax impairment expense of $12.4 million associated with long-lived assets in our U.S. segment. See Note 4 - Impairment Charges to the notes to the consolidated financial statements included in Item 8 of this annual report for further discussion. Operating Income (Loss). Operating income increased $153.2 million, or 104%, in 2021 compared to 2020 primarily due to $144.1 million of impairment expense of goodwill and long-lived assets recorded in 2020. Interest (Expense) and Income, net. Net interest expense decreased $3.7 million, or 22%, in 2021 compared to 2020 primarily related to lower average debt levels on term loan and revolving credit facility borrowings during 2021 compared to 2020. Other Income. Other income decreased $7.6 million, or 37%, in 2021 compared to 2020. Other income in 2021 included $3.5 million of other income related to proceeds from the Canada Emergency Wage Subsidy (CEWS), $2.7 million of other income related to the settlement of a contract dispute with a customer and a $6.2 million gain on sale of assets primarily related 52 to the sale of our West Permian Lodge in the U.S. and the sale of a manufacturing facility and mobile assets in Canada. Other income in 2020 included $13.0 million of other income related to proceeds from the CEWS and $4.7 million of other income associated with the settlement of a representations and warranties claim related to the Noralta Acquisition. In addition, 2020 included a $2.9 million gain on sale of assets primarily related to the sale of unutilized lodge assets in Canada. Income Tax (Expense) Benefit. Our income tax expense for 2021 totaled $3.4 million, or 57.5% of pretax income, compared to a benefit of $10.6 million, or 7.4% of pretax loss for 2020. Our effective tax rate for 2021 was higher than the Canadian federal statutory rate of 15%, primarily due to the higher Australian income tax rate of 30% and an increase in the valuation allowance related to a non-deductible Australian impairment charge of $5.1 million related to various undeveloped land positions in Australia. Additionally, due to full valuation allowances maintained in both Canada and the U.S., no tax expense or benefit was recorded related to pre-tax income in Canada and pre-tax losses in the U.S. Tax expense in Canada was offset by a valuation allowance release of $1.3 million and the tax benefit in the U.S. was offset by the establishment of a valuation allowance of $0.8 million. Our effective tax rate for 2020 was lower than the Canadian federal statutory rate of 15%, primarily due to a non-deductible Canadian goodwill impairment charge of $95.3 million, as well as the release of a valuation allowance of $9.1 million against the net deferred tax assets in Australia. Due to maintaining full valuation allowances in Canada and the U.S., no tax expense or benefit was recorded. The tax benefit related to pre-tax losses in Canada and the U.S. was offset by the establishment of a valuation allowance of $6.4 million against net deferred tax assets in Canada and the U.S. Other Comprehensive Income (Loss). Other comprehensive income decreased $27.2 million in 2021 compared to 2020 primarily as a result of foreign currency translation adjustments due to changes in the Canadian and Australian dollar exchange rates compared to the U.S. dollar. The Canadian dollar exchange rate compared to the U.S. dollar remained relatively consistent in 2021 compared to a 2% increase in 2020. The Australian dollar exchange rate compared to the U.S. dollar decreased 6.1% in 2021 compared to a 10.4% increase in 2020. 53 Segment Results of Operations – Canadian Segment Year Ended December 31, 2021 2020 Change Revenues ($ in thousands) Accommodation revenue (1) $ 239,526 $ 202,534 $ 36,992 Mobile facility rental revenue (2) 62,856 33,192 29,664 Food service and other services revenue (3) 18,996 33,923 (14,927) Total revenues $ 321,378 $ 269,649 $ 51,729 Cost of sales and services ($ in thousands) Accommodation cost $ 170,071 $ 143,213 $ 26,858 Mobile facility rental cost 38,571 24,842 13,729 Food service and other services cost 16,750 30,616 (13,866) Indirect other cost 10,027 10,612 (585) Total cost of sales and services $ 235,419 $ 209,283 $ 26,136 Gross margin as a % of revenues 26.7 % 22.4 % 4.4 % Average daily rate for lodges (4) $ 99 $ 95 $ 4 Total billed rooms for lodges (5) 2,404,880 2,095,784 309,096 Average Canadian dollar to U.S. dollar $ 0.798 $ 0.746 $ 0.052 (1) Includes revenues related to lodge rooms and hospitality services for owned rooms for the periods presented. (2) Includes revenues related to mobile assets for the periods presented. (3) Includes revenues related to food service, laundry and water and wastewater treatment services for the periods presented. (4) Average daily rate is based on billed rooms and accommodation revenue. (5) Billed rooms represents total billed days for owned assets for the periods presented. Our Canadian segment reported revenues in 2021 that were $51.7 million, or 19%, higher than 2020. The strengthening of the average exchange rate for the Canadian dollar relative to the U.S. dollar by 7% in 2021 compared to 2020 resulted in a $20.8 million period-over-period increase in revenues. Excluding the impact of the stronger Canadian exchange rate, the revenue increase was due to higher billed rooms at our oil sands lodges related to turnaround activities by a number of customers and by increased mobile asset activity from pipeline projects. Partially offsetting these items, revenue was lower at our Sitka Lodge related to the COVID-19 pandemic and the British Columbia health order affecting activity in the first half of the year and from reduced food services activity. Our Canadian segment cost of sales and services increased $26.1 million, or 12%, in 2021 compared to 2020. The strengthening of the average exchange rate for the Canadian dollar relative to the U.S. dollar by 7% in 2021 compared to 2020 resulted in a $14.9 million period-over-period increase in cost of sales and services. Excluding the impact of the stronger Canadian exchange rate, the increased cost of sales and services was driven by increased occupancy at our oil sands lodges related to turnaround activities by a number of customers and by increased mobile asset activity from pipeline projects. Partially offsetting these items, cost of sales and services decreased from reduced food services activity and from reduced activity at our Sitka Lodge related to the COVID-19 pandemic and the British Columbia health order resulting in reduced activity in the first half of the year. Our Canadian segment gross margin as a percentage of revenues increased from 22% in 2020 to 27% in 2021. This was primarily driven by increased mobile asset activity and related operating efficiencies. 