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. 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 2023 and 2022 and provides year-over-year comparisons for such periods. For a similar discussion and year-over-year comparisons to our 2021 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, 2022, filed with the Securities and Exchange Commission on March 1, 2023. Description of the Business We provide a suite of hospitality services for our guests in the natural resources industry, 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 these 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, where, in many cases, traditional accommodations and related infrastructure often are not accessible, sufficient or cost effective. Our customers include major and independent oil companies, mining companies, engineering companies and oilfield and mining service companies. We operate in two principal reportable business segments – Canada and Australia. 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 United States (U.S.) dollars. Overview and Macroeconomic Environment 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, production costs, economic growth, global commodity supply/demand, estimates of resource production and the expectations of our customers' shareholders. 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, and the resultant impact of these commodity price expectations on our customers’ spending. Other factors that can affect our business and financial results include the general global economic environment, including inflationary pressures, supply chain disruptions and labor shortages, volatility affecting the banking system and financial markets, availability of capital to the natural resource industry and regulatory changes in Canada, Australia and other markets, including governmental measures introduced to fight climate change. Commodity Prices There is continued uncertainty around commodity price levels, including the impact of inflationary pressures, actions taken by Organization of the Petroleum Exporting Countries Plus (OPEC+) to adjust production levels, geopolitical events such as the ongoing Russia/Ukraine and Israel/Hamas conflicts and rising geopolitical risks in the Middle East, U.S. oil production levels and regulatory implications on such prices. In particular, these items could cause our Canadian oil sands and pipeline 45 customers to reduce production, delay expansionary and maintenance spending and defer additional investments in their oil sands assets. Recent Commodity Prices Recent West Texas Intermediate (WTI) crude, Western Canadian Select (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 23, 2024 $ 74.99 $ 56.16 $ 323.93 $ 127.50 12/31/2023 78.55 55.31 332.24 122.24 9/30/2023 82.50 66.20 260.12 111.04 6/30/2023 73.54 60.25 243.54 106.98 3/31/2023 75.96 56.61 341.08 117.08 12/31/2022 82.82 54.72 276.19 94.93 9/30/2022 91.63 70.70 252.63 99.21 6/30/2022 108.77 92.89 464.61 128.80 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 12/31/2020 42.63 31.34 109.37 128.24 (1) Source: WTI crude prices are from U.S. Energy Information Administration, WCS crude prices and iron ore prices are from Bloomberg and hard coking coal prices are from IHS Markit. WTI Crude. After reaching historic lows in early 2020 during the start of the COVID-19 pandemic, global oil prices increased to above $100 per barrel in the second quarter 2022. In the second half of 2022 and throughout 2023, oil prices declined due to (i) rising fears of a recession resulting from severe inflation and rising interest rates, (ii) resulting lower demand for oil and (iii) increasing U.S. oil production. In an effort to support the price of oil amidst demand concerns, OPEC+ countries announced additional oil production cuts through the end of 2023. These production cuts, coupled with the rising geopolitical risks in the Middle East, resulted in increased oil prices in the third quarter and early part of the fourth quarter of 2023, before reducing in the latter part of the fourth quarter back to levels consistent with the first six months of 2023. WCS Crude. In Canada, WCS crude is the benchmark price for our oil sands customers. Pricing for WCS is driven by several factors, including the underlying price for WTI crude, the availability of transportation infrastructure (consisting of pipelines and crude by railcar), refinery blending requirements 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 is approximately 98% complete, with mechanical completion expected to occur in the first quarter 2024, commercial service expected to begin in April 2024 and volumes expected to ramp up to full capacity by year end 2024. WCS prices in the fourth quarter of 2023 averaged $55.31 per barrel compared to an average of $54.72 in the fourth quarter of 2022. The WCS Differential decreased from $27.39 per barrel at the end of the fourth quarter of 2022 to $19.35 at the