Item 2. Management’s Discussion and Analysis
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
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, reserve replacement, 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, metallurgical (met) coal, liquefied natural gas (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, driven by many factors including rising fears of a recession resulting from severe inflation and higher interest rates, 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 Middle East conflicts and rising geopolitical risks in the Middle East, United States (U.S.) oil production levels and regulatory implications on such prices. In particular, these items could cause our Canadian oil sands and
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pipeline 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)
Third Quarter through July 26, 2024
$ 81.27 $ 64.98 $ 238.80 $ 100.82
6/30/2024 80.83 67.24 242.93 106.01
3/31/2024 77.01 59.48 307.68 118.54
12/31/2023 78.60 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
(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 generally declined due to (i) rising fears of a recession resulting from severe inflation and higher interest rates, (ii) resulting lower demand growth for oil and (iii) increasing U.S. oil production. In an effort to support the price of oil amidst demand concerns, OPEC+ countries have extended their 2023 oil production cuts through the remainder of 2024 and into 2025. These production cuts, coupled with the rising geopolitical risks in the Middle East, resulted in rising oil prices during the first half of 2024 following a decline in prices in the latter part of the fourth quarter 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, most notably the Trans Mountain Pipeline expansion, which began operating in the second quarter of 2024.
WCS prices in the second quarter of 2024 averaged $67.24 per barrel compared to an average of $60.25 in the second quarter of 2023. The WCS Differential decreased from $19.35 per barrel at the end of the fourth quarter of 2023 to $15.27 at the end of the second quarter of 2024. As of July 26, 2024, the WTI price was $77.16 and the WCS price was $60.26, resulting in a WCS Differential of $16.90
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 by the level of global steel production, which remained flat through June 2024 compared to the same period of 2023. Production stability was the result of steady production in China and continued growth in India, which offset weaker production in the U.S., Japan and South Korea. As of July 26, 2024, met coal spot prices were $217.00 per tonne. Steel demand is expected to increase marginally in 2024 compared to 2023, with continued improvements in demand from India.
Met coal prices weakened in March through early April 2024. Prices have since stabilized in the range of approximately $220 to $250 per tonne and continue to support existing production. As supply remains steady and with limited prospects in demand growth, analysts forecast prices to average $235 to $245 over the second-half of 2024.
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Iron Ore. Iron ore prices fluctuated during the first quarter of 2024 and weakened through June 2024, with prices having since stabilized at approximately $105 per tonne. Analysts expect iron ore prices to average $105 to $110 through the second-half of 2024, with stable supply and steady demand.
Other
Inflationary Pressures. During 2023 and through the second quarter of 2024, inflationary pressures and supply chain disruptions have been, and are being, 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, we continue to be impacted by increased staff costs as a result of hospitality labor shortages in Australia due to 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 conflicts between Russia/Ukraine and in the Middle East have 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, with commercial operations beginning in 2025. 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 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 our 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. 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. Our McClelland Lake Lodge assets were dismantled and completely removed from the existing site in January 2024. During the third and fourth quarters of 2023, we recognized $14.2 million in dismantle costs and received $28.2 million in cash proceeds associated with the sale. During the first quarter of 2024, the transaction was completed, and we recognized the remaining $1.0 million in dismantle costs and received the remaining $7.8 million in cash proceeds.
U.S. Business. In the second quarter of 2024, we sold the land at our Louisiana location. In addition, in the first quarter of 2023, we sold our accommodation assets in Louisiana. Our U.S. business supports completion 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 (loss) in Canada and Australia. These revenues and profits/losses are translated into U.S. dollars for financial reporting purposes under U.S. Generally Accepted Accounting Principles. 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:
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Three Months Ended
June 30, Six Months Ended
June 30,
2024 2023 Change Percentage 2024 2023 Change Percentage
Average Canadian dollar to U.S. dollar $0.731 $0.745 ($0.01) (1.9)% $0.736 $0.742 ($0.01) (0.8)%
Average Australian dollar to U.S. dollar $0.659 $0.668 ($0.01) (1.3)% $0.658 $0.676 ($0.02) (2.7)%
As of
June 30, 2024 December 31, 2023 Change Percentage
Canadian dollar to U.S. dollar $0.731 $0.756 ($0.03) (3.4)%
Australian dollar to U.S. dollar $0.667 $0.681 ($0.01) (2.0)%
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 $31.6 million. We may adjust our capital expenditure plans in the future as we continue to monitor customer activity.
