Civeo Corp 10-Q

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis together with our consolidated financial statements and the notes to those statements included elsewhere in this quarterly report on Form 10-Q. Overview and Macroeconomic Environment Demand for our hospitality services is driven primarily by ongoing operations of existing natural resource projects in Australia and Canada. 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, annual maintenance requirements and the expectations of our customers' shareholders. As a result, demand for our hospitality services is sensitive to expected commodity prices, principally related to oil, metallurgical (met) coal, iron ore and liquefied natural gas (LNG), 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 mitigate climate change. Commodity Prices There is continued uncertainty around commodity price levels, driven by many factors including rising fears of a recession resulting from lingering inflation and higher interest rates, an economic slowdown in China and resultant economic stimulus by the Chinese government, the impact of inflationary pressures, actions taken by Organization of the Petroleum Exporting Countries Plus (OPEC+) to adjust oil production levels, geopolitical events such as the ongoing Russia/Ukraine 19 conflict and rising conflict and 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 pipeline customers to delay expansionary and maintenance spending and defer additional investments in their oil sands assets and in extreme cases reduce production. 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) Fourth Quarter through October 25, 2024 $ 72.34 $ 59.40 $ 204.98 $ 96.34 9/30/2024 75.29 59.97 210.74 94.54 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. Oil prices decreased during the third quarter of 2024 due to increased market concerns over economic growth and demand. 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 third quarter of 2024 averaged $59.97 per barrel compared to an average of $66.20 in the third quarter of 2023. The WCS Differential decreased from $19.35 per barrel at the end of the fourth quarter of 2023 to $13.66 at the end of the third quarter of 2024. As of October 25, 2024, the WTI price was $71.99 and the WCS price was $59.33, resulting in a WCS Differential of $12.66. Met Coal. In Australia, 84% of our Australian owned 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. Following negative growth in both July and August 2024, steel production through September 2024 has weakened by 1.9% when compared to the same period of 2023. While there is positive growth in India and Europe, a decline in production during July and August in China more than offset those stronger production results. As of October 25, 2024, met coal spot prices were $200.70 per tonne. Steel demand is expected to increase marginally in 2024 compared to 2023, with continued improvements in demand from India. 20 Met coal prices stabilized during the second quarter of 2024 in the range of approximately $220 to $250 per tonne. As steel demand production declined in July and August alongside high met coal inventories, prices for met coal weakened to approximately $190 to $200 per tonne. With supply remaining steady and muted demand, analysts expect prices to remain under pressure through the second half of 2024, with improvement anticipated in early 2025. Improved prices remain contingent on a recovery in demand particularly from China. The decline in Chinese infrastructure spending, along with a weaker Chinese housing market, have impacted prices and are expected to influence near-term outlook. To mitigate this, the Chinese government has put in place a stimulus package to support the domestic real estate market. Iron Ore. Iron ore prices fluctuated during the first quarter of 2024 and weakened through September 2024, with prices moving between $90 and $100 per tonne. Analysts expect iron ore prices to average $90 to $100 per tonne through the remainder of 2024 and into 2025, with stable supply and muted demand. Other Inflationary Pressures. During 2023 and through the third 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 (LNGC) project and related pipeline projects, specifically the Coastal GasLink Pipeline, the pipeline constructed to transport natural gas feedstock to LNGC. 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 the initial phase of a liquefaction and export facility in Kitimat, British Columbia (Kitimat LNG Facility). Construction activity of both Phase 1 of the Kitimat LNG Facility and the Coastal GasLink Pipeline are nearing completion in 2024. The majority of our contracted commitments associated with the Coastal GasLink Pipeline were completed in the fourth quarter of 2023. As such, we expect lower occupancy at our Sitka Lodge in the near-term until subsequent phases, or additional construction activity in the region, drive new occupancy demand. 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, experts believe additional investment in LNG supply will be needed to meet the resulting expected long-term LNG demand growth. 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. 