end of the fourth quarter of 2023. As of February 23, 2024, the WTI price was $77.54 and the WCS price was $58.60, resulting in a WCS Differential of $18.94. Met Coal. In Australia, 84% 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 46 by the level of global steel production, which decreased by 0.1% during 2023 compared to 2022. The decrease year-over-year was the result of weaker production in December 2023 from China, offset by stronger production throughout 2023 from both Europe and Russia. As of February 23, 2024, met coal spot prices were $311.40 per tonne. Steel output is forecast to improve marginally through 2024, with large infrastructure rollouts in a number of major economies including the U.S. and India. Met coal prices remained over $200 per tonne during 2023, which supported existing producers, and also assisted new and expansion projects. In the last quarter of 2023, met coal prices averaged over $330 per tonne which continues to provide a positive short-term outlook for producing projects, though future investment could be impacted by the increase in the Queensland royalty scheme introduced in 2022. Analysts forecast prices to remain elevated in the near term but to fall below $300 per tonne in 2024 as supply side pressures are expected to ease and Chinese met coal imports fall following high restocking levels. Iron Ore. Iron ore prices remained consistently above $100 per tonne throughout 2023 and averaged over $130 per tonne in late December 2023, following a sustained period of high prices. Analysts are forecasting 2024 prices to remain over $100 per tonne on average. Other Inflationary Pressures. During 2022 and 2023, inflationary pressures and supply chain disruptions have been, and continue to be, experienced worldwide. Price increases resulting from inflation and supply chain concerns have, and are expected to continue to have, a negative impact on our labor and food costs, as well as consumable costs such as fuel. We are managing inflation risk with negotiated service scope changes and contractual protections. Labor Shortages. In addition to the macro inflationary impacts on labor costs noted above, during the COVID-19 pandemic, we were, and continue to be, impacted by increased staff costs as a result of hospitality labor shortages in Australia as government-imposed and voluntary social distancing and quarantining impacted travel. 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. LNG. Our Sitka Lodge supports the LNG Canada project and related pipeline projects. From a macroeconomic standpoint, LNG demand has continued to grow, 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/Ukraine and Israel/Hamas 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 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). The Kitimat LNG Facility is nearing completion and expected to be operational in 2024. 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 were contracted to serve several designated portions of the related pipeline construction activity. The majority of our contracted commitments associated with the Coastal GasLink Pipeline, the pipeline constructed to transport natural gas feedstock to LNGC, were completed in the fourth quarter of 2023. McClelland Lake Lodge . We did not renew an expiring land lease associated with our McClelland Lake Lodge in Alberta, Canada, which expired in June 2023, in order to support our customer’s intent to mine the land where the lodge was located. In addition, the accompanying hospitality services contract at McClelland Lake Lodge expired in July 2023; however, we continued to provide hospitality services to the customer at our other owned lodges through January 31, 2024 under a short-term take-or-pay commitment. Subsequent to this date, we have continued to provide such services at our other lodges; however, not pursuant to a take-or-pay commitment. Our assets were demobilized and completely removed from the existing site in January 2024. During the third quarter of 2023, we entered into a definitive agreement to sell our McClelland Lake Lodge assets to a U.S.-based mining project for approximately C$49 million, or US$36 million. The transaction was completed in January 2024. During the third and fourth quarters of 2023, we recognized $14.2 million in demobilization costs and received $28.2 million in cash proceeds associated with the sale. We expect to recognize the remaining demobilization costs and the proceeds of the sale in the first quarter of 2024. U.S. Business. In the first quarter of 2023, we sold our accommodation assets in Louisiana. In addition, in the second half of 2022, we sold both our U.S. wellsite services and offshore businesses. Our remaining U.S. business supports completion 47 activity in the Bakken. U.S. oil completion activity will continue to be impacted by oil prices, pipeline capacity, federal energy policies and availability of capital to support exploration and production completion plans. 