54 Segment Results of Operations – Australian Segment Year Ended December 31, 2021 2020 Change Revenues ($ in thousands) Accommodation revenue (1) $ 145,335 $ 144,070 $ 1,265 Food service and other services revenue (2) 105,739 90,472 15,267 Total revenues $ 251,074 $ 234,542 $ 16,532 Cost of sales ($ in thousands) Accommodation cost 71,550 63,504 8,046 Food service and other services cost 100,469 77,358 23,111 Indirect other cost 7,123 3,847 3,276 Total cost of sales and services $ 179,142 $ 144,709 $ 34,433 Gross margin as a % of revenues 28.6 % 38.3 % (9.7) % Average daily rate for villages (3) $ 79 $ 73 $ 6 Total billed rooms for villages (4) 1,846,882 1,968,284 (121,402) Australian dollar to U.S. dollar $ 0.752 $ 0.691 $ 0.061 (1) Includes revenues related to village rooms and hospitality services for owned rooms for the periods presented. (2) Includes revenues related to food service and other services, including facilities management for the periods presented. (3) Average daily rate is based on billed rooms and accommodation revenue. (4) Billed rooms represents total billed days for owned assets for the periods presented. Our Australian segment reported revenues in 2021 that were $16.5 million, or 7%, higher than 2020. The strengthening of the average exchange rate for Australian dollars relative to the U.S. dollar by 9% in the 2021 compared to 2020 resulted in a $19.8 million period-over-period increase in revenues. Excluding the impact of the stronger Australian exchange rate, the Australian segment experienced reduced revenue due to decreased activity at our Bowen Basin villages and Western Australia villages, partially offset by increased occupancy at our integrated services villages. Our Australian segment cost of sales increased $34.4 million, or 24%, in 2021 compared to 2020. The strengthening of the average exchange rate for Australian dollars relative to the U.S. dollar by 9% in 2021 compared to 2020 resulted in a $14.1 million period-over-period increase in cost of sales and services. Excluding the impact of the stronger Australian exchange rate, the increase in cost of sales and services was largely driven by increased occupancy at our integrated services villages and increased costs of temporary labor due to ongoing labor shortages. Our Australian segment gross margin as a percentage of revenues decreased to 29% in 2021 from 38% in 2020. This decrease was primarily driven by our integrated services business, which has a service-only business model, and therefore results in lower overall gross margins than the accommodation business. The integrated services business gross margin decrease was further exacerbated as two key client contracts transferred from construction phase to operational phase with inherently lower margins. Reduced occupancy at the Bowen Basin villages and Western Australia villages, further impacted gross margin as efficiencies were unable to be realized with a fixed cost structure at lower occupancy levels. Segment gross margin has also been negatively impacted by increased staff costs as a result of a hospitality labor shortage in Australia which has been exacerbated by state and international border closures due to COVID-19. State and international border closures have affected the number of staff available which has subsequently led to an increased reliance on more expensive temporary labor hire resources and has placed upward pressure on wages for permanent staff as competitors compete for a small pool of labor. 55 Segment Results of Operations – U.S. Segment Year Ended December 31, 2021 2020 Change Revenues ($ in thousands) $ 22,011 $ 25,538 $ (3,527) Cost of sales ($ in thousands) $ 21,901 $ 28,096 $ (6,195) Gross margin as a % of revenues 0.5 % (10.0) % 10.5 % Our U.S. segment reported revenues in 2021 that were $3.5 million, or 14%, lower than 2020. This decrease was due to reduced U.S. drilling activity affecting our wellsite business and reduced activity in our offshore fabrication business as a number of projects were completed in 2020 that did not recur to the same extent in 2021. These decreases were partially offset by increased activity at our West Permian, Killdeer and Acadian Acres lodges. Our U.S. segment cost of sales and services decreased $6.2 million, or 22%, in 2021 compared to 2020. The decrease was due to reduced U.S. drilling activity affecting our wellsite business, reduced activity in our offshore fabrication business as a number of projects were completed in 2020 that did not recur to the same extent in 2021 and reduced costs at our West Permian lodge under a new customer contract through September 30, 2021. Our U.S. segment gross margin as a percentage of revenues increased from (10)% in 2020 to 0.5% in 2021, primarily due to improved margins at our West Permian lodge under a new customer contract through September 30, 2021. Margins at our Killdeer and Acadian Acres lodges also increased due to increased activity. These increases were partially offset by reduced operating efficiencies due to lower activity levels in our wellsite business. Liquidity and Capital Resources Our primary liquidity needs are to fund capital expenditures, which in the past have included expanding and improving our hospitality services, developing new lodges and villages, purchasing or leasing land, and for general working capital needs. In addition, capital has been used to repay debt and fund strategic business acquisitions. Historically, our primary sources of funds have been available cash, cash flow from operations, borrowings under our Credit Agreement and proceeds from equity issuances. In the future, we may seek to access the debt and equity capital markets from time to time to raise additional capital, increase liquidity, fund acquisitions, refinance debt or retire preferred shares. The following summarizes our material future cash requirements at December 31, 2021, and the effect such obligations are expected to have on our liquidity and cash flow over the next five years (in thousands): Total Less Than 1 Year 1 – 3 Years 3 – 5 Years More Than 5 Years Debt maturities $ 175,130 $ 31,552 $ 31,552 $ 112,026 $ — Interest payments (1) 18,134 6,104 9,111 2,919 — Purchase obligations 9,290 9,290 — — — Non-cancelable operating lease obligations 23,036 5,302 8,720 5,695 3,319 Asset retirement obligations – expected cash payments 76,057 564 1,951 1,248 72,294 Total contractual cash obligations $ 301,647 $ 52,812 $ 51,334 $ 121,888 $ 75,613 (1) Interest payments due under the Credit Agreement, which matures on September 8 2025; based on a interest rate of 3.7% for Canadian term loan, 3.7% for Canadian revolver borrowings and 3.3% for Australian revolver borrowings for the twelve month period ended December 31, 2021. Our debt obligations at December 31, 2021 are reflected in our consolidated balance sheet, which is a part of our consolidated financial statements in Item 8 of this annual report. We have not entered into any material leases subsequent to December 31, 2021. 