21 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: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 Change Percentage 2024 2023 Change Percentage Average Canadian dollar to U.S. dollar $0.733 $0.746 ($0.01) (1.7)% $0.735 $0.743 ($0.01) (1.0)% Average Australian dollar to U.S. dollar $0.670 $0.655 $0.02 2.3% $0.662 $0.669 ($0.01) (1.0)% As of September 30, 2024 December 31, 2023 Change Percentage Canadian dollar to U.S. dollar $0.741 $0.756 ($0.02) (2.0)% Australian dollar to U.S. dollar $0.691 $0.681 $0.01 1.6% 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 $31.6 million. We may adjust our capital expenditure plans in the future as we continue to monitor customer activity. See “Liquidity and Capital Resources ” below for further discussion of our 2024 capital expenditures. 22 Results of Operations Unless otherwise indicated, discussion of results for the three and nine months ended September 30, 2024, is based on a comparison to the corresponding period of 2023. Results of Operations – Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023 Three Months Ended September 30, 2024 2023 Change ($ in thousands) Revenues: Canada $ 57,736 $ 95,144 $ (37,408) Australia 116,622 87,885 28,737 Other 1,980 543 1,437 Total revenues 176,338 183,572 (7,234) Costs and expenses: Cost of sales and services Canada 50,052 65,972 (15,920) Australia 87,067 63,595 23,472 Other 1,423 729 694 Total cost of sales and services 138,542 130,296 8,246 Selling, general and administrative expenses 19,635 20,236 (601) Depreciation and amortization expense 17,440 16,914 526 Loss on sale of McClelland Lake Lodge assets, net 171 — 171 Other operating expense 506 87 419 Total costs and expenses 176,294 167,533 8,761 Operating income 44 16,039 (15,995) Interest expense, net (1,675) (3,321) 1,646 Other income (expense) 204 (4,709) 4,913 Income (loss) before income taxes (1,427) 8,009 (9,436) Income tax (expense) benefit (3,862) 1,214 (5,076) Less: Net income (loss) attributable to noncontrolling interest (5,289) 9,223 (14,512) Less: Net income (loss) attributable to noncontrolling interest (198) 201 (399) Net income (loss) attributable to Civeo Corporation $ (5,091) $ 9,022 $ (14,113) We reported net loss attributable to Civeo for the quarter ended September 30, 2024 of $5.1 million, or $0.36 per diluted share, compared to net income attributable to Civeo for the quarter ended September 30, 2023 of $9.0 million, or $0.61 per diluted share. As further discussed below, net income for the quarter ended September 30, 2023 included $4.9 million of expenses associated with the sale of the McClelland Lake Lodge in Canada. Revenues. Consolidated revenues decreased $7.2 million, or 4%, in the third quarter of 2024 compared to the third quarter of 2023. This decrease was primarily due to (i) reduced mobile asset activity from pipeline projects in Canada which were largely completed in 2023, (ii) lower year-over-year occupancy in our oil sands lodges in Canada due to the timing and extent of maintenance activity by our customers, (iii) lower occupancy associated with the sale of the McClelland Lake Lodge in Canada and (iv) lower occupancy at our Sitka Lodge in Canada. These items were partially offset by increased activity at our Civeo owned villages in the Australian Bowen Basin and new business in our integrated services villages in Western Australia. 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 $8.2 million, or 6%, in the third quarter of 2024 compared to the third 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 various lodges in Canada due to reduced occupancy levels. See the discussion of segment results of operations below for further information. 23 Selling, General and Administrative Expenses. SG&A expenses decreased $0.6 million, or 3%, in the third quarter of 2024 compared to the third quarter of 2023. This decrease was primarily due to lower incentive compensation cost of $3.4 million. This item was partially offset by higher compensation expense of $1.1 million and higher professional fees of $1.1 million. The increase in compensation expense was primarily due to increased staff and associated recruitment costs in the third quarter of 2024 compared to the third quarter of 2023. Depreciation and Amortization Expense. Depreciation and amortization expense increased $0.5 million, or 3%, in the third quarter of 2024 compared to the third quarter of 2023. The increase was primarily due to additional property, plant and equipment placed in service during 2024. Operating Income. Consolidated operating income decreased $16.0 million, or 100%, in the third quarter of 2024 compared to the third quarter of 2023, primarily due to reduced mobile asset activity and lower lodge occupancy in Canada in the third quarter of 2024 compared to the third quarter of 2023. These items were partially offset by higher activity levels in Australia in the third quarter of 2024 compared to the third quarter of 2023. Interest Expense, net. Net interest expense decreased by $1.6 million, or 50%, in the third quarter of 2024 compared to the third quarter of 2023, primarily related to lower average debt levels and lower interest rates on credit facility borrowings during 2024 compared to 2023. Other Income (expense). The third quarter of 2023 included expenses of $4.9 million associated with the demobilization of the McClelland Lake Lodge to prepare the assets for sale. Income Tax (Expense) Benefit. Our