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 in Canada and Australia. These revenues and profits/losses are translated into U.S. dollars for U.S. generally accepted accounting principles 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, 2023 2022 Change Percentage Average Canadian dollar to U.S. dollar $0.741 $0.769 (0.028) (3.6)% Average Australian dollar to U.S. dollar $0.665 $0.695 (0.030) (4.3)% As of December 31, 2023 2022 Change Percentage Canadian dollar to U.S. dollar $0.756 $0.738 0.018 2.4% Australian dollar to U.S. dollar $0.681 $0.679 0.002 0.2% 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. Capital Expenditures. We continue to monitor the global economy, commodity prices, demand for crude oil, met coal, LNG and iron ore, inflation and the resultant impact on the capital spending plans of our customers in order to plan our business activities. We currently expect that our 2024 capital expenditures will be in the range of approximately $30 million to $35 million, compared to 2023 capital expenditures of $31.6 million. Our 2023 capital expenditures included approximately $10 million related to village enhancements in Australia, for which our customer has reimbursed us, resulting in a net negligible cash flow impact in 2023 for these expenditures. We may adjust our capital expenditure plans in the future as we continue to monitor customer activity. See “Liquidity and Capital Resources ” below for further discussion of 2024 and 2023 capital expenditures. 48 Results of Operations Unless otherwise indicated, discussion of results for the year ended December 31, 2023 is based on a comparison with the corresponding period of 2022. Results of Operations – Year Ended December 31, 2023 Compared to Year Ended December 31, 2022 Year Ended December 31, 2023 2022 Change ($ in thousands) Revenues Canada $ 352,795 $ 395,997 $ (43,202) Australia 336,763 278,252 58,511 Other 11,247 22,803 (11,556) Total revenues 700,805 697,052 3,753 Costs and expenses Cost of sales and services Canada 277,067 293,576 (16,509) Australia 243,011 200,944 42,067 Other 10,209 22,543 (12,334) Total cost of sales and services 530,287 517,063 13,224 Selling, general and administrative expenses 72,605 69,962 2,643 Depreciation and amortization expense 75,142 87,214 (12,072) Impairment expense 1,395 5,721 (4,326) Gain on sale of McClelland Lake Lodge assets, net (18,590) — (18,590) Other operating expense 479 74 405 Total costs and expenses 661,318 680,034 (18,716) Operating income 39,487 17,018 22,469 Interest expense, net (13,005) (11,435) (1,570) Other income 13,881 5,149 8,732 Income before income taxes 40,363 10,732 29,631 Income tax expense (10,633) (4,402) (6,231) Net income 29,730 6,330 23,400 Less: Net income (expense) attributable to noncontrolling interest (427) 2,333 (2,760) Net income attributable to Civeo Corporation 30,157 3,997 26,160 Less: Dividends attributable to Class A preferred shares — 1,771 (1,771) Net income attributable to Civeo common shareholders $ 30,157 $ 2,226 $ 27,931 We reported net income attributable to Civeo for 2023 of $30.2 million, or $2.01 per diluted share. As further discussed below, net income included (i) $28.3 million of net gains associated with the sale of the McClelland Lake Lodge in Canada and (ii) a $1.4 million pre-tax loss resulting from the impairment of fixed assets included in Impairment expense. We reported net income attributable to Civeo for 2022 of $2.2 million, or $0.21 loss per diluted share. As further discussed below, net income included a $5.7 million pre-tax loss resulting from the impairment of fixed assets included in Impairment expense. Revenues. Consolidated revenues increased $3.8 million, or 1%, in 2023 compared to 2022. This increase was primarily due to (i) increased occupancy at our Civeo owned villages in the Australian Bowen Basin and Gunnedah Basin and (ii) increased activity at our integrated services villages in Western Australia. These items were partially offset by (i) decreased mobile asset activity from pipeline projects in Canada, (ii) lower billed rooms at our Canadian lodges, (iii) reduced activity in the U.S. operations due to the sale of our wellsite and offshore businesses in the second half of 2022 and (iv) a weaker Australian and Canadian dollar relative to the U.S. dollar in 2023 compared to 2022. 