OIS - Oil State International

[Chalk bag]

Hi folks, this name seems to be beaten to death by multuple HF gurus. But here gos:

 

Oil States International’s comig Spin-off

 

It’s called Civeo, and it’s coming soon. Literally a one-stop shop from lodging, house-keeping, site preparation, wastewater treatment, and logistics for mining and drilling sites far, far away from urbanization. EBITDA, as you can see below, is very impressive. The thesis is straight-forward too – The Co is going to seek REIT status and hopefully trade like one eventually. With REIT-like multiples of 12-16x, Civeo can sport a $6-7.5 Bn EV, or ~$5.5-7 Bn Market Cap with ~$500 mm net debt post spin. This potential valuation covers the current OIS market cap alone and you get the rest of the business (Well-site servicing + offshort products) for free.

 

http://files.shareholder.com/downloads/ABEA-4M2TKH/3112478470x0x736284/C45A0CE0-AB01-4B19-8F3F-7F3AAF36DBC1/OISPresentation_140324_HW.pdf

 

I don’t profess to know anything about the rest of these parts. But simply aggregating the oil-servicing peers @ 7-10x, I get ~$3-4 Bn EV valuation on this end or $60-80 / share pro forma. This is really back-of-the-envelope math here, but it seems like a really clear way to get to $150 + per share – almost too easy.

 

What am I missing?

[tytthus]

it looks like Civeo will start life with a $775 term loan:

 

http://www.ir.oilstatesintl.com/releasedetail.cfm?ReleaseID=845512

 

with an expected May 30 spin off date.

 

i'd think lodging REIT multiples would be the best to apply.  eyeballing some EBITDA lodging numbers from yahoo, looks like they range from 7 to 13X.  going at the low end of 7X would give a Civeo mcap of ~$3 B with EBITDA of $433.

 

putting a 7X mulitple of the rest of OIS's EBITDA of $419 gives mcap of $2.9 B.

 

summing them gives ~16% upside, potentially higher if you want to slap higher multiples on 'em.

 

nice idea, wasn't aware of it until this morning.  thanks!

[BG2008]

tytthus

 

What names are you using for lodging multiples that you get you a low end of 7X?  It seems that all the larger REITs are at least 15X EBITDA multiple with some as high as 25-30.  Now CiVeo does not deserve multiples that high given that D&A is likely much more real and the land that they sit do not appreciate over time.  However, I think a 10X EBITDA multiple on the low end should be conservative.  This would yield around $4.3bn EV for the spin off on the low end.  CiVeo is likely a growth company as well.  If you read the Q1 2014 transcripts, they mentioned that they will increase room counts this year.  Australian operations should recover later this year with Q2 being the trough. 

[tytthus]

i'm sure there are better comps out there, maybe some of the canadian lodging REITs.  i quickly pulled up HT, HST, HPT & RLJ.  respectively they are at EBITDA ttm multiples of 10.9, 13.1, 7.3, & 11.3X.  these are all mid to high end hotel guys -a fairly different space than Civeo.  numbers from yahoo and not checked against company reports.

 

even at a true low end of 7X this appears to present a good return.

 

anyone know if Civeo will have to pay out a disbursement of taxable income to qualify as a REIT?

[BG2008]

tytthus,

 

I think your EV/EBITDA Multiples are off.  Are you adding the debt into the EV calculation? 

 

For HT (Hersha) is a $2bn EV with a 2013 EBITDA of $101mm which would imply a 20x EV/EBITDA multiple

HPT is a $7.133bn EV company with a 2013 EBITDA of $584mm which would imply a 12.2x EV/EBITDA multiple

RLJ Lodging is a $4.8bn EV with a $291mm EBITDA which would imply a 16.4x EBITDA multiple

 

The average of the three is 16.2x EV/EBITDA.  Let's say the market gives it a 4X EV/EBITDA discount.  This is still a 12x EV/EBITDA for the accommodation business.  I believe that the accommodation biz should be $5.2 bn alone.   