income tax expense for the three months ended September 30, 2024 totaled $3.9 million, or (270.6)% of pretax loss, compared to an income tax benefit of $1.2 million, or (15.2)% of pretax income, for the three months ended September 30, 2023. Our effective tax rate for the three months ended September 30, 2024 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. Our effective tax rate for the three months ended September 30, 2023 was impacted by considering the U.S. a loss jurisdiction that was removed from the annual effective tax rate computation for purposes of computing the interim tax provision. Other Comprehensive Income. Other comprehensive income increased $14.0 million in the third quarter of 2024 compared to the third quarter of 2023, primarily as a result of foreign currency translation adjustments due to changes in the Canadian and Australian dollar exchange rates compared to the U.S. dollar. The Canadian dollar exchange rate compared to the U.S. dollar increased 1% in the third quarter of 2024 compared to a 2% decrease in the third quarter of 2023. The Australian dollar exchange rate compared to the U.S. dollar increased 4% in the third quarter of 2024 compared to a 3% decrease in the third quarter of 2023. 24 Segment Results of Operations – Canadian Segment Three Months Ended September 30, 2024 2023 Change Revenues ($ in thousands) Accommodation revenue (1) $ 48,747 $ 71,417 $ (22,670) Mobile facility rental revenue (2) 123 17,314 (17,191) Food service and other services revenue (3) 8,866 6,413 2,453 Total revenues $ 57,736 $ 95,144 $ (37,408) Cost of sales and services ($ in thousands) Accommodation cost $ 38,762 $ 46,063 $ (7,301) Mobile facility rental cost 361 11,636 (11,275) Food service and other services cost 8,385 5,867 2,518 Indirect other costs 2,544 2,406 138 Total cost of sales and services $ 50,052 $ 65,972 $ (15,920) Gross margin as a % of revenues 13.3 % 30.7 % (17.4) % Average daily rate for lodges (4) $ 100 $ 98 $ 2 Total billed rooms for lodges (5) 483,767 726,364 (242,597) Average Canadian dollar to U.S. dollar $ 0.733 $ 0.746 $ (0.013) (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 third quarter of 2024 that were $37.4 million, or 39%, lower than the third quarter of 2023. The revenue decrease was driven by (i) reduced mobile asset activity from pipeline projects which were largely completed in 2023, (ii) lower occupancy associated with the sale of the McClelland Lake Lodge and (iii) lower year-over-year occupancy in our oil sands lodges due to the timing and extent of maintenance activity by our customers. In addition, our Sitka Lodge had lower occupancy as the Kitimat LNG facility nears completion. Our Canadian segment cost of sales and services decreased $15.9 million, or 24%, in the third quarter of 2024 compared to the third quarter of 2023. The cost of sales and services decrease was driven by lower costs related to reduced mobile asset activity from pipeline projects which were largely completed in 2023 and lower costs at various lodges due to reduced occupancy levels. Our Canadian segment gross margin as a percentage of revenues decreased from 30.7% in the third quarter of 2023 to 13.3% in the third quarter of 2024. This was primarily driven by lower margins at our lodges due to reduced efficiencies at lower occupancy level and reduced mobile asset activity from pipeline projects which were largely completed in 2023. 25 Segment Results of Operations – Australian Segment Three Months Ended September 30, 2024 2023 Change Revenues ($ in thousands) Accommodation revenue (1) $ 51,370 $ 46,012 $ 5,358 Food service and other services revenue (2) 65,252 41,873 23,379 Total revenues $ 116,622 $ 87,885 $ 28,737 Cost of sales and services ($ in thousands) Accommodation cost $ 24,783 $ 22,404 $ 2,379 Food service and other services cost 58,787 38,898 19,889 Indirect other cost 3,497 2,293 1,204 Total cost of sales and services $ 87,067 $ 63,595 $ 23,472 Gross margin as a % of revenues 25.3 % 27.6 % (2.3) % Average daily rate for villages (3) $ 79 $ 74 $ 5 Total billed rooms for villages (4) 647,358 623,436 23,922 Average Australian dollar to U.S. dollar $ 0.670 $ 0.655 $ 0.015 (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 third quarter of 2024 that were $28.7 million, or 33%, higher than the third quarter of 2023. The strengthening of the average exchange rate for Australian dollars relative to the U.S. dollar by 2.3% in the third quarter of 2024 compared to the third quarter of 2023 resulted in a $2.5 million period-over-period increase in revenues. On a constant currency basis, the Australian segment experienced a 30% period-over-period increase in revenues. Excluding the impact of the stronger 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 3.8% in the third quarter of 2024 due to increased activity in the Bowen Basin coupled with recent contract renewals and extensions. Our Australian segment cost of sales and services increased $23.5 million, or 37%, in the third quarter of 2024 compared to the third quarter of 2023. The strengthening of the average exchange rate for Australian dollars relative to the U.S. dollar by 2.3% in the third quarter of 2024 compared to the third quarter of 2023 resulted in a $1.9 million period-over-period increase in cost of sales