Civeo Corp 10-Q

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis together with our consolidated financial statements and the notes to those statements included elsewhere in this quarterly report on Form 10-Q. 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, estimates of resource production and shareholder expectations. As a result, demand for our hospitality services is largely sensitive to expected commodity prices, principally related to oil, metallurgical (met) coal, liquefied natural gas (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. 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. In the first quarter of 2022, approximately 63% 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, 17 which can range from several weeks to several years. The remainder of our revenue is 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, upfront 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 labor shortage has been exacerbated by significantly reduced migration in and around Australia affecting labor availability, which has subsequently led to an increased reliance on more expensive temporary labor resources. 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. In part due to the impact of COVID-19 on the global economy, increasing inflationary pressures are being experienced worldwide. These price increases could negatively impact our labor and food costs, as well as consumable costs such as fuel. The Company is managing inflation risk with service scope changes and contractual protections. 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. Since this trough in early 2020, global oil prices increased later in 2020 and throughout 2021 primarily due to improved global oil demand and lagging global oil supply due to oil production discipline from publicly traded oil producers and OPEC+ countries. These supply/demand dynamics have continued into early 2022 and have been exacerbated by the recent conflict between Russia and Ukraine and related sanctions on Russia, which decreased global fossil fuel supply even further. This has led to a significant increase in global oil prices to above $100 per barrel. Several governments, including the U.S. government under the Biden administration, have begun to release oil from the government controlled strategic reserves in the hopes of stemming high oil prices and the related impacts on higher heating fuels and gasoline. 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 50% 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. As a result, the TMX pipeline construction has been delayed, and there is a risk that there are more delays to come. Recent legal issues between the Canadian government and First Nation groups have been resolved for the time being and construction has resumed. WCS prices in the first quarter of 2022 averaged $82.04 per barrel compared to an average of $46.28 in the first quarter of 2021. The WCS Differential decreased from $14.12 per barrel at the end of the fourth quarter of 2021 to $10.78 at the end of the first quarter of 2022. As of April 25, 2022, the WTI price was $99.54 and the WCS price was $86.62, resulting in a WCS Differential of $12.92. Together with the initial spread of COVID-19, 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, throughout 2021 and into the first three months of 2022. While oil prices have recently increased to multi-year highs, there is continued uncertainty around commodity price 18 levels, including the impact of COVID-19 and regulatory complications on such prices, which 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. 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 spread of COVID-19, 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. The conflict between Russia and Ukraine has further highlighted the need for secure natural gas supply globally, particularly in Europe. Accordingly, additional investment in LNG supply will be needed to meet the resulting 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 (CGL) pipeline 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 or COVID-19. Our current expectation is that our contracted commitments associated with the CGL pipeline project will be completed in the second half of 2022 or 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 at our Sitka Lodge in the second half of 2021 and into 2022. 