 

 

[tytthus]

Looks like I was unclear and incomplete for the 946th time in my career.  I was just going with straight EBITDA multiples rather than including debt.  I know EV/EBITDA would give a less imprecise picture.

 

 

[BG2008]

Presentation on Civeo, the accommodation business

 

https://www.sec.gov/Archives/edgar/data/1590584/000143774914008966/ex99-1.htm

 

[hyten1]

should reit value using dividend yield and/or cap rates? i guess EV/EBITDA is another?

 

civeo will pay a dividend of $0.52 per share at 3% to 6% yield that translate to $17 to $8.7

 

share outstanding will be 106 mil which gives a market cap or $1.8bil to $900mil

 

 

another way P/FFO, FFO for civeo is approx $300mil (this might be overstate a bit since i just added NI with D&A), give it a 15x for P/FFO gives a market cap of 4.5bil

 

i hope civeo will raise its dividend soon

[Chalk bag]

tytthus

 

What names are you using for lodging multiples that you get you a low end of 7X?  It seems that all the larger REITs are at least 15X EBITDA multiple with some as high as 25-30.  Now CiVeo does not deserve multiples that high given that D&A is likely much more real and the land that they sit do not appreciate over time.  However, I think a 10X EBITDA multiple on the low end should be conservative.  This would yield around $4.3bn EV for the spin off on the low end.  CiVeo is likely a growth company as well.  If you read the Q1 2014 transcripts, they mentioned that they will increase room counts this year.  Australian operations should recover later this year with Q2 being the trough.

 

Hi BG,

 

I think assigning 10x on 2015 numbers may make the RemainCo overly cheap (and if the market does that I think it backward implies 3.5x vs. every comp @ 7x+) , so my math so far is 7x on Civeo and 6.5x on RemainCo. But clearly I'm not giving the optionality to Civeo's potential REIT-associated tax savings any credit, so to be honest, I haven't a clue so far on how market will value both pieces during when-issued. Should be very interesting.

 

On another note, the other reason I said 7x on my 2015 figure is that I think sell-side almost unanimously peg 35-36% EBITDA for 2014 and 2015 (probably extrapolating mgmt's 2Q 33-34% guidance). I don't profess to be an expert, but I do think MAC's 07-12 40%+ EBITDA margin is here to stay, so if time gets  bettter we can definitely see 38%+ EBITDA margin, and I struggle to back out a reasonable SG&A or gross margin number from a 35% sell-side number. But who  knows, a guy might use this consensus as is and slap a 10x on it and price it according to such, which in reality it might be too low.

 

Any updates on your front will be much appreciated.

[BG2008]

The dividend method is not the best when they do not pay out close to 100% of the cashflow.  At $0.52, Civeo will only pay out $57mm of dividends/year.  Hence, EV/EBITDA is the best method.  In the REIT/real estate world, people look at unlevered cash on cash returns.  At a 12X EV/EBITDA, it would imply a 8.3% cap rate at the asset level.  At 12X and net of $775mm of debt, the implied market cap would be about $3.5bn.  I'm using a TTM EBITDA figure of $356mm (I added $32mm of Corp expenses for Civeo).  On a normalized basis, it's not hard for Civeo to do $400mm of EBITDA since they are adding 1,561 rooms in Canada.  At RevPAR of $130, occupancy of 90%, and EBITDA margin of 40%, the new addition should add $66mm of revenue and another $26.6mm of EBITDA.  This would imply market cap of closer to $4.0bn.  If EBITDA hit $450 and the market is willing to apply a 15X EV/EBITDA, then the implied market cap would be $5.9bn. 

 

I like the situation given that post spin, Civeo will account for the bulk of today's OIS's market cap.  In short, we're kind of getting the remaining business for free or close to it.  The way to think of it is that as a whole, OIS is trading at roughly 7X EBITDA.  We can all agree that Civeo will trade at EV/EBITDA greater than 7X.  I'm comfortable that the OIS stub will trade at 7X. So, the appreciation will be your view of (Civeo's EV/EBITDA-7X)*Civeo's EBITDA

 

should reit value using dividend yield and/or cap rates? i guess EV/EBITDA is another?