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 $13.2 million, or 3%, in 2023 compared to 2022. This increase was primarily due to (i) increased occupancy at our Civeo owned villages in the Australian 49 Bowen Basin and Gunnedah Basin, (ii) increased activity at our integrated services villages in Western Australia and (iii) increased operating costs due to inflationary pressures in Australia. These items were partially offset by (i) reduced activity in the U.S. operations due to the sale of our wellsite and offshore businesses in the second half of 2022, (ii) lower costs related to reduced mobile asset activity in Canada, (iii) lower billed rooms at our Canadian lodges and (iv) a weaker Australian and Canadian dollar relative to the U.S. dollar in 2023 compared to 2022. See the discussion of segment results of operations below for further information. Selling, General and Administrative Expenses. SG&A expense increased $2.6 million, or 4%, in 2023 compared to 2022. This increase was primarily due to higher compensation expense of $2.4 million, higher information technology expense of $2.3 million and higher incentive compensation costs of $2.0 million. The increase in compensation expense was primarily due to increased staff and recruitment costs. The increase in information technology expense was related to ongoing investment in our newly implemented human capital management (HCM) system and set-up costs incurred in a cloud computing arrangement for the HCM system, which are being amortized through SG&A expense instead of depreciation and amortization expense. These items were partially offset by lower share-based compensation expense of $3.9 million and a weaker Australian and Canadian dollar relative to the U.S. dollar in 2023 compared to 2022 resulted in a $2.1 million decrease in SG&A expense. The decrease in share-based compensation expense was due to a relative decrease in our share price during 2023 compared to 2022. Depreciation and Amortization Expense. Depreciation and amortization expense decreased $12.1 million, or 14%, in 2023 compared to 2022. The decrease was primarily due to (i) the sale of our wellsite and offshore businesses in the U.S. in the second half of 2022, (ii) certain assets becoming fully depreciated in Canada in the second quarter of 2023 and (iii) lower depreciation and amortization expense due to a weaker Australian and Canadian dollar relative to the U.S. dollar in 2023 compared to 2022. This was partially offset by the shortening of the useful lives on certain assets in Canada, including the McClelland Lake Lodge. Impairment Expense. We recorded pre-tax impairment expense of $1.4 million in 2023 associated with long-lived assets in the U.S. We recorded pre-tax impairment expense of $5.7 million in 2022 associated with long-lived assets in the U.S. and our Australian reporting unit. See Note 4 - Impairment Charges to the notes to the consolidated financial statements included in Item 8 of this annual report for further discussion. Gain on Sale of McClelland Lake Lodge Assets, net. We recorded $18.6 million in 2023 related to net gains associated with the sale of the McClelland Lake Lodge. The remaining net gains related to the sale of the McClelland Lake Lodge will be recognized in the first quarter of 2024. Operating Income. Operating income increased $22.5 million, or 132%, in 2023 compared to 2022 primarily due to a net gain on sale of McClelland Lake Lodge assets, higher activity levels in Australia and lower depreciation and amortization and impairment expenses in 2023 compared to 2022. These items were partially offset by reduced mobile asset activity in Canada and increased operating costs due to inflationary pressures in 2023 compared to 2022. Interest (Expense) Income, net. Net interest expense increased $1.6 million, or 14%, in 2023 compared to 2022 primarily related to higher interest rates on credit facility borrowings during 2023 compared to 2022, partially offset by lower average debt levels. Other Income. Consolidated other income increased $8.7 million, or 170%, in 2023 compared to 2022. Other income in 2023 included $9.7 million in reimbursements associated with the dismantlement of the McClelland Lake Lodge. In addition, 2023 included gains related to the sale of our Acadian Acres accommodation assets in the U.S. and a gain on the settlement of an ARO in Canada. Other income in 2022 included $4.7 million in gains on the sale of assets primarily related to our Kambalda village and undeveloped land holdings in Australia, our wellsite and offshore businesses in the U.S. and various mobile assets across Canada, Australia and the U.S. Income Tax (Expense) Benefit. Our income tax expense for 2023 totaled $10.6 million, or 26.3% of pretax income, compared to an expense of $4.4 million, or 41.0% of pretax income for 2022. Our effective tax rate for 2023 and 2022 was higher than the Canadian federal statutory rate of 15%, primarily due to pre-tax income in Australia being taxed at the higher Australian income tax rate of 30%. Additionally, due to the 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 the U.S. In 2023, tax expense in Canada and the U.S. was offset by a valuation allowance release of $1.7 million and $0.8 million, respectively. In 2022, tax expense in Canada 50 was offset by a valuation allowance release of $0.6 million and the tax benefit in the U.S. was offset by an increase to the valuation allowance of $1.0 million. Other Comprehensive Income (Loss). Other comprehensive income increased $28.0 million in 2023 compared to 2022 primarily as a result of foreign currency translation adjustments due to changes in the Canadian and Australian dollar exchange rates compared to the U.S. dollar. The Canadian dollar exchange rate compared to the U.S. dollar increased 2.4% in 2023 compared to a 6.4% decrease in 2022. The Australian dollar exchange rate compared to the U.S. dollar increased 0.2% in 2023 compared to a 6.5% decrease in 2022. 