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 decreased by 6.8% during the first three months of 2022 compared to the same period of 2021 but remained at high levels. As of April 25, 2022, met coal spot prices were $480 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 led to a rebalancing of the market globally in 2021, with China relying on domestic production along with increased met coal imports from the U.S., Canada and Mongolia. With the backdrop of continuing strong steel demand and met coal supply constraints, the spot price for met coal surged to record highs through the second half of 2021 into early 2022. While met coal prices have receded from their all-time highs, they still remain over $400 per tonne. Analysts expect elevated met coal prices to persist in the short-term but to moderate and decline further over the medium term if supply and demand issues are resolved. If the trade impasse with China remains unresolved and the Ukraine conflict continues, 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. Iron ore prices experienced strong support through the first half of 2021, with prices reaching in excess of $200 US per metric tonne by mid year due to high demand for steel used for infrastructure and increased manufacturing activity in China. Through the second half of 2021, with forced cuts in Chinese steel production along with weaker demand, prices retreated. As of April 25, 2022, iron ore spot prices were $126.38 per metric tonne, which reflects a sustained improvement in prices early in 2022 with tighter supply and strong demand. Higher iron production is expected to continue through 2022 and along with constrained supply, analysts are forecasting an average iron ore price of $135-$150 per metric tonne for 2022. Despite some constraint in supply, Australian iron ore exports in 2022 are forecast to exceed both 2020 and 2021 volumes. 19 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. In 2020, the U.S. oil rig count and associated completion activity decreased due to COVID-19 and the global oil price decline discussed above. Only 267 oil rigs were active at the end of 2020. With the recovery of oil prices, oil rig count and drilling activity have recovered substantially, with 531 oil rigs active at the end of the first quarter 2022. The Permian Basin remains the most active U.S. unconventional play, representing 60% of the oil rigs active in the U.S. at the end of the first quarter of 2022. The increase in the U.S. rig count and oil prices has only resulted in slight increases to U.S. oil production from an average of 11.3 million barrels per day in 2021 to an average of 11.4 million barrels per day at the end of January 2022. As of April 22, 2022, there were 549 active oil rigs in the U.S. (as measured by Bakerhughes.com). U.S. oil shale drilling and completion activity will continue to be impacted by higher WTI oil prices, pipeline capacity, federal energy policies and availability of capital to support exploration and production (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) Second Quarter through April 25, 2022 $ 101.36 $ 88.55 $ 475.20 $ 140.72 3/31/2022 95.17 82.04 474.83 129.46 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 (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: Three Months Ended March 31, 2022 2021 Change Percentage Average Canadian dollar to U.S. dollar $0.790 $0.790 $— —% Average Australian dollar to U.S. dollar $0.724 $0.773 ($0.05) (6.3)% As of March 31, 2022 December 31, 2021 Change Percentage Canadian dollar to U.S. dollar $0.800 $0.789 $0.011 1.4% Australian dollar to U.S. dollar $0.749 $0.726 $0.023 3.2% 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. 20 Capital Expenditures. We continue to monitor 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, and the COVID-19 global pandemic and the responses thereto 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 $15.6 million. We may adjust our capital expenditure plans in the future as we continue to monitor customer activity. See “Liquidity and Capital Resources ” below for further discussion of 2022 capital expenditures. 21 Results of Operations Unless otherwise indicated, discussion of results for the three months ended March 31, 2022, is based on a comparison to the corresponding period of 2021. Results of Operations – Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021 Three Months Ended March 31, 2022 2021 Change ($ in thousands) Revenues Canada $ 95,952 $ 61,885 $ 34,067 Australia 63,529 59,637 3,892 U.S. and other 6,197 3,908 2,289 Total revenues 165,678 125,430 40,248 Costs and expenses Cost of sales and services Canada 75,206 51,885 23,321 Australia 44,514 42,903 1,611 U.S. and other 6,123 5,022 1,101 Total cost of sales and services 125,843 99,810 26,033 Selling, general and administrative expenses 15,213 14,181 1,032 Depreciation and amortization expense 20,127 21,269 (1,142) Other operating expense 258 71 187 Total costs and expenses 161,441 135,331 26,110 Operating income (loss) 4,237 (9,901) 14,138 Interest expense, net (2,468) (3,362) 894 Other income 1,696 4,914 (3,218) Income (loss) before income taxes 3,465 (8,349) 11,814 Income tax (expense) (1,557) (1,076) (481) Net income (loss) 1,908 (9,425) 11,333 Less: Net income attributable to noncontrolling interest 498 59 439 Net income (loss) attributable to Civeo Corporation 1,410 (9,484) 10,894 Less: Dividends attributable to preferred shares 487 478 9 Net income (loss) attributable to Civeo common shareholders $ 923 $ (9,962) $ 10,885 We reported net income attributable to Civeo for the quarter ended March 31, 2022 of $0.9 million, or $0.06 per diluted share compared to net loss attributable to Civeo for the quarter ended March 31, 2021 of $10.0 million, or $0.70 per diluted share. Revenues. Consolidated revenues increased $40.2 million, or 32%, in the first quarter of 2022 compared to the first quarter of 2021. This increase was primarily due to (i) higher billed rooms at our Canadian lodges as occupancy in the first quarter of 2021 was negatively impacted by the COVID-19 pandemic, particularly at our Sitka Lodge, (ii) higher average daily rate at our Canadian lodges due to mix, (iii) increased mobile asset activity from pipeline projects in Canada, (iv) increased occupancy at our Australian Civeo owned villages and (v) increased activity in our U.S. offshore and wellsite business. These items were partially offset by a weaker Australian dollar relative to the U.S. dollar in the first quarter of 2022 compared to the first quarter of 2021. 