 

civeo will pay a dividend of $0.52 per share at 3% to 6% yield that translate to $17 to $8.7

 

share outstanding will be 106 mil which gives a market cap or $1.8bil to $900mil

 

 

another way P/FFO, FFO for civeo is approx $300mil (this might be overstate a bit since i just added NI with D&A), give it a 15x for P/FFO gives a market cap of 4.5bil

 

i hope civeo will raise its dividend soon

[hyten1]

BG thanks for the explanation.

 

my bad i had thought REIT conversion was a forgone conclusion, that was the reason for my reasoning. but now i see they plan to access it after the spin off.

 

i also assume u guys have also looked at IRM, also in the process of REIT conversion

 

 

 

hy

[BG2008]

IRM already trade at too high of EV/EBITDA multiple for me to care.  A potential REIT conversion that trades at 7X EV/EBITDA, that grabs my attention

[Chalk bag]

The dividend method is not the best when they do not pay out close to 100% of the cashflow.  At $0.52, Civeo will only pay out $57mm of dividends/year.  Hence, EV/EBITDA is the best method.  In the REIT/real estate world, people look at unlevered cash on cash returns.  At a 12X EV/EBITDA, it would imply a 8.3% cap rate at the asset level.  At 12X and net of $775mm of debt, the implied market cap would be about $3.5bn.  I'm using a TTM EBITDA figure of $356mm (I added $32mm of Corp expenses for Civeo).  On a normalized basis, it's not hard for Civeo to do $400mm of EBITDA since they are adding 1,561 rooms in Canada.  At RevPAR of $130, occupancy of 90%, and EBITDA margin of 40%, the new addition should add $66mm of revenue and another $26.6mm of EBITDA.  This would imply market cap of closer to $4.0bn.  If EBITDA hit $450 and the market is willing to apply a 15X EV/EBITDA, then the implied market cap would be $5.9bn. 

 

I like the situation given that post spin, Civeo will account for the bulk of today's OIS's market cap.  In short, we're kind of getting the remaining business for free or close to it.  The way to think of it is that as a whole, OIS is trading at roughly 7X EBITDA.  We can all agree that Civeo will trade at EV/EBITDA greater than 7X.  I'm comfortable that the OIS stub will trade at 7X. So, the appreciation will be your view of (Civeo's EV/EBITDA-7X)*Civeo's EBITDA

 

should reit value using dividend yield and/or cap rates? i guess EV/EBITDA is another?

 

civeo will pay a dividend of $0.52 per share at 3% to 6% yield that translate to $17 to $8.7

 

share outstanding will be 106 mil which gives a market cap or $1.8bil to $900mil

 

 

another way P/FFO, FFO for civeo is approx $300mil (this might be overstate a bit since i just added NI with D&A), give it a 15x for P/FFO gives a market cap of 4.5bil

 

i hope civeo will raise its dividend soon

 

BG, thanks. How do you feel about their ability to re-negotiate the contracts to get RevPAR and occupancy up again (note that RevPAR had been down 7 quarters in a row)? I don't see any sell-siders assigning $400 mm EBITDA for 2015, presumably due to fear of Australian softpatch.

And my thought is that the market will not assign a sterling multiple for CVEO on day one. If it does, I'm going to really load up on OIS-W. But the whole situation still baffles me -- why do you think this "arb" exist? I've looked at many spin-offs and none of the strike me as potentially inefficient as this one. What am I missing?

 

I guess there are common skepticisms towards the longevity of assets / resource base, bargaining power given limited client base, and capital intensity on US expansion (thus potentially termed-out REIT conversion) could hit CVEO’s valuation. But still.