See “Liquidity and Capital Resources ” below for further discussion of our 2024 capital expenditures.
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Results of Operations
Unless otherwise indicated, discussion of results for the three and six months ended June 30, 2024, is based on a comparison to the corresponding period of 2023.
Results of Operations – Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023
Three Months Ended
June 30,
2024 2023 Change
($ in thousands)
Revenues:
Canada $ 79,527 $ 95,470 $ (15,943)
Australia 108,608 82,544 26,064
Other 578 829 (251)
Total revenues 188,713 178,843 9,870
Costs and expenses:
Cost of sales and services
Canada 58,849 71,845 (12,996)
Australia 81,037 58,545 22,492
Other 948 1,035 (87)
Total cost of sales and services 140,834 131,425 9,409
Selling, general and administrative expenses 17,433 16,459 974
Depreciation and amortization expense 17,059 20,701 (3,642)
Loss on sale of McClelland Lake Lodge assets, net 87 — 87
Other operating expense 188 86 102
Total costs and expenses 175,601 168,671 6,930
Operating income 13,112 10,172 2,940
Interest expense, net (2,149) (3,554) 1,405
Other income 310 427 (117)
Income before income taxes 11,273 7,045 4,228
Income tax expense (3,786) (2,878) (908)
Less: Net income attributable to noncontrolling interest 7,487 4,167 3,320
Less: Net loss attributable to noncontrolling interest (740) (296) (444)
Net income attributable to Civeo Corporation $ 8,227 $ 4,463 $ 3,764
We reported net income attributable to Civeo for the quarter ended June 30, 2024 of $8.2 million, or $0.56 per diluted share compared to net income attributable to Civeo for the quarter ended June 30, 2023 of $4.5 million, or $0.30 per diluted share.
Revenues. Consolidated revenues increased $9.9 million, or 6%, in the second quarter of 2024 compared to the second quarter of 2023. This increase was primarily due to (i) increased activity at our Civeo owned villages in the Australian Bowen Basin, (ii) new business in our integrated services villages in Western Australia and (iii) increased year-over-year occupancy in our Canadian oil sands lodges. These items were partially offset by declined occupancy associated with the sale of the McClelland Lake Lodge and reduced mobile asset activity from pipeline projects in Canada which were largely completed in 2023. 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 $9.4 million, or 7%, in the second quarter of 2024 compared to the second quarter of 2023. This increase was primarily due to increased occupancy at our Civeo owned villages in the Australian Bowen Basin and new business in our integrated services villages in Western Australia and the associated overhead costs. These items were partially offset by decreased mobile asset activity from pipeline projects in Canada which were largely completed in 2023 and lower costs at certain lodges, including the McClelland Lake Lodge, in Canada. See the discussion of segment results of operations below for further information.
Selling, General and Administrative Expenses. SG&A expenses increased $1.0 million, or 6%, in the second quarter of 2024 compared to the second quarter of 2023. This increase was primarily due to higher compensation expense of $1.3
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million and higher travel and entertainment costs of $0.4 million. The increase in compensation expense was primarily due to severance costs and increased staff and associated recruitment costs. These items were partially offset by lower incentive compensation costs of $0.7 million in the second quarter of 2024 compared to the second quarter of 2023.
Depreciation and Amortization Expense. Depreciation and amortization expense decreased $3.6 million, or 18%, in the second quarter of 2024 compared to the second quarter of 2023. The decrease was primarily due to certain assets becoming fully depreciated in Canada, including the McClelland Lake Lodge, in the second quarter of 2023.
Operating Income. Consolidated operating income increased $2.9 million, or 29%, in the second quarter of 2024 compared to the second quarter of 2023, primarily due to higher activity levels in Australia and lower depreciation and amortization expense in the second quarter of 2024 compared to the second quarter of 2023. These items were partially offset by reduced mobile asset activity in Canada in the second quarter of 2024 compared to the second quarter of 2023.
Interest Expense, net. Net interest expense decreased by $1.4 million, or 40%, in the second quarter of 2024 compared to the second quarter of 2023, primarily related to lower average debt levels during 2024 compared to 2023, partially offset by higher interest rates on credit facility borrowings.