56 The following table summarizes our consolidated liquidity position as of December 31, 2021 and 2020 (in thousands): December 31, 2021 2020 Lender commitments $ 200,000 $ 167,300 Borrowings against revolving credit capacity (112,026) (63,556) Outstanding letters of credit (1,439) (4,487) Unused availability 86,535 99,257 Cash and cash equivalents 6,282 6,155 Total available liquidity $ 92,817 $ 105,412 Cash totaling $88.5 million was provided by operations during 2021 compared to $117.4 million provided by operations during 2020. The decrease in operating cash flow in 2021 compared to 2020 was primarily due to lower cash provided by working capital. Net cash used by working capital was $8.8 million during 2021 compared to net cash provided by working capital of $19.9 million during 2020. The decrease in cash provided by working capital in 2021 compared to 2020 is largely due to increased accounts receivable balances, partially offset by increased accounts payable and accrual balances. Cash was used in investing activities during 2021 of $0.7 million compared to cash used in investing activities of $1.8 million during 2020. The decrease in cash used in investing activities in 2021 compared to 2020 was primarily due to higher proceeds from the sale of our West Permian Lodge in the U.S. and the sale of our manufacturing facility and mobile assets in Canada during 2021, partially offset by $4.7 million of other income associated with the settlement of a representations and warranties claim in 2020 related to the Noralta Acquisition and lower capital expenditures during 2020. Capital expenditures totaled $15.6 million and $10.1 million during 2021 and 2020, respectively. The increase in capital expenditures in 2021 was related primarily to deferred 2020 routine maintenance capital expenditures as well as increased Canadian pipeline-related capital expenditures during 2021. We expect our capital expenditures for 2022 to be in the range of $20 million to $25 million, which excludes any unannounced and uncommitted projects, the spending for which is contingent on obtaining customer contracts or commitments. Whether planned expenditures will actually be spent in 2022 depends on industry conditions, project approvals and schedules, customer room commitments and project and construction timing. We expect to fund these capital expenditures with available cash, cash flow from operations and revolving credit borrowings under our Credit Agreement. The foregoing capital expenditure forecast does not include any funds for strategic acquisitions, which we could pursue should the transaction economics be attractive enough to us compared to the current capital allocation priorities of debt reduction. We continue to monitor the COVID-19 global pandemic and the responses thereto, the global economy, the prices of and demand for crude oil, met coal and iron ore and the resultant impact on the capital spending plans of our customers in order to plan our business activities, and we may adjust our capital expenditure plans in the future. The table below delineates historical capital expenditures split between expansionary and maintenance spending on our lodges and villages, mobile asset spending and other capital expenditures. We classify capital expenditures for the development of rooms and central facilities at our lodges and villages as expansion capital expenditures. Other capital expenditures in the table below relate to routine capital spending for support equipment, upgrades to infrastructure at our lodge and village properties and spending related to our manufacturing facilities, among other items. Based on management’s judgment of capital spending classifications, we believe the following table represents the components of capital expenditures for the years ended December 31, 2021 and 2020 (in millions): Year Ended December 31, 2021 2020 Expansion Maint Total Expansion Maint Total Lodge/village $ 2.8 $ 8.7 $ 11.5 $ 1.5 $ 5.9 $ 7.4 Mobile assets 1.6 0.6 2.2 0.7 — 0.7 Other 0.7 1.2 1.9 0.9 1.1 2.0 Total $ 5.1 $ 10.5 $ 15.6 $ 3.1 $ 7.0 $ 10.1 Expansion lodge and village spending in 2021 was primarily related to infrastructure improvements at an Australian village. Expansion lodge and village spending in 2020 was primarily associated with the purchase of previously rented rooms for a lodge in the U.S segment. 57 Maintenance lodge and village spending in 2021 and 2020 was primarily associated with routine maintenance projects at our major properties. Mobile asset spending in 2021 and 2020 was primarily associated with Canadian pipeline-related capital expenditures. Other maintenance and expansion spending in 2021 and 2020 was primarily associated with purchases of miscellaneous equipment and supplies to support the day-to-day operations at our accommodation facilities and information technology infrastructure to support our business. Net cash of $86.5 million was used in financing activities during 2021 primarily due to repayments of term loan borrowings of $125.5 million, $1.1 million used to settle tax obligations on vested shares under our share-based compensation plans, debt issuance costs of $4.4 million related to our Credit Agreement and $4.6 million used to repurchase our common shares, partially offset by net borrowings under our revolving credit facilities of $49.2 million. Net cash of $114.2 million was used in financing activities during 2020 primarily due to net repayments under our revolving credit facilities of $70.3 million, repayments of term loan borrowings of $39.9 million, $1.5 million used to settle tax obligations on vested shares under our share-based compensation plans and debt issuance costs of $2.6 million related to our Credit Agreement. The following table summarizes the changes in debt outstanding during 2021 (in thousands): Canada Australia U.S. Total Balance as of December 31, 2020 $ 233,319 $ 17,767 $ — $ 251,086 Borrowings under revolving credit facilities 375,122 20,330 2,500 397,952 Repayments of borrowings under revolving credit facilities (309,549) (36,746) (2,500) (348,795) Repayments of term