51 Segment Results of Operations – Canadian Segment Year Ended December 31, 2023 2022 Change Revenues ($ in thousands) Accommodation revenue (1) $ 266,926 $ 279,455 $ (12,529) Mobile facility rental revenue (2) 61,899 96,400 (34,501) Food service and other services revenue (3) 23,970 20,142 3,828 Total revenues $ 352,795 $ 395,997 $ (43,202) Cost of sales and services ($ in thousands) Accommodation cost $ 195,843 $ 204,592 $ (8,749) Mobile facility rental cost 49,073 60,055 (10,982) Food service and other services cost 21,821 18,372 3,449 Indirect other cost 10,330 10,557 (227) Total cost of sales and services $ 277,067 $ 293,576 $ (16,509) Gross margin as a % of revenues 21.5 % 25.9 % (4.4) % Average daily rate for lodges (4) $ 97 $ 100 $ (3) Total billed rooms for lodges (5) 2,710,784 2,759,521 (48,737) Average Canadian dollar to U.S. dollar $ 0.741 $ 0.769 $ (0.028) (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 2023 that were $43.2 million, or 11%, lower than 2022. The weakening of the average exchange rate for the Canadian dollar relative to the U.S. dollar by 3.6% in 2023 compared to 2022 resulted in a $13.9 million period-over-period decrease in revenues. Excluding the impact of the weaker Canadian exchange rate, the revenue decrease was driven by (i) reduced mobile asset activity from pipeline projects and (ii) lower billed rooms at our lodges. Our Canadian segment cost of sales and services decreased $16.5 million, or 6%, in 2023 compared to 2022. The weakening of the average exchange rate for the Canadian dollar relative to the U.S. dollar by 3.6% in 2023 compared to 2022 resulted in a $10.8 million period-over-period decrease in cost of sales and services. Excluding the impact of the weaker Canadian exchange rate, the decrease in cost of sales and services was driven by lower costs related to the reduced mobile asset activity and reduced activity at certain lodges. Our Canadian segment gross margin as a percentage of revenues decreased from 25.9% in 2022 to 21.5% in 2023. This decrease was primarily driven by reduced margins from our mobile asset activity as certain higher margin components were recognized over the initial contract terms through late 2022, with 2023 representing mobile camp activity winding down. In addition, mobile camp demobilization costs of approximately $6.5 million were incurred in the second half of 2023. 52 Segment Results of Operations – Australian Segment Year Ended December 31, 2023 2022 Change Revenues ($ in thousands) Accommodation revenue (1) $ 177,834 $ 152,714 $ 25,120 Food service and other services revenue (2) 158,929 125,538 33,391 Total revenues $ 336,763 $ 278,252 $ 58,511 Cost of sales ($ in thousands) Accommodation cost $ 85,461 $ 73,325 $ 12,136 Food service and other services cost 148,599 119,957 28,642 Indirect other cost 8,951 7,662 1,289 Total cost of sales and services $ 243,011 $ 200,944 $ 42,067 Gross margin as a % of revenues 27.8 % 27.8 % — % Average daily rate for villages (3) $ 75 $ 75 $ — Total billed rooms for villages (4) 2,371,763 2,024,068 347,695 Australian dollar to U.S. dollar $ 0.665 $ 0.695 $ (0.030) (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 2023 that were $58.5 million, or 21%, higher than 2022. The weakening of the average exchange rate for Australian dollars relative to the U.S. dollar by 4.3% in the 2023 compared to 2022 resulted in a $14.9 million period-over-period decrease in revenues. Excluding the impact of the weaker Australian exchange rate, the increase in the Australian segment was driven by increased activity at our Civeo owned villages in the Bowen Basin and Gunnedah Basin and our integrated services villages in Western Australia. Our Australian segment cost of sales and services increased $42.1 million, or 21%, in 2023 compared to 2022. The weakening of the average exchange rate for Australian dollars relative to the U.S. dollar by 4.3% in 2023 compared to 2022 resulted in a $10.8 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 Civeo owned villages in the Bowen Basin and Gunnedah Basin and our integrated services villages in Western Australia and increased operating costs due to inflationary pressures. Our Australian segment gross margin as a percentage of revenues remained constant at 27.8% in both 2023 and 2022. The increased revenue contribution in 2023 from our integrated services business, which has a service only-business model and therefore generates lower overall margins than our accommodation business, had a negative impact on margins in 2023. This negative impact was offset by improved margins at Civeo owned villages in the Bowen Basin and Gunnedah Basin as a result of increased activity and improved margins in the integrated services business due to reduced costs realized from our inflation mitigation plan in the year. 