Income Tax Expense. Our income tax expense for the three months ended June 30, 2024 totaled $3.8 million, or 33.6% of pretax income, compared to an income tax expense of $2.9 million, or 40.9% of pretax income, for the three months ended June 30, 2023. Our effective tax rate for each of the three months ended June 30, 2024 and 2023 was impacted by Canada and the U.S. being considered loss jurisdictions that were removed from the annual effective tax rate computation for purposes of computing the interim tax provision.
Other Comprehensive Income. Other comprehensive income decreased $0.5 million in the second quarter of 2024 compared to the second quarter of 2023, primarily as a result of foreign currency translation adjustments due to changes in the Canadian and Australian dollar exchange rates compared to the U.S. dollar. The Canadian dollar exchange rate compared to the U.S. dollar decreased 1% in the second quarter of 2024 compared to a 2% increase in the second quarter of 2023. The Australian dollar exchange rate compared to the U.S. dollar increased 2% in the second quarter of 2024 compared to a 1% decrease in the second quarter of 2023.
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Segment Results of Operations – Canadian Segment
Three Months Ended
June 30,
2024 2023 Change
Revenues ($ in thousands)
Accommodation revenue (1)
$ 72,259 $ 72,355 $ (96)
Mobile facility rental revenue (2)
356 17,407 (17,051)
Food service and other services revenue (3)
6,912 5,708 1,204
Total revenues $ 79,527 $ 95,470 $ (15,943)
Cost of sales and services ($ in thousands)
Accommodation cost $ 48,197 $ 52,431 $ (4,234)
Mobile facility rental cost 1,401 11,598 (10,197)
Food service and other services cost 6,314 5,060 1,254
Indirect other costs 2,937 2,756 181
Total cost of sales and services $ 58,849 $ 71,845 $ (12,996)
Gross margin as a % of revenues 26.0 % 24.7 % 1.3 %
Average daily rate for lodges (4)
$ 96 $ 100 $ (4)
Total billed rooms for lodges (5)
752,364 724,299 28,065
Average Canadian dollar to U.S. dollar $ 0.731 $ 0.745 $ (0.014)
(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 second quarter of 2024 that were $15.9 million, or 17%, lower than the second quarter of 2023. The revenue decrease was driven by reduced mobile asset activity from pipeline projects which were largely completed in 2023. Lower mobile asset activity was partially offset by increased year-over-year occupancy in our oil sands lodges with billed rooms up 3.9% due to the timing and extent of maintenance activity by our customers, with some offset from declined occupancy associated with the sale of the McClelland Lake Lodge.
Our Canadian segment cost of sales and services decreased $13.0 million, or 18%, in the second quarter of 2024 compared to the second quarter of 2023. The cost of sales and services decrease was driven by lower costs related to reduced mobile asset activity from pipeline projects which were largely completed in 2023 and lower costs at certain lodges including the McClelland Lake Lodge resulting from the sale.
Our Canadian segment gross margin as a percentage of revenues increased from 24.7% in the second quarter of 2023 to 26.0% in the second quarter of 2024. This was primarily driven by improved margins at our lodges due to improved efficiencies at higher occupancy levels and the removal of certain fixed costs with the sale of the McClelland Lake Lodge, partially offset by reduced mobile asset activity from pipeline projects which were largely completed in 2023 and mobile camp demobilization costs of approximately $1.4 million which were incurred in the second quarter of 2024.
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Segment Results of Operations – Australian Segment
Three Months Ended
June 30,
2024 2023 Change
Revenues ($ in thousands)
Accommodation revenue (1)
$ 48,914 $ 44,342 $ 4,572
Food service and other services revenue (2)
59,694 38,202 21,492
Total revenues $ 108,608 $ 82,544 $ 26,064
Cost of sales and services ($ in thousands)
Accommodation cost $ 23,613 $ 20,948 $ 2,665
Food service and other services cost 54,527 35,372 19,155
Indirect other cost 2,897 2,225 672
Total cost of sales and services $ 81,037 $ 58,545 $ 22,492
Gross margin as a % of revenues 25.4 % 29.1 % (3.7) %
Average daily rate for villages (3)
$ 78 $ 75 $ 3
Total billed rooms for villages (4)
625,353 587,855 37,498
Average Australian dollar to U.S. dollar $ 0.659 $ 0.668 $ (0.009)
(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 second quarter of 2024 that were $26.1 million, or 32%, higher than the second quarter of 2023. The increase in the Australian segment was driven by increased activity at our Civeo owned villages in the Bowen Basin and new business in our integrated services villages in Western Australia. Billed rooms in Civeo owned villages were up 6.4% in the second quarter of 2024 due to increased activity in both the Bowen Basin and Gunnedah Basin coupled with recent contract renewals and extensions.