and services. Excluding the impact of the stronger Australian exchange rate, the increase in cost of sales and services in the Australian segment was largely driven by increased occupancy at our Civeo owned villages in the Bowen Basin and new business in our integrated services villages in Western Australia and the associated overhead costs. Our Australian segment gross margin as a percentage of revenues decreased to 25.3% in the third quarter of 2024 from 27.6% in the third quarter of 2023. This was primarily driven by an increased relative revenue contribution from our integrated services business, which has a service-only business model, and generates lower overall gross margins than our accommodation business. The reduced gross margin was partially offset by improved profitability across the integrated services villages in the third quarter of 2024. 26 Results of Operations – Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023 Nine Months Ended September 30, 2024 2023 Change ($ in thousands) Revenues: Canada $ 204,423 $ 280,067 $ (75,644) Australia 316,967 247,418 69,549 Other 9,781 2,521 7,260 Total revenues 531,171 530,006 1,165 Costs and expenses: Cost of sales and services Canada 166,158 211,722 (45,564) Australia 234,217 180,448 53,769 Other 9,446 3,065 6,381 Total cost of sales and services 409,821 395,235 14,586 Selling, general and administrative expenses 55,708 52,885 2,823 Depreciation and amortization expense 51,269 59,277 (8,008) Impairment expense 7,823 — 7,823 Gain on sale of McClelland Lake Lodge assets, net (5,817) — (5,817) Other operating expense 992 302 690 Total costs and expenses 519,796 507,699 12,097 Operating income 11,375 22,307 (10,932) Interest expense, net (6,141) (10,499) 4,358 Other income (expense) 967 (1,832) 2,799 Income before income taxes 6,201 9,976 (3,775) Income tax expense (9,199) (2,897) (6,302) Less: Net income (loss) attributable to noncontrolling interest (2,998) 7,079 (10,077) Less: Net loss attributable to noncontrolling interest (1,001) (53) (948) Net income (loss) attributable to Civeo Corporation $ (1,997) $ 7,132 $ (9,129) We reported net loss attributable to Civeo for nine months ended September 30, 2024 of $2.0 million, or $0.14 per diluted share. As further discussed below, net loss included $5.8 million of net gains associated with the sale of the McClelland Lake Lodge in Canada and a $7.8 million pre-tax loss resulting from the impairment of fixed assets included in Impairment expense. We reported net income attributable to Civeo for the nine months ended September 30, 2023 of $7.1 million, or $0.47 per diluted share. As further discussed below, net income included $4.9 million of expenses associated with the sale of the McClelland Lake Lodge in Canada. Revenues. Consolidated revenues increased $1.2 million, or 0.2%, in the nine months ended September 30, 2024 compared to the nine months ended September 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 lower year-over-year occupancy at certain lodges in Canada in the nine months ended September 30, 2024 compared to the nine months ended September 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 $14.6 million, or 4%, in the nine months ended September 30, 2024 compared to the nine months ended September 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 reduced mobile asset activity from pipeline projects in Canada which were largely 27 completed in 2023 and lower costs at certain lodges in Canada in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. See the discussion of segment results of operations below for further information. Selling, General and Administrative Expenses. SG&A expenses increased $2.8 million, or 5%, in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. This increase was primarily due to higher compensation expense of $4.1 million, higher travel and entertainment costs of $1.1 million and higher professional fees of $1.8 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 incentive compensation costs of $3.5 million, lower share-based compensation expense of $1.2 million and a weaker Australian and Canadian dollar relative to the U.S. dollar in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. The decrease in share-based compensation expense was primarily due to forfeitures and reduced performance share expense due to a lower probability of achieving performance criteria 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 $8.0 million, or 14%, in nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. The decrease was primarily due to certain assets becoming fully depreciated in Canada, including the McClelland Lake Lodge, in the nine months ended September 30, 2023 and lower depreciation and amortization expense due to a weaker Australian and Canadian dollar relative to the U.S. dollar in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. These items were partially offset by higher depreciation and amortization expense due to additional property, plant and equipment placed in service during 2024. Impairment Expense. We recorded pre-tax impairment expense of $7.8 million in nine months ended September 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 $5.8 million in net gains associated with the sale of the McClelland Lake Lodge in the nine months ended