loans (125,483) — — (125,483) Translation 995 (625) — 370 Balance at December 31, 2021 $ 174,404 $ 726 $ — $ 175,130 We believe that cash on hand and cash flow from operations will be sufficient to meet our anticipated liquidity needs in the coming 12 months. If our plans or assumptions change, including as a result of the impact of COVID-19 or the decline in the price of and demand for oil, or are inaccurate, or if we make acquisitions, we may need to raise additional capital. Acquisitions have been, and our management believes acquisitions will continue to be, an element of our long-term business strategy. The timing, size or success of any acquisition effort and the associated potential capital commitments are unpredictable and uncertain. We may seek to fund all or part of any such efforts with proceeds from debt and/or equity issuances or may issue equity directly to the sellers. Our ability to obtain capital for additional projects to implement our growth strategy over the longer term will depend on our future operating performance, financial condition and, more broadly, on the availability of equity and debt financing. Capital availability will be affected by prevailing conditions in our industry, the global economy, the global financial markets and other factors, many of which are beyond our control. In addition, any additional debt service requirements we take on could be based on higher interest rates and shorter maturities and could impose a significant burden on our results of operations and financial condition, and the issuance of additional equity securities could result in significant dilution to shareholders. Amended and Restated Credit Agreement As of December 31, 2020, our credit agreement provided for a $167.3 million revolving credit facility scheduled to mature on May 30, 2023, allocated as follows: (A) a $10.0 million senior secured revolving credit facility in favor of certain of our U.S. subsidiaries, as borrowers; (B) a $122.3 million senior secured revolving credit facility in favor of Civeo and certain of our Canadian subsidiaries, as borrowers; (C) a $35.0 million senior secured revolving credit facility in favor of one of our Australian subsidiaries, as borrower; and (D) a $194.8 million term loan facility scheduled to mature on May 30, 2023 for certain lenders in favor of Civeo. New Syndicated Facility Agreement On September 8, 2021, we entered into a new Syndicated Facility Agreement (Credit Agreement), which, among other things, as compared to the prior credit agreement provided for a $200.0 million revolving credit facility scheduled to mature on September 8, 2025, allocated as follows: (A) a $10.0 million senior secured revolving credit facility in favor of one of our U.S. subsidiaries, as borrower; (B) a $155.0 million senior secured revolving credit facility in favor of Civeo, as borrower; and (C) a $35.0 million senior secured revolving credit facility in favor of one of our Australian subsidiaries, as borrower. In addition, it provided for a C$100.0 million term loan facility scheduled to be fully repaid on December 31, 2023 for certain lenders in favor of Civeo. 58 As of December 31, 2021, we had outstanding letters of credit of $0.3 million under the U.S facility, zero under the Australian facility and $1.2 million under the Canadian facility. We also had outstanding bank guarantees of A$0.8 million under the Australian facility. See Note 11 - Debt to the notes to the consolidated financial statements in Item 8 of this annual report for the terms of the Credit Agreement and further discussion regarding our debt. Dividends The declaration and amount of all potential future dividends will be at the discretion of our Board of Directors and will depend upon many factors, including our financial condition, results of operations, cash flows, prospects, industry conditions, capital requirements of our business, covenants associated with certain debt obligations, legal requirements, regulatory constraints, industry practice and other factors the Board of Directors deems relevant. In addition, our ability to pay cash dividends on common or preferred shares is limited by covenants in the Credit Agreement. Future agreements may also limit our ability to pay dividends, and we may incur incremental taxes if we are required to repatriate foreign earnings to pay such dividends. If we elect to pay dividends in the future, the amount per share of our dividend payments may be changed, or dividends may be suspended, without advance notice. The likelihood that dividends will be reduced or suspended is increased during periods of market weakness. There can be no assurance that we will pay a dividend in the future. The preferred shares we issued in the Noralta Acquisition are entitled to receive a 2% annual dividend on the liquidation preference (initially $10,000 per share), paid quarterly in cash or, at our option, by increasing the preferred shares’ liquidation preference, or any combination thereof. Quarterly dividends have been paid in-kind for each quarterly period beginning June 30, 2018 through December 31, 2021, thereby increasing the liquidation preference to $10,776 per share as of December 31, 2021. We currently expect to pay dividends on the preferred shares through an increase in liquidation preference rather than cash until they mandatorily convert to Civeo common shares in April 2023. For further information, see Note 16 - Preferred Shares to the notes to the consolidated financial statements included in Item 8 of this annual report for further information. Critical Accounting Policies Our consolidated financial statements in Item 8 of this annual report have been prepared in accordance with U.S. GAAP, which require that management make numerous estimates and assumptions. Actual results could differ from those estimates and assumptions, thus impacting our reported results of operations and financial position. The critical accounting policies and estimates described in this section are those that are most important to the depiction of our financial condition and results of operations and the application of which requires management’s most subjective judgments in making estimates about the effect of matters that are inherently uncertain. We describe our significant accounting policies more fully in Note 2 - Summary of Significant Accounting Policies to the notes to consolidated financial statements in Item 8 of this annual report. Accounting for Contingencies We have contingent liabilities and future claims for which we have made estimates of the amount of the eventual cost to liquidate these liabilities