Our Australian segment cost of sales and services increased $22.5 million, or 38%, in the second quarter of 2024 compared to the second quarter of 2023. The increase in cost of sales and services in the Australian segment was largely driven by increased occupancy at our Civeo owned villages in the Bowen Basin and new business in our integrated services villages in Western Australia and the associated overhead costs.
Our Australian segment gross margin as a percentage of revenues decreased to 25.4% in the second quarter of 2024 from 29.1% in the second quarter of 2023. This was primarily driven by an increased relative revenue contribution from our integrated services business, which has a service-only business model, and generates lower overall gross margins than our accommodation business. The reduced gross margin was partially offset by improved profitability across the integrated services villages in the second quarter of 2024.
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Results of Operations – Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023
Six Months Ended
June 30,
2024 2023 Change
($ in thousands)
Revenues:
Canada $ 146,687 $ 184,923 $ (38,236)
Australia 200,345 159,533 40,812
Other 7,801 1,978 5,823
Total revenues 354,833 346,434 8,399
Costs and expenses:
Cost of sales and services
Canada 116,106 145,750 (29,644)
Australia 147,150 116,853 30,297
Other 8,023 2,336 5,687
Total cost of sales and services 271,279 264,939 6,340
Selling, general and administrative expenses 36,073 32,649 3,424
Depreciation and amortization expense 33,829 42,363 (8,534)
Impairment expense 7,823 — 7,823
Gain on sale of McClelland Lake Lodge assets, net (5,988) — (5,988)
Other operating expense 486 215 271
Total costs and expenses 343,502 340,166 3,336
Operating income 11,331 6,268 5,063
Interest expense, net (4,466) (7,178) 2,712
Other income 763 2,877 (2,114)
Income before income taxes 7,628 1,967 5,661
Income tax expense (5,337) (4,111) (1,226)
Less: Net income (loss) attributable to noncontrolling interest 2,291 (2,144) 4,435
Less: Net loss attributable to noncontrolling interest (803) (254) (549)
Net income (loss) attributable to Civeo Corporation $ 3,094 $ (1,890) $ 4,984
We reported net income attributable to Civeo for six months ended June 30, 2024 of $3.1 million, or $0.21 per diluted share. As further discussed below, net income included (i) $6.0 million of net gains associated with the sale of the McClelland Lake Lodge in Canada and (ii) a $7.8 million pre-tax loss resulting from the impairment of fixed assets included in Impairment expense.
We reported net loss attributable to Civeo for the six months ended June 30, 2023 of $1.9 million, or $0.13 per diluted share.
Revenues. Consolidated revenues increased $8.4 million, or 2%, in the six months ended June 30, 2024 compared to the six months ended June 30, 2023. This increase was primarily due to increased activity at our Civeo owned villages in the Australian Bowen Basin and new business in our integrated services villages in Western Australia. These items were partially offset by decreased mobile asset activity from pipeline projects in Canada which were largely completed in 2023 and a weaker Australian dollar relative to the U.S. dollar in the six months ended June 30, 2024 compared to the six months ended June 30, 2023. 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 $6.3 million, or 2%, in the six months ended June 30, 2024 compared to the six months ended June 30, 2023. This increase was primarily due to increased occupancy at our Civeo owned villages in our Australian Bowen Basin and new business in our integrated services villages in Western Australia and the associated overhead costs. These items were partially offset by the decrease in cost of sales and services largely driven by (i) reduced mobile asset activity from pipeline projects in Canada which were largely completed in 2023, (ii) lower costs at certain lodges in Canada and (iii) a weaker Australian dollar relative to the U.S. dollar in the six months ended June 30, 2024 compared to the six months ended June 30, 2023. See the discussion of segment results of operations below for further information.