 

[BG2008]

I spoke with a friend about this idea and we kept going back and forth about the "why this opportunity exist".  I really don't have a great answer.  My friend's view point is that, this is a well known idea, it's out there.  Jana and Einhorn has been trumpeting this idea for some time.  From my experience, it appears that many large institutional funds won't want to buy the parts until it's actually separated.  Meaning, a REIT fund won't want to own Civeo until Civeo actually trades as Civeo.  They don't want to go through the trouble of buying OIS and selling the energy segment later on.  The same applies to the energy focused funds.  They just want to own the energy segment and not touch the Civeo.  So, there is some price appreciation baked in due to hedge funds and other "enterprising investors" who doesn't mind rolling up their sleeves and doing the work.  But keep in mind, spinoffs are kind of tough for most investors to value.  In this case, the EBITDA is split 50/50, in most cases, the Rev/EBITDA/Cash/Debt split can be quite complicated and one needs to really invest the time to figure it all out.  Imagine if you are a mutual fund that owns >200 positions and their objective is to mimic the benchmark and just gather assets.  Do you think they look at spinoffs and say "ohh, let me roll up my sleeve and really dig into the parts here." 

 

I can be completely wrong here.  But I like my odds and I like the fact that very soon there will be a standalone accommodation business that the market can own separately.  I guess the best way to explain it is that OIS is like a porterhouse stake.  The porterhouse is selling for $7/lb.  We know that if we cut out the filet mignon separately, it can be sold for $12.  Assuming we can still sell the strip steak for $7/lb as well.  The parts are now worth more because the people who want filet gets filet and the people who want strip steak can get strip steak.  I guess the whole trades at $7 because no one wants to get their hands all messy. 

 

Regarding $400mm EBITDA, I'm not saying it will get there, I'm saying it's easy to get there.  Note the increased room counts coming online in Canada.  That should add $20+mm in EBITDA.  On the last call, management team said that Q2 will be trough and they see recovery in Q3 and Q4.  Australia is half of the room counts but only 1/4 of the EBITDA.  I'm less concerned about Aussie land.  I pay more attention to Canadian oilsand and the longevity of the oilsand mining activities.  I have no delusion that roughneck O&G workers will depreciate these assets much quicker.  With the rest of the world at 16-7X for lodging and non-traditional like GLPI, AMT etc, I think a 12x is fine.  Even with a 10X, we are talking about 21% upside. 

 

To be fair, I want to disclose that I've structured this as an event driven trade.  I am probably not interested in either parts unless Civeo trades at 7-8X EV/EBITDA post spin. 

[BG2008]

OIS is up about 2%

OIS stub trades at $54.90 implying 6.5X EV/EBITDA based on $395mm of EBITDA

Civeo trades at $22.15 per shares implying roughly 9X EV/EBITDA based on $356mm of EBITDA

[Chalk bag]

OIS is up about 2%

OIS stub trades at $54.90 implying 6.5X EV/EBITDA based on $395mm of EBITDA

Civeo trades at $22.15 per shares implying roughly 9X EV/EBITDA based on $356mm of EBITDA

 

OIS is no longer interesting, but CVEO may be. Still think they can do $400 mm EBITDA and it's currently 7.5x on that number. Hotels & REITs trade at 10x+. Still think it's cheap here. Running on maintenance CapEx (they won't) it's close to 8-10% FCF yield. Of course if you think Met coal is in deep dodo given China slow-down then there's nothing to do. But still worth a look given their expansion plans.

[BG2008]

Yeah, the OIS stub is trading at a decent price here.  Civeo remains to be the more interesting sub of the spin.  I think in this yield starve environment, a 12X EV/EBITDA is more likely.  This adjusts for the higher maint cap ex etc.  But I get the sense that Civeo can grow its revenue much faster than a traditional REIT.  I have not looked at their Cap Ex versus incremental revenue and EBITDA in the past, but it seems like the cash on cash yield of a new construction is anywhere near the 6-8% of traditional RE assets. 

 

At these prices today, I would recommend trimming the OIS stub and keeping the Civeo.  I think Civeo re-rate will happen in steps.  It is being added to the S&P MidCap 400.  This will trade at a discount to 12X until it receives its REIT status. 

 

[Tug Bovine]

I have been spending some time looking at CVEO and was wondering if I could pick your brain on a couple of things:

1.) how do you think about the rent roll issues - we have 31% of rooms rolling off in '14 and 38% rolling off in '15 - any idea what % should renew and at what rates?