September 30, 2024. Operating Income. Consolidated operating income decreased $10.9 million, or 49%, in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, primarily due to reduced mobile asset activity and lower lodge occupancy in Canada and impairment expenses in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. These items were partially offset by higher activity levels in Australia and lower depreciation and amortization expense in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. Interest Expense, net. Net interest expense decreased by $4.4 million, or 42%, in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, primarily related to lower average debt levels during 2024 compared to 2023, which decreased approximately 51%, partially offset by higher interest rates on credit facility borrowings. Other Income. Consolidated other income increased $2.8 million in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, primarily due to expenses of $4.9 million associated with the demobilization of the McClelland Lake Lodge to prepare the assets for sale, partially offset by higher gain on the sale of assets related to the sale of our Louisiana accommodation assets in the U.S. in the nine months ended September 30, 2023. Income Tax Expense. Our income tax expense for the nine months ended September 30, 2024 totaled $9.2 million, or 148.3% of pretax income, compared to an income tax expense of $2.9 million, or 29.0% of pretax income, for the nine months ended September 30, 2023. Our effective tax rate for the nine months ended September 30, 2024 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. Our effective tax rate for the nine months ended September 30, 2023 was impacted by considering the U.S. a loss jurisdiction that was removed from the annual effective tax rate computation for purposes of computing the interim tax provision. Other Comprehensive Loss. Other comprehensive loss decreased $5.5 million in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, primarily as a result of foreign currency translation adjustments due to changes in the Canadian and Australian dollar exchange rates compared to the U.S. dollar. The Canadian dollar exchange rate compared to the U.S. dollar decreased 2% in the nine months ended September 30, 2024 compared to a 0.2% increase in 28 the nine months ended September 30, 2023. The Australian dollar exchange rate compared to the U.S. dollar increased 2% in the nine months ended September 30, 2024 compared to a 5% decrease in the nine months ended September 30, 2023. Segment Results of Operations – Canadian Segment Nine Months Ended September 30, 2024 2023 Change Revenues ($ in thousands) Accommodation revenue (1) $ 180,793 $ 208,000 $ (27,207) Mobile facility rental revenue (2) 1,473 54,752 (53,279) Food service and other services revenue (3) 22,157 17,315 4,842 Total revenues $ 204,423 $ 280,067 $ (75,644) Cost of sales and services ($ in thousands) Accommodation cost $ 132,679 $ 150,592 $ (17,913) Mobile facility rental cost 4,413 37,736 (33,323) Food service and other services cost 20,839 15,701 5,138 Indirect other costs 8,227 7,693 534 Total cost of sales and services $ 166,158 $ 211,722 $ (45,564) Gross margin as a % of revenues 18.7 % 24.4 % (5.7) % Average daily rate for lodges (4) $ 97 $ 98 $ (1) Total billed rooms for lodges (5) 1,846,163 2,093,459 (247,296) Average Canadian dollar to U.S. dollar $ 0.735 $ 0.743 $ (0.008) (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 nine months ended September 30, 2024 that were $75.6 million, or 27%, lower than the nine months ended September 30, 2023. The revenue decrease was driven by (i) reduced mobile asset activity from pipeline projects which were largely completed in 2023, (ii) lower year-over-year occupancy in our oil sands lodges due to the timing and extent of maintenance activity by our customers and (iii) declined occupancy associated with the sale of the McClelland Lake Lodge. In addition, occupancy at our Sitka Lodge has declined as the Kitimat LNG facility nears completion. Our Canadian segment cost of sales and services decreased $45.6 million, or 22%, in the nine months ended September 30, 2024 compared to the nine months ended September 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 various lodges due to reduced occupancy levels. Our Canadian segment gross margin as a percentage of revenues decreased from 24.4% in the nine months ended September 30, 2023 to 18.7% in the nine months ended September 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 $3.6 million which were incurred in the first nine months of 2024. In addition, margins at our lodges were lower due to reduced efficiencies at lower occupancy levels. 