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Selling, General and Administrative Expenses. SG&A expenses increased $3.4 million, or 10%, in the six months ended June 30, 2024 compared to the six months ended June 30, 2023. This increase was primarily due to higher compensation expense of $3.0 million, higher travel and entertainment costs of $0.9 million and higher professional fees of $0.6 million. The increase in compensation expense was primarily due to $1.1 million in severance costs related to the departure of our former Chief Financial Officer, other severance costs and increased staff and associated recruitment costs. These items were partially offset by lower share-based compensation expense of $1.1 million and a weaker Australian dollar relative to the U.S. dollar in the six months ended June 30, 2024 compared to the six months ended June 30, 2023. The decrease in share-based compensation expense was primarily due to forfeitures during 2024 compared to 2023, partially offset by the changes in our share price during 2024 compared to 2023.
Depreciation and Amortization Expense. Depreciation and amortization expense decreased $8.5 million, or 20%, in six months ended June 30, 2024 compared to the six months ended June 30, 2023 The decrease was primarily due to certain assets becoming fully depreciated in Canada, including the McClelland Lake Lodge, in the six months ended June 30, 2023 and lower depreciation and amortization expense due to a weaker Australian dollar relative to the U.S. dollar in the six months ended June 30, 2024 compared to the six months ended June 30, 2023.
Impairment Expense. We recorded pre-tax impairment expense of $7.8 million in six months ended June 30, 2024 associated with long-lived assets in Australia and the U.S.
See Note 3 - Impairment Charges to the notes to the unaudited consolidated financial statements included in Item 1 of this quarterly report for further discussion.
Gain on Sale of McClelland Lake Lodge Assets, net. We recorded $6.0 million in the six months ended June 30, 2024 related to net gains associated with the sale of the McClelland Lake Lodge.
Operating Income. Consolidated operating income increased $5.1 million, or 81%, in the six months ended June 30, 2024 compared to the six months ended June 30, 2023, primarily due to a net gain on sale of McClelland Lake Lodge assets, higher activity levels in Australia and lower depreciation and amortization expense in the six months ended June 30, 2024 compared to the six months ended June 30, 2023. These items were partially offset by reduced mobile asset activity in Canada and impairment expenses in the six months ended June 30, 2024 compared to the six months ended June 30, 2023.
Interest Expense, net. Net interest expense decreased by $2.7 million, or 38%, in the six months ended June 30, 2024 compared to the six months ended June 30, 2023, primarily related to lower average debt levels during 2024 compared to 2023, partially offset by higher interest rates on credit facility borrowings.
Other Income. Consolidated other income decreased $2.1 million in the six months ended June 30, 2024 compared to the six months ended June 30, 2023, primarily due to higher gain on the sale of assets related to the sale of our Louisiana accommodation assets in the U.S. in the six months ended June 30, 2023 compared to the six months ended June 30, 2024.
Income Tax Expense. Our income tax expense for the six months ended June 30, 2024 totaled $5.3 million, or 70.0% of pretax income, compared to an income tax expense of $4.1 million, or 209.0% of pretax income, for the six months ended June 30, 2023. Our effective tax rate for each of the six months ended June 30, 2024 and 2023 was impacted by Canada and the U.S. being considered loss jurisdictions that were removed from the annual effective tax rate computation for purposes of computing the interim tax provision.
Other Comprehensive Loss. Other comprehensive loss increased $8.5 million in the six months ended June 30, 2024 compared to the six months ended June 30, 2023, primarily as a result of foreign currency translation adjustments due to changes in the Canadian and Australian dollar exchange rates compared to the U.S. dollar. The Canadian dollar exchange rate compared to the U.S. dollar decreased 3% in the six months ended June 30, 2024 compared to a 2% increase in the six months ended June 30, 2023. The Australian dollar exchange rate compared to the U.S. dollar decreased 2% in the six months ended June 30, 2024 compared to a 2% decrease in the six months ended June 30, 2023.