or claims. We make an assessment of our exposure and record a provision in our accounts to cover an expected loss when we believe a loss is probable and the amount of the loss can be reasonably estimated. These liabilities and claims sometimes involve threatened or actual litigation where damages have been quantified. Other claims or liabilities have been estimated based on their fair value or our experience in these matters and, when appropriate, the advice of outside counsel or other outside experts. Upon the ultimate resolution of these uncertainties, our future reported financial results will be impacted by the difference between our estimates and the actual amounts paid to settle a liability. Examples of areas where we have made important estimates of future liabilities include taxes, interest, insurance claims, litigation, warranty claims, contract claims and obligations. Impairment of Tangible and Intangible Assets, including Goodwill Goodwill. Goodwill represents the excess of the purchase price paid for acquired businesses over the allocated fair value of the related net assets after impairments, if applicable. We evaluate goodwill for impairment, at the reporting unit level, annually and when an event occurs or circumstances change to suggest that the carrying amount may not be recoverable. A reporting unit is the operating segment, or a business one level below that operating segment (the “component” level) if discrete financial information is prepared and regularly reviewed by management at the component level. Each segment of our business represents a separate reporting unit, and all three of our reporting units have or previously had goodwill. 59 In connection with the preparation of our financial statements for the three months ended March 31, 2020, we performed a quantitative goodwill impairment test as of March 31, 2020, and we reduced the value of our goodwill in our Canadian reporting unit to zero. See Note 4 – Impairment Charges to the notes to consolidated financial statements in Item 8 of this annual report for further discussion of goodwill impairments recorded in the years ended December 31, 2020 and 2019. We conduct our annual impairment test as of November 30 of each year. We compare each reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. If the carrying amount of the reporting unit exceeds its fair value, goodwill is impaired. We are given the option to test for impairment of our goodwill by first performing a qualitative assessment to determine whether it is more likely than not (that is, likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill. If it is determined that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then performing the currently prescribed quantitative impairment test is unnecessary. In developing a qualitative assessment to meet the “more-likely-than-not” threshold, each reporting unit with goodwill is assessed separately and different relevant events and circumstances are evaluated for each unit. We have the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the quantitative goodwill impairment test. When performing our annual assessment on November 30, 2021, we performed the qualitative assessment related to our Australia reporting unit. All of our goodwill resides in our Australia reporting unit as of November 30, 2021. Qualitative factors that we considered as part of our assessment include industry and market conditions, macroeconomic conditions and financial performance of our business. After assessing these events and circumstances, we determined that it was more likely than not that the fair value of the Australia reporting unit was greater than its carrying value. Based on the interim quantitative testing performed as of March 31, 2020, the fair value of the Australia reporting unit exceeded its carrying value by 127%. In performing the quantitative goodwill impairment test, we compare each reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. Because none of our reporting units has a publicly quoted market price, we must determine the value that willing buyers and sellers would place on the reporting unit through a routine sale process (a Level 3 fair value measurement). In our analysis, we target a fair value that represents the value that would be placed on the reporting unit by market participants, and value the reporting unit based on historical and projected results throughout a cycle, not the value of the reporting unit based on trough or peak earnings. The fair value of the reporting unit is estimated using a combination of (i) an analysis of trading multiples of comparable companies (Market Approach) and (ii) discounted projected cash flows (Income Approach). We also use acquisition multiples analyses in certain circumstances. The relative weighting of each approach reflects current industry and market conditions. Market Approach - This valuation approach utilizes publicly traded comparable companies’ enterprise values, as compared to their recent and forecasted earnings before interest, taxes and depreciation (EBITDA) information. We use EBITDA because it is a widely used (1) key indicator of the cash generating capacity and (2) valuation metric of companies in our industry. Income Approach - This valuation approach derives a present value of the reporting unit’s projected future annual cash flows over the next five years with a terminal value assumption. We use a variety of underlying assumptions to estimate these future cash flows, including assumptions relating to future economic market conditions, rates, occupancy levels, costs and expenses and capital expenditures. These assumptions can vary by each reporting unit depending on market conditions. In addition, a terminal value is estimated, using a Gordon Growth methodology with a long-term growth rate of 2%. We discount our projected cash flows using a long-term weighted average cost of capital based on our estimate of investment returns that would be required by a market participant. The discount rates used to value our reporting units for the March 31, 2020 interim goodwill impairment test ranged between 10.5% and 14.0%. The fair value of our reporting units is affected by future oil, coal and natural gas prices, anticipated spending by our customers and the cost of capital. Our estimate of fair value requires us to use significant unobservable inputs, representative of Level 3 fair value measurements, including numerous assumptions with respect to future circumstances, such as industry and/or local market conditions that might directly impact each reporting unit’s operations in the future. We