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 $26.0 million, or 26%, in the first quarter of 2022 compared to the first quarter of 2021. This increase was primarily due to (i) higher billed rooms at our Canadian lodges, (ii) increased mobile asset activity from pipeline projects in Canada, (iii) increased occupancy at our Australian Civeo owned villages and the increased cost of temporary labor due to ongoing labor shortages in Australia and (vi) increased activity in our U.S. offshore business and wellsite business. These items were partially offset by a weaker Australian dollar relative to the U.S. dollar in the first quarter of 2022 compared to the first quarter of 2021. See the discussion of segment results of operations below for further information. 22 Selling, General and Administrative Expenses. SG&A expense increased $1.0 million, or 7%, in the first quarter of 2022 compared to the first quarter of 2021. This increase was primarily due to higher share-based compensation expense and information technology expense related to our newly implemented human capital management system. The increase in share-based compensation expense was due to an increase in our stock price during the first quarter of 2022 compared to the first quarter of 2021. Depreciation and Amortization Expense. Depreciation and amortization expense decreased $1.1 million, or 5%, in the first quarter of 2022 compared to the first quarter of 2021. The decrease was primarily due to certain assets in Canada becoming fully depreciated during 2021 and the disposal of our West Permian Lodge during 2021 in the U.S. Operating Income (Loss). Consolidated operating income increased $14.1 million, or 143%, in the first quarter of 2022 compared to the first quarter of 2021, primarily due to higher activity levels in Canada and Australia in the first quarter of 2022 compared to the first quarter of 2021. Interest Expense, net. Net interest expense decreased by $0.9 million, or 27%, in the first quarter of 2022 compared to the first quarter of 2021, primarily related to lower average debt levels on credit facility borrowings during 2022 compared to 2021 and lower interest rates on credit facility borrowings. Other Income. Consolidated other income decreased $3.2 million in the first quarter of 2022 compared to the first quarter of 2021, primarily due to $2.8 million of other income in 2021 related to proceeds from the Canada Emergency Wage Subsidy (CEWS) and higher gains on sale of assets in 2021 compared to 2022. Income Tax (Expense) Benefit. Our income tax expense for the three months ended March 31, 2022 totaled $1.6 million, or 44.9% of pretax income, compared to an income tax expense of $1.1 million, or (12.9)% of pretax loss, for the three months ended March 31, 2021. Our effective tax rate for both the three months ended March 31, 2022 and 2021 was impacted by considering Canada and the U.S. loss jurisdictions that were removed from the annual effective tax rate computation for purposes of computing the interim tax provision. Other Comprehensive (Loss) Income. Other comprehensive income increased $9.6 million in the first quarter of 2022 compared to the first quarter of 2021, primarily as a result of foreign currency translation adjustments due to changes in the Canadian and Australian dollar exchange rates compared to the U.S. dollar. The Canadian dollar exchange rate compared to the U.S. dollar increased 1% in the first quarter of 2022 compared to a 1% increase in the first quarter of 2021. The Australian dollar exchange rate compared to the U.S. dollar increased 3% in the first quarter of 2022 compared to a 2% decrease in the first quarter of 2021. 