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Segment Results of Operations – Canadian Segment
Six Months Ended
June 30,
2024 2023 Change
Revenues ($ in thousands)
Accommodation revenue (1)
$ 132,046 $ 136,583 $ (4,537)
Mobile facility rental revenue (2)
1,350 37,438 (36,088)
Food service and other services revenue (3)
13,291 10,902 2,389
Total revenues $ 146,687 $ 184,923 $ (38,236)
Cost of sales and services ($ in thousands)
Accommodation cost $ 93,917 $ 104,529 $ (10,612)
Mobile facility rental cost 4,052 26,100 (22,048)
Food service and other services cost 12,454 9,834 2,620
Indirect other costs 5,683 5,287 396
Total cost of sales and services $ 116,106 $ 145,750 $ (29,644)
Gross margin as a % of revenues 20.8 % 21.2 % (0.3) %
Average daily rate for lodges (4)
$ 97 $ 98 $ (1)
Total billed rooms for lodges (5)
1,362,396 1,367,095 (4,699)
Average Canadian dollar to U.S. dollar $ 0.736 $ 0.742 $ (0.006)
(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 six months ended June 30, 2024 that were $38.2 million, or 21%, lower than the six months ended June 30, 2023. The revenue decrease was driven by reduced mobile asset activity from pipeline projects which were largely completed in 2023.
Our Canadian segment cost of sales and services decreased $29.6 million, or 20%, in the six months ended June 30, 2024 compared to the six months ended June 30, 2023. The cost of sales and services decrease was driven by lower costs related to reduced mobile asset activity from pipeline projects which were largely completed in 2023 and lower costs at certain lodges.
Our Canadian segment gross margin as a percentage of revenues decreased from 21.2% in the six months ended June 30, 2023 to 20.8% in the six months ended June 30, 2024. This was primarily driven by reduced mobile asset activity from pipeline projects which were largely completed in 2023 and mobile camp demobilization costs of approximately $3.2 million which were incurred in the first six months of 2024, partially offset by improved margins at our lodges due to improved efficiencies and the removal of certain fixed costs with the sale of the McClelland Lake Lodge.
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Segment Results of Operations – Australian Segment
Six Months Ended
June 30,
2024 2023 Change
Revenues ($ in thousands)
Accommodation revenue (1)
$ 96,021 $ 84,941 $ 11,080
Food service and other services revenue (2)
104,324 74,592 29,732
Total revenues $ 200,345 $ 159,533 $ 40,812
Cost of sales and services ($ in thousands)
Accommodation cost $ 46,207 $ 41,266 $ 4,941
Food service and other services cost 95,431 71,234 24,197
Indirect other cost 5,512 4,353 1,159
Total cost of sales and services $ 147,150 $ 116,853 $ 30,297
Gross margin as a % of revenues 26.6 % 26.8 % (0.2) %
Average daily rate for villages (3)
$ 77 $ 76 $ 1
Total billed rooms for villages (4)
1,239,289 1,110,568 128,721
Average Australian dollar to U.S. dollar $ 0.658 $ 0.676 $ (0.018)
(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 six months ended June 30, 2024 that were $40.8 million, or 26%, higher than the six months ended June 30, 2023. The weakening of the average exchange rate for Australian dollars relative to the U.S. dollar by 2.7% in the six months ended June 30, 2024 compared to the six months ended June 30, 2023 resulted in a $5.1 million period-over-period decrease in revenues. On a constant currency basis, the Australian segment experienced a 29% period-over-period increase 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 new business in our integrated services villages in Western Australia. Billed rooms in Civeo owned villages were up 11.6% in the first half of 2024 due to increased activity in both the Bowen Basin and Gunnedah Basin coupled with recent contract renewals and extensions. Excluding the weakening Australian dollar, average daily rates for Civeo owned villages were up 4.4% year-over-year.
Our Australian segment cost of sales and services increased $30.3 million, or 26%, in the six months ended June 30, 2024 compared to the six months ended June 30, 2023. The weakening of the average exchange rate for Australian dollars relative to the U.S. dollar by 2.7% in the six months ended June 30, 2024 compared to the six months ended June 30, 2023 resulted in a $3.7 million period-over-period decrease in cost of sales and services. Excluding the impact of the weaker Australian exchange rate, the increase in the Australian segment was largely driven by increased occupancy at our Civeo owned villages in the Bowen Basin and new business in our integrated services villages in Western Australia and the associated overhead costs.
Our Australian segment gross margin as a percentage of revenues decreased to 26.6% in the six months ended June 30, 2024 from 26.8% in the six months ended June 30, 2023. This was primarily driven by an increased relative revenue contribution from our integrated services business, which has a service-only business model and therefore generates lower overall gross margins than our accommodation business. The reduced gross margin was partially offset by improved profitability across our integrated services villages in the six months ended June 30, 2024.