selected these valuation approaches because we believe the combination of these approaches and our best judgment regarding underlying assumptions and estimates provides us with the best estimate of fair value for each of our reporting units. We believe these valuation approaches are proven valuation techniques and methodologies for our industry and widely accepted by investors. The fair value of each reporting unit would change if our assumptions under these valuation approaches, or relative weighting of the valuation approaches, were materially modified. The following assumptions are significant to our evaluation process: 60 Business Projections - We make assumptions about the level of revenues, gross profit, operating expenses, as well as capital expenditures and net working capital requirements. These assumptions drive our planning assumptions and represent key inputs for developing our cash flow projections. These projections are developed using our internal business plans over a five-year planning period that are updated at least annually; Long-term Growth Rates - We also utilize an assumed long-term growth rate representing the expected rate at which our cash flow stream is projected to grow. These rates are used to calculate the terminal value and are added to the cash flows projected during our planning period; and Discount Rates - The estimated future cash flows are then discounted at a rate that is consistent with a weighted-average cost of capital that is likely to be expected by market participants. The weighted-average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt holders of a business enterprise. Definite-Lived Tangible and Intangible Assets. The recoverability of the carrying values of tangible and intangible assets is assessed at an asset group level which represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Whenever, in management’s judgment, we review our assets for impairment in step one when events or changes in circumstances indicate that the carrying value of such asset groups may not be recoverable based on estimated future cash flows, an asset impairment evaluation is performed. Indicators of impairment might include persistent and sustained negative economic trends affecting the markets we serve, recurring cash flow losses or significantly lowered expectations of future cash flows expected to be generated by our assets. As part of the initial step, we also reevaluate the remaining useful lives and salvage values of our assets when indicators of impairment exist. Identification of Asset Groups – The following summarizes the asset groups that we have identified in each of our reporting segments. Our Canada segment consists of numerous lodges, as well as our mobile assets. These properties are grouped in the following asset groups: • Core Region ◦ Fort McMurray Village – North Athabasca ◦ Beaver River Lodge – North Athabasca ◦ Athabasca Lodge – North Athabasca ◦ Hudson and Borealis Lodges – North Athabasca • McClelland Lake Lodge – North Athabasca • Wapasu Creek Lodge – North Athabasca • Grey Wolf Lodge - North Athabasca • Conklin Lodge – South Athabasca • Anzac Lodge – South Athabasca • Red Earth Lodge - South Athabasca • Wabasca Lodge - South Athabasca • Sitka Lodge – Kitimat, British Columbia • Geetla camp – British Columbia • Antler River camp – Manitoba • Red Earth camp – Alberta • Christina Lake camp – Alberta • Mobile assets • Various land holdings in British Columbia purchased in anticipation of potential LNG related projects In general, the lodges are operated on a lodge by lodge basis. However, for one set of lodges (the Core Region, including Beaver River, Athabasca, Hudson and Borealis Lodges and Fort McMurray Village), there are no identifiable cash flows largely independent of the cash flows of other assets and liabilities for such lodges, and therefore, such lodges are combined into a single asset group. Factors such as proximity to each other, commonality of customers, common monitoring by management 61 and operating decisions being made to optimize these lodges as a group result in these lodges being treated as a single asset group for the purposes of our impairment assessments. Our Australia segment consists of nine villages in several regions within the country, as well as our integrated services assets and land banked assets. These properties are grouped in the following asset groups: • Karratha – Pilbara Region, Western Australia • Integrated services – Assets held on client owned sites in Western Australia • Kambalda – Kambalda, Western Australia • Gunnedah Basin ◦ Narrabri – Gunnedah Basin, New South Wales ◦ Boggabri – Gunnedah Basin, New South Wales • Bowen Basin ◦ Moranbah – Bowen Basin, Queensland ◦ Dysart – Bowen Basin, Queensland ◦ Nebo – Bowen Basin, Queensland ◦ Coppabella – Bowen Basin, Queensland ◦ Middlemount – Bowen Basin, Queensland • Various non-operational sites acquired as part of Civeo’s land-banking strategy In general, the villages are operated on a village by village basis, except for the villages located in the Bowen Basin (Moranbah, Dysart, Nebo, Coppabella and Middlemount) and the Gunnedah Basin (Narrabri and Boggabri). The villages in the Bowen and Gunnedah Basins contain significant levels of interdependency that allow these assets to be combined into cash generating units (asset groups). Factors such as commonality of customers, location, resource basins served and common monitoring by management result in the Bowen and Gunnedah Basins to be treated as single asset groups for the purposes of our impairment assessments. Integrated services assets provide catering and managed services to the mining industry in Western Australia. Our U.S. segment consists of lodges in two geographical areas, mobile assets in various geographical areas, and a wastewater treatment plant (WWTP). These properties are grouped in the following asset groups: • Killdeer Lodge – North Dakota • Acadian Acres Lodge – Louisiana • Offshore – this asset group includes mobile assets which are utilized in the Gulf of Mexico • Wellsites – this asset group includes mobile assets, primarily in the Permian Basin region, the Mid-Continent and the Rocky mountain corridor • Killdeer WWTP – this asset group represents a WWTP in Killdeer, North Dakota, which was constructed in early 2014 Recoverability Assessment – In performing an impairment analysis, the second step is to compare each asset group’s carrying value to estimates of undiscounted future direct cash flows associated with the asset group over the remaining useful life of the asset group's primary asset. We use a variety of underlying