2.) multiple - any idea what the right multiple is? I think it needs to trade at a discount to Hotel reits - there is no secondary use for an oil sands lodge in Ft McMurray, ie, unlike hotel reits, CVEO cannot cut prices to boost occupancy. Given the fact that these assets get 3-5 year contracts, it seems that trading at 10x EBITDA assumes that there is no obsolescence risk.

3.) macro - is there any way to get comfortable with the macro - mgmt is calling for Australia to bottom this quarter. However, met coal continues to weaken. I'm having trouble figuring reconciling the two.

4.) taxation - any idea on what tax rate CVEO will pay, or if they'll have to pay any depreciation recapture?

5.) maint capex - any way to get comfortable with the $50M maintenance capex number - it's 30% of depreciation (which is assuming something like an 11 year life). Given the potential for obsolescence with these assets it seems like $50M understates the true economic depreciation. Like the assets that the lodging provides workers for, it seems that both are depleting and feels similar to an upstream mlp - if they only take out $50M of maintenance capex then they'll need to tap the markets for additional funding to replace EBITDA that is rolling off.

 

FWIW i get to EBITDA in the low $300's and AFFO assuming the $50M of capex of $2-2.20

 

tx

Tug Bovine

[BG2008]

https://www.sec.gov/Archives/edgar/data/1590584/000117184314004506/newsrelease.htm

 

Pretty large downward revision due to 1) Lower guidance and 2) abandoning REIT conversion

 

Management had previously promised that Q2 of 2014 would be the bottom.  Now they are stating that 2015 is expected to be materially lower than 2014.  Personally, I believe that the lowered revision is a larger contributor towards the price movement today than the abandonment of REIT conversion.  I am still confused how it cost $720mm of cash expenditure to pay $300mm of tax payments.

 

No longer own this name, but at these prices, it's starting to look interesting. 

[krazeenyc]

https://www.sec.gov/Archives/edgar/data/1590584/000117184314004506/newsrelease.htm

 

Pretty large downward revision due to 1) Lower guidance and 2) abandoning REIT conversion

 

Management had previously promised that Q2 of 2014 would be the bottom.  Now they are stating that 2015 is expected to be materially lower than 2014.  Personally, I believe that the lowered revision is a larger contributor towards the price movement today than the abandonment of REIT conversion.  I am still confused how it cost $720mm of cash expenditure to pay $300mm of tax payments.

 

No longer own this name, but at these prices, it's starting to look interesting.

 

The $720mm cash expenditure would include $300mm of tax payments as well as the retained earnings purge and other fees which would total $720mm.

[BG2008]

Einhorn takes 9.9% position in CVEO, it's interesting that he sold in the $25s and bought in the $12 after the announcement.  I sold in the mid 20s and now it's starting to get interesting again. 

 

http://www.sec.gov/Archives/edgar/data/1079114/000092963814000799/sc13d.htm

 

[Wilson-TPC]

Anyone interested in this at this price?

 

Trades at 4.5x EBITDA? My GOD.

[mateo999]

Anyone interested in this at this price?

 

Trades at 4.5x EBITDA? My GOD.

 

As I see it, I think you simply have to be very comfortable with the EBITDA profile of a specific lodge.  Model out what you think the cash flows would look like during the first three years while rooms are on contract (revPAR has to be high enough to attract CVEO to build), and then model out what you think years 4+ might look like if an uneconomic oil sands / met coal customer simply doesn't need rooms, or needs fewer rooms.  Or even if they do still need rooms, what do you think will happen to revPAR at that individual lodge in the out years?  Who holds the leverage in re-negotiations?

 

Speaking of leverage, this drop off will only be exacerbated by financial leverage.  I disagree with Einhorn on this one and think he's just trying to save face.  Also, not so sure I know what Einhorn's beef with the CEO is: 1) operations are a function of a bad commodity environment; and 2) would he have preferred he actually convert to a REIT and raise debt to fund an NPV negative $720mm purge/payment?  Again, I think he's just trying to save face on this one.