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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. 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, capital may be required to move lodges from one site to another, and 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.
The following table summarizes our consolidated liquidity position as of June 30, 2024 and December 31, 2023 (in thousands):
June 30, 2024 December 31, 2023
Lender commitments $ 200,000 $ 200,000
Borrowings against revolving credit capacity (47,489) (65,554)
Outstanding letters of credit (977) (1,353)
Unused availability 151,534 133,093
Cash and cash equivalents 7,435 3,323
Total available liquidity $ 158,969 $ 136,416
Cash totaling $38.3 million was provided by operations during the six months ended June 30, 2024, compared to $19.8 million provided by operations during the six months ended June 30, 2023. During the six months ended June 30, 2024 and 2023, $2.4 million was provided by working capital and $25.2 million was used in working capital, respectively. The year-over-year increase in cash provided by working capital in 2024 compared to 2023 is largely due to the collection of holdbacks in Canada related to the completion of mobile asset pipeline projects during the six months ended June 30, 2024 compared to the six months ended June 30, 2023.
Cash was used in investing activities during the six months ended June 30, 2024 in the amount of $0.1 million, compared to cash used in investing activities during the six months ended June 30, 2023 in the amount of $9.0 million. The decrease in cash used in investing activities was primarily due to higher proceeds from the sale of property, plant and equipment. We received net proceeds from the sale of property, plant and equipment of $10.6 million during the six months ended June 30, 2024 related to the sale of our McClelland Lake Lodge accommodation assets in Canada and the sale of our Louisiana land in the U.S., compared to $2.7 million during the six months ended June 30, 2023 primarily related to the sale of our Louisiana accommodation assets in the U.S. Capital expenditures totaled $10.9 million and $11.7 million during the six months ended June 30, 2024 and 2023, respectively. Capital expenditures in both periods were primarily related to maintenance. In addition, our 2024 capital expenditures included approximately $2.9 million related to customer-funded infrastructure upgrades in Australia.
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.
Net cash of $34.1 million was used in financing activities during the six months ended June 30, 2024 primarily due to net repayments under our revolving credit facilities of $15.8 million, repurchases of our common shares of $9.9 million, dividend payments of $7.4 million and payments to settle tax obligations on vested shares under our share-based compensation plans of $1.1 million. Net cash of $6.9 million was used in financing activities during the six months ended June 30, 2023 primarily due
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to term loan repayments of $14.9 million and repurchases of our common shares of $8.0 million, partially offset by net borrowings under our revolving credit facilities of $16.0 million.
The following table summarizes the changes in debt outstanding during the six months ended June 30, 2024 (in thousands):
Balance at December 31, 2023 $ 65,554
Borrowings under revolving credit facilities 120,816
Repayments of borrowings under revolving credit facilities (136,641)
Translation (2,240)
Balance at June 30, 2024 $ 47,489
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 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 of Directors (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 in the first and second quarters of 2024. The dividend is an eligible dividend pursuant to the Income Tax Act (Canada). See Note 12 – Share Repurchase Programs and Dividends to the notes to the unaudited consolidated financial statements included in Item 1 of this quarterly report for further discussion.
Credit Agreement
As of June 30, 2024, our Credit Agreement (as then amended to date, the Credit Agreement) provided for a $200.0 million revolving credit facility scheduled to mature on September 8, 2025, allocated as follows: (A) a $10.0 million senior secured revolving credit facility in favor of one of our U.S. subsidiaries, as borrower; (B) a $155.0 million senior secured revolving credit facility in favor of Civeo, as borrower; and (C) a $35.0 million senior secured revolving credit facility in favor of one of our Australian subsidiaries, as borrower. A C$100.0 million term loan facility provided under the Credit Agreement was fully repaid on December 31, 2023.
As of June 30, 2024, we had outstanding letters of credit of $0.3 million under the U.S. facility, zero under the Australian facility and $0.7 million under the Canadian facility. We also had outstanding bank guarantees of A$1.6 million under the Australian facility.
See Note 8 – Debt to the notes to the unaudited consolidated financial statements included in Item 1 of this quarterly report for further discussion.
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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
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, 2023. 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. There have been no material changes to the judgments, assumptions and estimates upon which our critical accounting estimates are based.
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