assumptions to estimate these future cash flows, including assumptions relating to future economic market conditions, rates, occupancy levels, costs and expenses and capital expenditures. The estimates are consistent with those used for purposes of our goodwill impairment test, as further discussed in Goodwill , above. Fair Value Determination – If, based on the assessment, the carrying values of any of our asset groups are determined to not be recoverable as a result of the undiscounted future cash flows not exceeding the net book value of the asset group, we proceed to the third step. In this step, we compare the fair value of the respective asset group to its carrying value. Our estimate of the fair value requires us to use significant unobservable inputs, representative of Level 3 fair value measurements, including numerous assumptions with respect to future circumstances, such as industry and/or local market conditions that might directly impact each of the asset groups’ operations in the future, and are therefore uncertain. 62 Our industry is cyclical and our estimates of the period over which future cash flows will be generated, as well as the predictability of these cash flows and our determination of whether a decline in value of our investment has occurred, can have a significant impact on the carrying value of these assets and, in periods of prolonged down cycles, may result in impairment losses. If this assessment indicates that the carrying values will not be recoverable, an impairment loss is recognized equal to the excess of the carrying value over the fair value of the asset group. The fair value of the asset group is based on prices of similar assets, if available, or discounted cash flows. In estimating future cash flows, we make numerous assumptions with respect to future circumstances that might directly impact each of the asset groups’ operations in the future and are therefore uncertain. These assumptions with respect to future circumstances include future oil and coal prices, anticipated customer spending, and industry and/or local market conditions. These assumptions represent our best judgment based on the current facts and circumstances. However, different assumptions could result in a determination that the carrying values of additional asset groups are no longer recoverable based on estimated future cash flows. Our estimate of fair value is primarily calculated using the Income Approach, which derives a present value of the asset group based on the asset groups’ estimated future cash flows. We discounted our estimated future cash flows using a long-term weighted average cost of capital based on our estimate of investment returns required by a market participant. The discount rates used during the 2020 Canadian and U.S. segments long-lived asset impairment analysis ranged between 10.5% and 14.0%. See Note 4 – Impairment Charges to the notes to consolidated financial statements in Item 8 of this annual report for further discussion of impairments of definite-lived tangible and intangible assets recorded in the years ended December 31, 2021, 2020 and 2019. Revenue and Cost Recognition We generally recognize accommodation, mobile facility rental, food service and other services revenues over time as our customers simultaneously receive and consume benefits as we serve our customers because of continuous transfer of control to the customer. Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. We transfer control and recognize a sale based on a periodic (usually daily) room rate each night a customer stays in our rooms or when the services are rendered. In some contracts, rates may vary over the contract term. In these cases, revenue may be deferred and recognized on a straight-line basis over the contract term. A limited portion of our revenue is recognized at a point in time when control transfers to the customer related to small modular construction and manufacturing contracts, minor food service arrangements and optional purchases our customers make for incidental services offered at our accommodation and mobile facilities. For significant projects, manufacturing revenues are recognized over time with progress towards completion measured using the cost based input method as the basis to recognize revenue and an estimated profit. Billings on such contracts in excess of costs incurred and estimated profits are classified as deferred revenue. Costs incurred and estimated profits in excess of billings on these contracts are recognized as unbilled receivables. Management believes this input method is the most appropriate measure of progress to the satisfaction of a performance obligation on larger modular construction and manufacturing contracts. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, estimated profitability and final contract settlements may result in revisions to projected costs and revenue and are recognized in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated. Factors that may affect future project costs and margins include weather, production efficiencies, availability and costs of labor, materials and subcomponents. These factors can significantly impact the accuracy of our estimates and materially impact our future reported earnings. Because of control transferring over time, the majority of our revenue is recognized based on the extent of progress towards completion of the performance obligation. At contract inception, we assess the goods and services promised in our contracts with customers and identify a performance obligation for each promise to transfer our customers a good or service (or bundle of goods or services) that is distinct. Our customers typically contract for hospitality services under take-or-pay contracts with terms that most often range from several months to three years. Our contract terms generally provide for a rental rate for a reserved room and an occupied room rate that compensates us for services provided. We typically contract our facilities to our customers on a fee per day basis where the goods and services promised include lodging and meals. To identify the performance obligations, we consider all of the goods and services promised in the context of the contract and the pattern of transfer to our customers. Revenues exclude taxes assessed based on revenues such as sales or value added taxes. 