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 and purchasing or leasing land, to pay dividends, to repurchase common shares and for general working capital needs. In addition, capital has been used to repay debt and fund strategic business acquisitions. In the future, capital may be required to move lodges from one site to another. 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 or refinance debt. 53 The following summarizes our material future cash requirements at December 31, 2023, 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 $ 65,554 $ — $ 65,554 $ — $ — Interest payments (1) 10,236 6,031 4,205 — — Purchase obligations 11,064 11,064 — — — Non-cancelable lease obligations 15,713 4,563 6,531 4,065 554 Asset retirement obligations – expected cash payments 68,645 2,576 2,066 2,365 61,638 Total contractual cash obligations $ 171,212 $ 24,234 $ 78,356 $ 6,430 $ 62,192 (1) Interest payments due under the Credit Agreement, which matures on September 8, 2025; based on an interest rate of 9.2% for Canadian revolver borrowings. Our debt obligations at December 31, 2023 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, 2023. The following table summarizes our consolidated liquidity position as of December 31, 2023 and 2022 (in thousands): December 31, 2023 2022 Lender commitments $ 200,000 $ 200,000 Borrowings against revolving credit capacity (65,554) (102,505) Outstanding letters of credit (1,353) (1,365) Unused availability 133,093 96,130 Cash and cash equivalents 3,323 7,954 Total available liquidity $ 136,416 $ 104,084 Cash totaling $96.6 million was provided by operations during 2023 compared to $91.8 million provided by operations during 2022. During 2023 and 2022, net cash used for working capital was $1.6 million and $13.9 million, respectively. The decrease in cash used for working capital in 2023 compared to 2022 is largely due to payments received from a customer for village enhancements in Australia and other working capital changes driven by timing of receipts and payments during 2023 compared to 2022. Cash used in investing activities during 2023 totaled $14.5 million compared to cash used in investing activities during 2022 of $8.9 million. The increase in cash used in investing activities was primarily due to higher capital expenditures. Capital expenditures totaled $31.6 million and $25.4 million during 2023 and 2022, respectively. Capital expenditures in both periods were primarily related to maintenance. In addition, our 2023 capital expenditures included approximately $10 million related to customer-funded infrastructure upgrades in Australia. We received net proceeds from the sale of property, plant and equipment of $16.7 million during 2023 primarily related to the sale of our McClelland Lake Lodge accommodation assets in Canada and Acadian Acres accommodation assets in the U.S., compared to $16.3 million during 2022 primarily related to the sale of our Kambalda village and undeveloped land holdings in Australia, unused corporate office space and various mobile assets in Canada and our wellsite and offshore businesses in the U.S. We expect our capital expenditures for 2024 to be in the range of $30 million to $35 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 2024 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 and return of capital to shareholders. We continue to monitor the global economy, commodity prices, demand for crude oil, met coal, LNG and iron ore, inflation 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. 54 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, 2023 and 2022 (in millions): Year Ended December 31, 2023 2022 Expansion Maint Total Expansion Maint Total Lodge/village $ 12.8 $ 11.6 $ 24.4 $ 0.2 $ 19.7 $ 19.9 Mobile assets 1.3 — 1.3 — 1.1 1.1 Other 2.4 3.5 5.9 2.0 2.4 4.4 Total $ 16.5 $ 15.1 $ 31.6 $ 2.2 $ 23.2 $ 25.4 Expansion lodge and village spending in 2023 was largely related to customer-funded infrastructure upgrades at three Australian villages. Maintenance lodge and village spending in 2023 and 2022 was primarily associated with routine maintenance projects at our major properties. Mobile asset spending in 2023 was primarily related to an asset storage yard purchased in Canada. Mobile asset spending in 2022 was primarily related to routine maintenance of our mobile assets in the U.S. and Canadian markets. Other maintenance and expansion spending in 2023 was primarily related to miscellaneous equipment and supplies to support the day-to-day operations at our accommodation and laundry facilities and information technology infrastructure