29 Segment Results of Operations – Australian Segment Nine Months Ended September 30, 2024 2023 Change Revenues ($ in thousands) Accommodation revenue (1) $ 147,391 $ 130,953 $ 16,438 Food service and other services revenue (2) 169,576 116,465 53,111 Total revenues $ 316,967 $ 247,418 $ 69,549 Cost of sales and services ($ in thousands) Accommodation cost $ 70,990 $ 63,670 $ 7,320 Food service and other services cost 154,218 110,132 44,086 Indirect other cost 9,009 6,646 2,363 Total cost of sales and services $ 234,217 $ 180,448 $ 53,769 Gross margin as a % of revenues 26.1 % 27.1 % (1.0) % Average daily rate for villages (3) $ 78 $ 76 $ 2 Total billed rooms for villages (4) 1,886,647 1,734,004 152,643 Average Australian dollar to U.S. dollar $ 0.662 $ 0.669 $ (0.007) (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 nine months ended September 30, 2024 that were $69.5 million, or 28%, higher than the nine months ended September 30, 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 8.8% in the first nine months of 2024 due to increased activity in the Bowen Basin, Western Australia and the Gunnedah Basin coupled with recent contract renewals and extensions. Our Australian segment cost of sales and services increased $53.8 million, or 30%, in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. 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 26.1% in the nine months ended September 30, 2024 from 27.1% in the nine months ended September 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 nine months ended September 30, 2024. 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 Amended 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. 30 The following table summarizes our consolidated liquidity position as of September 30, 2024 and December 31, 2023 (in thousands): September 30, 2024 December 31, 2023 Lender commitments $ 245,000 $ 200,000 Borrowings against revolving credit capacity (50,078) (65,554) Outstanding letters of credit (1,053) (1,353) Unused availability 193,869 133,093 Cash and cash equivalents 17,910 3,323 Total available liquidity $ 211,779 $ 136,416 Cash totaling $74.0 million was provided by operations during the nine months ended September 30, 2024, compared to $56.6 million provided by operations during the nine months ended September 30, 2023. During the nine months ended September 30, 2024 and 2023, $26.8 million was provided by working capital and $20.0 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 nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, partially offset by decreased accounts payable and accrual balances. Cash was used in investing activities during the nine months ended September 30, 2024 in the amount of $7.5 million, compared to cash used in investing activities during the nine months ended September 30, 2023 in the amount of $14.1 million. The decrease in cash used in investing activities was primarily due to higher proceeds from the sale of property, plant and equipment and lower capital expenditures. We received net proceeds from the sale of property, plant and equipment of $10.7 million during the nine months ended September 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 $7.1 million during the nine months ended September 30, 2023 primarily related to the sale of our McClelland Lake Lodge accommodation assets in Canada and Louisiana accommodation assets in the U.S. Capital expenditures totaled $18.4 million and $21.2 million during the nine months ended September 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 compared to $4.4 million in 2023. 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 Amended 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 $48.3 million was used in financing activities during the nine months ended September 30, 2024 primarily due for repurchases of our common shares of $24.1 million, dividend payments of $11.0 million, net repayments under our revolving credit facilities of $9.2 million, debt issuance costs of $3.0 million and payments to settle tax obligations on vested shares under our share-based compensation plans of $1.1 million. Net cash of $42.0 million was used in financing activities during the nine months ended September 30, 2023 primarily due to term loan repayments of $22.3 million, repurchases of our common shares of $9.2 million, net repayments under our revolving credit facilities of $6.7 million and dividend payments of $3.7 million. 31 The following table summarizes the changes in debt outstanding during the nine months ended September 30, 2024 (in thousands): Balance at December 31, 2023 $ 65,554 Borrowings under revolving credit facilities 233,613 Repayments of borrowings under revolving credit facilities (242,859) Translation (6,230) Balance at September 30, 2024 $ 50,078 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 September 2024, 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 710,556 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, second and third quarters of 2024. These dividends were eligible dividends 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. Amended Credit Agreement As of September 30, 2024, the Amended Credit Agreement provides for a $245.0 million revolving credit facility scheduled to mature on August 8, 2028, 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 $200.0 million senior secured revolving credit facility in favor of Civeo and certain of our U.S. subsidiaries, as borrower; and (C) a $35.0 million senior secured revolving credit facility in favor of one of our Australian subsidiaries, as borrower. As of September 30, 2024, we had outstanding letters of credit of $0.3 million under the U.S. facility, zero under the Australian facility and $0.8 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. 32 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 Amended 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. 33