63 Cost of services includes labor, food, utility costs, cleaning supplies, and other costs of operating our accommodations facilities. Cost of goods sold includes all direct material and labor costs and those costs related to contract performance, such as indirect labor, supplies, tools and repairs. Selling, general and administrative costs are charged to expense as incurred. Estimation of Useful Lives The selection of the useful lives of many of our assets requires the judgments of our operating personnel as to the length of these useful lives. Our judgment in this area is influenced by our historical experience in operating our assets, technological developments and expectations of future demand for the assets. Should our estimates be too long or short, we might eventually report a disproportionate number of losses or gains upon disposition or retirement of our long-lived assets. We reevaluate the remaining useful lives and salvage values of our assets when certain events occur that directly impact the useful lives and salvage values, including changes in operating condition, functional capability, impairment assessment and market and economic factors. We believe our estimates of useful lives are appropriate. Share-Based Compensation Our historic share-based compensation is based on participating in Civeo’s 2014 Equity Participation Plan (the Plan). Our disclosures reflect only our employees’ participation in the Plans. We are required to estimate the fair value of share compensation made pursuant to awards under the Plans. An initial estimate of the fair value of each option award, restricted share award or deferred share award determines the amount of share compensation expense we will recognize in the future. For stock option awards, which were all granted prior to our May 30, 2014 spin-off from Oil States, to estimate the value of the awards under the Plan, Oil States selected a fair value calculation model. Oil States chose the Black-Scholes option pricing model to value stock options awarded under the Plan. Oil States chose this model because option awards were made under straightforward vesting terms, option prices and option lives. Utilizing the Black-Scholes option pricing model required Oil States to estimate the length of time options will remain outstanding, a risk free interest rate for the estimated period options are assumed to be outstanding, forfeiture rates, future dividends and the volatility of its common stock. All of these assumptions affect the amount and timing of future share-based compensation expense recognition. We have not made any option awards subsequent to May 30, 2014, but, in the event that we make future awards, we expect to utilize a similar valuation methodology. We will continually monitor our actual experience and change assumptions for future awards as we consider appropriate. We also grant performance share awards under the Plan. Awards granted in 2021 are earned in amounts between 0% and 200% of the participant’s target performance share award, based on (1) the payout percentage associated with Civeo’s relative total shareholder return (TSR) rank among a peer group of other companies and (2) the payout percentage associated with Civeo's cumulative free cash flow over the performance period relative to a preset target. Performance share awards granted prior to 2021 are earned in amounts between 0% and 200% of the participant’s target performance share award, based on the payout percentage associated with Civeo’s relative TSR rank among a peer group of other companies. The fair value of the TSR portion of each award was estimated using a Monte Carlo simulation pricing model. We chose this model because the performance awards contain complex vesting terms. Utilizing the Monte Carlo simulation pricing model required us to estimate the risk-free interest rate and the expected market price volatility of our common shares as well as the peer group of companies over a time period equal to the expected term of the award. The fair value of the free cash flow portion of each award was based on the closing market price of our common shares on the date of grant. We evaluate the probability of achieving the performance criteria throughout the performance period and make adjustments based on the number of shares expected to vest based on our estimate of the most probable performance outcome. The resulting costs for each portion of the award is recognized over the period during which an employee is required to provide service in exchange for the awards, usually the vesting period. For additional details, see Note 19 – Share-Based Compensation to the notes to the consolidated financial statements included in Item 8 of this annual report. Income Taxes We follow the liability method of accounting for income taxes in accordance with current accounting standards regarding the accounting for income taxes. Under this method, deferred income taxes are recorded based upon the differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws in effect at the time the underlying assets or liabilities are recovered or settled. When our earnings from foreign subsidiaries are considered to be indefinitely reinvested, no provision for Canadian income taxes is made for these earnings. If any of the subsidiaries have a distribution of earnings in the form of dividends or otherwise, we would be subject to both Canadian income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to various foreign countries. 64 We record a valuation allowance in each reporting period when our management believes that it is more likely than not that any recorded deferred tax asset will not be realized. Our management will continue to evaluate the appropriateness of the valuation allowance in the future, based upon our current and historical operating results and other potential sources of future taxable income. See Note 14 – Income Taxes to the notes to consolidated financial statements in Item 8 of this annual report for further discussion. In accounting for income taxes, we are required to estimate a liability for future income taxes for any uncertainty for potential income tax exposures. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for anticipated tax audit issues in Canada and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due, including an accrual of interest and penalties, if applicable, related to the unrecognized tax benefits. If we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We record an additional charge in our provision for taxes in the period in which we determine that the recorded tax liability is less than we expect the ultimate assessment to be. Recent Accounting Pronouncements See Note 2 – Summary of Significant Accounting Policies – Recent Accounting Pronouncements to the notes to consolidated financial statements in Item 8 of this annual report for further discussion.