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Why Greenlight Capital adds new position in Civeo

Smita Nair

Overview: Greenlight Capital's 2Q positions (Part 2 of 7)

(Continued from Part 1)

Greenlight Capital and Civeo

David Einhorn’s Greenlight Capital initiated new positions in Civeo Corp. (CVEO), AerCap Holdings NV (AER), Time Inc. (or TIME), and Chemtura Corp. (CHMT). It added to its positions in SunEdison Inc. (SUNE) and Lam Research (LRCX).

Greenlight disclosed a new position in Civeo Corp. (CVEO). It accounted for 2.15% of the fund’s 2Q14 portfolio.

Civeo was spun out of Oil States International (or OIS) in May, 2014. It provides remote site accommodations, logistics, and facility management services to the global natural resource industry. Its operations are mainly in Canada, Australia, and the United States. Civeo owns a total of 17 lodges and villages operating in Canada and Australia. It has an aggregate of more than 21,000 rooms. It also has 11 smaller open camp properties and a fleet of mobile accommodation assets in the United States and Canada. Civeo’s customers include major and independent oil and natural gas companies, mining companies, and oilfield and mining service companies.

JANA takes activist position in Civeo

JANA Partners was instrumental in driving Civeo’s spinoff by taking an activist position in Oil States International (or OIS) in April last year. Earlier in June, JANA disclosed an activist position in Civeo through a 13D filing. JANA’s 13D filing said the fund believes that Civeo’s “shares are undervalued and represent an attractive investment opportunity.” It also said that it will continue to discuss with management “regarding a potential real estate investment trust (or REIT) conversion.”

Greenlight noted in its investor letter that the combined OIS/CVEO share price increased. This owed to the spinoff because both businesses were valued separately.

According to a release on the spinoff, each OIS shareholder received two shares of Civeo for each share of OIS common stock held on the record date. Civeo is also expected to make a cash distribution of $750 million to OIS in connection to the spinoff.

An OIS report in July said that the accommodations business was spun off as a C-Corporation. This offers a faster path to separation.

The company said in its recent 2Q14 earnings release that management and the board are assessing a possible REIT conversion for the company. They expect to complete this process in 3Q14. In case of a conversion, JANA and Greenlight could benefit because an REIT is required to distribute 90% of its U.S. taxable income to its shareholders in the form of dividends.

Reports decline in revenue and adjusted EBITDA

Civeo said that its recent second quarter results are in-line with the previous quarterly guidance. It reported net income for the quarter ending June 30, 2014, of $13.9 million—or $0.13 per diluted share.

The company generated revenues of $227.1 million and adjusted earnings before interest, taxes, depreciation, and amortization (or EBITDA) of $76.6 million. This was down from revenues of $243 million and an adjusted EBITDA of $92.9 million reported in 2Q13.

The company said the decline in revenue and EBITDA was due to the impact of a stronger U.S. dollar compared to the Australian and Canadian dollars. It was also due to the lower occupancy levels in the Australian villages and Canadian lodges, and lower average daily rates at the Canadian lodges.

The company’s businesses are influenced by trends in natural gas prices and crude oil pricing. Civeo said in its 10Q filing that given the Western Canadian Select (or WCS) discount to West Texas Intermediate (or WTI), several oil sands customers have announced the deferral of certain new oil sands projects, “which could negatively affect its ability to expand its oil sands room count or its occupancy levels in the near term.”

In Australia, low met coal pricing, additional carbon and mining taxes on Australian accommodations customers, and several years of cost inflation caused customers to reduce the production from higher cost mines. This has impacted Civeo’s accommodation business.

For more on Civeo’s prospects and JANA’s activist position, please read Must-know: JANA Partners discloses activist position in Civeo.

Continue to Part 3

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