Why Civeo’s U.S. operations depend on oil and natural gas prices

Market Realist

Must-know: JANA Partners discloses activist position in Civeo (Part 4 of 6)

(Continued from Part 3)

U.S. operations depend on oil and natural gas prices

Civeo (CVEO), the workforce accommodation service provider that was spun-off from Oil States International (OIS) last month, saw hedge fund JANA Partners disclosing an activist position via a 13D filing last month.

Civeo said the demand for its services depends on its customers’ capital spending programs. The programs are related to the construction and development of oil sands, coal mines, and associated infrastructure as well as the exploration for oil and natural gas. These capital spending programs are generally based on the long-term outlook for commodity prices, economic growth, and estimates of resource production.

In Canada, Western Canadian Select (or WCS) crude is the benchmark price for Civeo’s oil sands accommodations’ customers. WCS crude is a significant factor affecting WCS pricing. It’s also the underlying price for West Texas Intermediate (or WTI). In its latest 10Q filing, WCS noted that “historically, WCS has traded at a discount to WTI, creating a WCS Basis Differential, due to transportation costs and limited capacity to move growing Canadian heavy oil production to U.S. refineries. The WCS Basis Differential narrowed from $23 per barrel at the end of the fourth quarter of 2013 to $20 per barrel by the end of the first quarter of 2014, due to increased demand from U.S. refineries, a continued increase in crude by rail volumes and a number of pipeline capacity improvements and expansion projects. As of June 11, 2014, the WCS Basis Differential was $19.10.” The company added that given the WCS discount to WTI, several oil sands customers have announced the deferral of new oil sands projects, which could impact its ability to expand oil sands room count or occupancy levels in the near term.

Civeo’s customers include Premier old sands operators such as Imperial Oil, Suncor Energy Oil Sands L.P. (SU), Fluor Canada (or FLR), Devon Canada (DVN), and KKD Oil Sands Partnership (or STO), formerly known as Statoil Canada Partnership.

Reports in May said France’s largest oil producer Total SA (TOT) and its partners, including Suncor Energy, put its Joslyn north oil sands project on hold due to escalating industry costs. André Goffart, who heads Total’s Canadian division, said on a conference call that “costs are continuing to inflate when the oil price and specifically the netbacks for the oil sands are remaining stable at best —squeezing the margins.”

U.S. accommodations impacted by slowdown in activity

Natural gas prices and WTI crude oil pricing impact demand for U.S. accommodations. Civeo said in its 10Q that in spite of the increases in natural gas prices during 1Q14, additional customer spending in the natural gas shale plays was limited. Natural gas production from already developed unconventional natural gas resources in North America remained high during the quarter. As a result of natural gas production growth outpacing demand in the U.S., natural gas prices continue to be weak relative to prices experienced in 2006–2008. Gas prices are expected to remain below levels considered economic for new investments in numerous natural gas fields.

Mobile camp revenues in the U.S. in the 1Q14 were negatively impacted by lower occupancy levels mainly due to continued slowdown in activity. However, they were positively affected by the addition of two new lodges that weren’t operating in 1Q13.

Civeo saw U.S. accommodations revenue decline 35% in 2013 due to lower utilization of rooms because of a reduced rig count and weather related issues in the Bakken. Also, in its Securities and Exchange Commission (or SEC) filing, the company said it reduced pricing due to high levels of competition. The company’s U.S. competitors include Stallion Oilfield Holdings (or SLOH), Target Logistics Management, a subsidiary of Algeco Scotsman Global, and Black Diamond Group (or BDE).

In a May presentation, Civeo said that it expects U.S. results activity to improve in 3Q14. Production is likely to continue growing at a rapid pace, with 700–950 thousand barrels of oil per day (or Mbopd) in annual production adds through 2016. It added, citing Wall Street research, that U.S. oil production is expected to reach 11 millions of barrels of oil per day (or MMbopd) in 2018, versus current production of around eight MMbopd.


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