to support our business. Other maintenance and expansion spending in 2022 was primarily associated with mobilization of new sites at our integrated services business in Western Australia, 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. Cash used in financing activities during 2023 of $86.8 million was primarily due to (i) net repayments under our revolving credit facilities of $37.8 million, (ii) repayments of term loan borrowings of $29.9 million, (iii) repurchases of our common shares of $11.6 million and (iv) dividend payments of $7.4 million. Cash used in financing activities during 2022 of $79.7 million was primarily due to (i) repayments of term loan borrowings of $30.4 million, (ii) repurchases of our preferred shares and our common shares of $30.6 million and $14.2 million, respectively, (iii) net repayments under our revolving credit facilities of $3.4 million, (iv) settlement of tax obligations on vested shares under our share-based compensation plans of $1.0 million and (v) a cash dividend paid on our preferred shares in connection with the repurchase of $0.1 million. The following table summarizes the changes in debt outstanding during 2023 (in thousands): Canada Australia Total Balance as of December 31, 2022 $ 130,679 $ 1,358 $ 132,037 Borrowings under revolving credit facilities 199,247 11,337 210,584 Repayments of borrowings under revolving credit facilities (235,670) (12,760) (248,430) Repayments of term loans (29,899) — (29,899) Translation 1,197 65 1,262 Balance at December 31, 2023 $ 65,554 $ — $ 65,554 We believe that cash on hand and cash flow from operations will be sufficient to meet our anticipated liquidity needs for the next 12 months. If our plans or assumptions change, including as a result of changes in our customers' capital spending or changes in the price of and demand for natural resources, 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 55 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 2023, 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 742,134 common shares, over a twelve month period. In addition, our Board declared quarterly dividends of $0.25 per common share to shareholders of record as of close of business on September 15, 2023 and November 27, 2023. Dividend payments of $3.7 million were made on both September 29, 2023 and December 18, 2023. The dividends are eligible dividends pursuant to the Income Tax Act (Canada). See Note 17 – Share Repurchase Programs and Dividends to the notes to the consolidated financial statements included in Item 8 of this annual report for further discussion. Credit Agreement As of December 31, 2023, 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, which was fully repaid on December 31, 2023, in favor of Civeo. As of December 31, 2023, we had outstanding letters of credit of $0.3 million under the U.S. facility, zero under the Australian facility and $1.1 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 We intend to pay regular quarterly dividends on our common shares, with all future dividend payments subject to quarterly review and approval by our Board. 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 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. 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 continue to pay a dividend in the future. 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. 56 Impairment of 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 • 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 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 eight 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 and South Australia • Gunnedah Basin ◦ Narrabri – Gunnedah Basin, New South Wales ◦ Boggabri – Gunnedah Basin, New South Wales • Bowen Basin ◦ Moranbah – Bowen Basin, Queensland 57 ◦ 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 and South Australia. U.S. consists of a lodge, land and a wastewater treatment plant (WWTP). These properties are grouped in the following asset groups: • Killdeer Lodge – North Dakota • Acadian Acres land – Louisiana • 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. 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. In some cases our estimate of fair value is based on appraisals from third parties. 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. 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, 2023, 2022 and 2021. 58 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. 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 range from several months to multiple 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. 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. 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 could be subject to both Canadian income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to various foreign countries. 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. 59 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.