23 Segment Results of Operations – Canadian Segment Three Months Ended March 31, 2022 2021 Change Revenues ($ in thousands) Accommodation revenue (1) $ 67,194 $ 46,530 $ 20,664 Mobile facility rental revenue (2) 24,018 10,499 13,519 Food service and other services revenue (3) 4,740 4,856 (116) Total revenues $ 95,952 $ 61,885 $ 34,067 Cost of sales and services ($ in thousands) Accommodation cost $ 53,127 $ 38,336 $ 14,791 Mobile facility rental cost 14,884 6,774 8,110 Food service and other services cost 4,359 4,121 238 Indirect other costs 2,836 2,654 182 Total cost of sales and services $ 75,206 $ 51,885 $ 23,321 Gross margin as a % of revenues 21.6 % 16.2 % 5.5 % Average daily rate for lodges (4) $ 106 $ 97 $ 9 Total billed rooms for lodges (5) 635,555 480,066 155,489 Average Canadian dollar to U.S. dollar $ 0.790 $ 0.790 $ — (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 services, 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 the first quarter of 2022 that were $34.1 million, or 55%, higher than the first quarter of 2021. This increase was driven by higher billed rooms at our lodges as occupancy in the first quarter of 2021 was negatively impacted by the COVID-19 pandemic, particularly at our Sitka Lodge, higher average daily rate at our lodges largely due to mix and by increased mobile asset activity from pipeline projects. Our Canadian segment cost of sales and services increased $23.3 million, or 45%, in the first quarter of 2022 compared to the first quarter of 2021. The increased cost of sales and services was driven by increased occupancy at our lodges and by increased mobile asset activity from pipeline projects. Our Canadian segment gross margin as a percentage of revenues increased from 16.2% in the first quarter of 2021 to 21.6% in the first quarter of 2022. This was primarily driven by increased lodge and mobile asset activity and related operating efficiencies. 24 Segment Results of Operations – Australian Segment Three Months Ended March 31, 2022 2021 Change Revenues ($ in thousands) Accommodation revenue (1) $ 37,599 $ 33,675 $ 3,924 Food service and other services revenue (2) 25,930 $ 25,962 $ (32) Total revenues $ 63,529 $ 59,637 $ 3,892 Cost of sales and services ($ in thousands) Accommodation cost $ 18,407 $ 17,105 $ 1,302 Food service and other services cost 24,363 24,297 66 Indirect other cost 1,744 1,501 243 Total cost of sales and services $ 44,514 $ 42,903 $ 1,611 Gross margin as a % of revenues 29.9 % 28.1 % 1.9 % Average daily rate for villages (3) $ 79 $ 79 $ — Total billed rooms for villages (4) 474,474 424,666 49,808 Australian dollar to U.S. dollar $ 0.724 $ 0.773 $ (0.049) (1) Includes revenues related to village rooms and hospitality services for owned rooms for the periods presented. (2) Includes revenues related to food services 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 represent total billed days for owned assets for the periods presented. Our Australian segment reported revenues in the first quarter of 2022 that were $3.9 million, or 7%, higher than the first quarter of 2021. The weakening of the average exchange rate for Australian dollars relative to the U.S. dollar by 6% in the first quarter of 2022 compared to the first quarter of 2021 resulted in a $4.2 million period-over-period decrease in revenues. Excluding the impact of the weaker Australian exchange rate, the Australian segment experienced increased activity at Civeo owned villages in the Bowen Basin. Our Australian segment cost of sales and services increased $1.6 million, or 4%, in the first quarter of 2022 compared to the first quarter of 2021. The weakening of the average exchange rate for Australian dollars relative to the U.S. dollar by 6% in the first quarter of 2022 compared to the first quarter of 2021 resulted in a $3.0 million period-over-period decrease in cost of sales and services. Excluding the impact of the weaker Australian exchange rate, the increase in cost of sales and services was largely driven by increased occupancy at our Bowen Basin villages and increased costs of temporary labor due to ongoing labor shortages. Our Australian segment gross margin as a percentage of revenues increased to 29.9% in the first quarter of 2022 from 28.1% in the first quarter of 2021. This was primarily driven by improved margins at Civeo owned villages in the Bowen Basin as a result of increased occupancy. 25 Segment Results of Operations – U.S. Segment Three Months Ended March 31, 2022 2021 Change Revenues ($ in thousands) $ 6,197 $ 3,908 $ 2,289 Cost of sales and services ($ in thousands) $ 6,123 $ 5,022 $ 1,101 Gross margin as a % of revenues 1.2 % (28.5) % 29.7 % Our U.S. segment reported revenues in the first quarter of 2022 that were $2.3 million, or 59%, higher than the first quarter of 2021. This increase was due to increased activity in our offshore rental and fabrication businesses and increased U.S. drilling activity positively impacting our wellsite business. Our U.S. segment cost of sales and services increased in the first quarter of 2022 compared to the first quarter of 2021. This increase was due to increased activity in our offshore rental and fabrication businesses and increased U.S. drilling activity positively impacting our wellsite business. These increases were partially offset by reduced costs from our former West Permian lodge, which operated in the first quarter of 2021 and was sold in the fourth quarter of 2021. Our U.S. segment gross margin as a percentage of revenues increased from (28.5)% in the first quarter of 2021 to 1.2% in the first quarter of 2022 primarily due to improved operating efficiencies in our offshore and wellsite businesses at higher activity levels. 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, repurchase our common shares 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 table summarizes our consolidated liquidity position as of March 31, 2022 and December 31, 2021 (in thousands): March 31, 2022 December 31, 2021 Lender commitments $ 200,000 $ 200,000 Borrowings against revolving credit capacity (121,886) (112,026) Outstanding letters of credit (1,456) (1,439) Unused availability 76,658 86,535 Cash and cash equivalents 6,423 6,282 Total available liquidity $ 83,081 $ 92,817 Cash totaling $2.0 million was provided by operations during the three months ended March 31, 2022, compared to $12.8 million provided by operations during the three months ended March 31, 2021. During the three months ended March 31, 2022 and 2021, $21.8 million and $0.1 million was used in working capital, respectively. The increase in cash used in working capital in 2022 compared to 2021 is largely due to increased accounts receivable balances resulting from increased activity in our Canadian and Australian businesses during the three months ended March 31, 2022 compared to the three months ended March 31, 2021 and decreased accounts payable and accrual balances largely due to timing of payments. Cash was used in investing activities during the three months ended March 31, 2022 in the amount of $1.0 million, compared to cash provided by investing activities during the three months ended March 31, 2021 in the amount of $3.3 million. The decrease in cash provided by investing activities was primarily due to proceeds from the sale of our manufacturing facility and mobile assets in Canada during the three months ended March 31, 2021. Capital expenditures totaled $3.6 million and $3.4 million during the three months ended March 31, 2022 and 2021, respectively. 26 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 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, the COVID-19 global pandemic and the responses thereto in order to plan our business activities, and we may adjust our capital expenditure plans in the future. Net cash of $1.3 million was used in financing activities during the three months ended March 31, 2022 primarily due to term loan repayments of $8.0 million and $1.0 million used to settle tax obligations on vested shares under our share-based compensation plans, partially offset by net borrowings under our revolving credit facilities of $7.7 million. Net cash of $16.7 million was used in financing activities during the three months ended March 31, 2021 primarily due to net repayments under our revolving credit facilities of $6.7 million, repayments of term loan borrowings of $8.9 million and $1.1 million used to settle tax obligations on vested shares under our share-based compensation plans. The following table summarizes the changes in debt outstanding during the three months ended March 31, 2022 (in thousands): Balance at December 31, 2021 $ 175,130 Borrowings under revolving credit facilities 94,266 Repayments of borrowings under revolving credit facilities (86,586) Repayments of term loans (8,003) Translation 3,100 Balance at March 31, 2022 $ 177,907 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 changes in 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. In August 2021, our Board authorized a common share repurchase program to repurchase up to 5.0% of our total common shares which are issued and outstanding, or 715,814 common shares, over a twelve month period. See Note 11 – Share Repurchase Program to the notes to the unaudited consolidated financial statements included in Item 1 of this quarterly report for further discussion. Credit Agreement As of March 31, 2022, our Credit Agreement (as then amended to date, the Credit Agreement) provided for: (i) 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; and (ii) a C$100.0 million term loan facility scheduled to be fully repaid on December 31, 2023 in favor of Civeo. 27 As of March 31, 2022, 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 7 – Debt to the notes to the unaudited consolidated financial statements included in Item 1 of this quarterly report for further discussion. Dividends The declaration and amount of all potential future dividends will be at the discretion of our Board 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 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 were paid in-kind on March 31, 2022, thereby increasing the liquidation preference to $10,830 per share as of March 31, 2022. 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. Critical Accounting Policies For a discussion of the critical accounting policies and estimates that we use in the preparation of our consolidated financial statements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2021. These estimates require significant judgments, assumptions and estimates. We have discussed the development, selection and disclosure of these critical accounting policies and estimates with the audit committee of our Board of Directors. There have been no material changes to the judgments, assumptions and estimates upon which our critical accounting estimates are based. 28