CVEO Investment Thesis - 11.18 Update

8/20/2019 CVEO Investment Thesis - 11.18 Update

1/13

Sid Arora November 18, 201

CVEO Long Thesis

1

Recommendation: Long CVEO

Price: $2.05 ($220M impl. market cap, 32% 15’ UFCF Yield, 0.4x TBV and 4.6x 15’ EBITDA of

$137M)

Price Target: $4.65 (12% ’16 Unlev. FCF Yield, 8.7x 2016E Consensus EBITDA of $100M)

Upside/Downside: ~5:1 (+130% Upside/ 25% Downside)

Recommended Portfolio Allocation: 5%

Investment Thesis

• Civeo Corporation (NYSE:CVEO), which spun-off from Oil States International (OIS) mid last year under pressure

from JANA Partners, is an underfollowed workforce accommodation provider for oil and mining workers in remot

areas in the Canadian oil sands, Australia and the US. Its facilities (lodges/mobile open camps) are located in close

proximity to the lowest cost producers of oil and met coal. At its peak as the Accommodations Division of OIS, th

business generated $500M in EBITDA (in FY2012) and grew its topline every single year until then.

• The stock has gotten pummeled over the past year (off 82% its 52 week high of $10.94) and appears to trade

deceivingly similarly to an entity destined for bankruptcy, due to (i) the dramatic drop in commodity prices (both

oil and coal) as well as CAD/AUS currency headwinds; (ii) the decision to pursue a redomicile transaction in Canadin favor of a REIT conversion which was looked down upon by the street, and more recently, (iii) overblown

concerns around its level of liquidity (fueled by inaccurate assumptions put forward by a misinformed short seller

• CVEO’s management team has done an excellent job given the circumstances to proactively address these issues

head on and weather the downturn: they have (i) successfully completed CVEO’s redomestication to take

advantage of lower tax rates and more efficiently utilize future cash flow, (ii) paid off 46% of the company debt

with cash on hand and amended the credit facility and leverage covenants which alleviates near-term liquidity

related concerns, (iii) secured multiple new contracts (contributions from which will show up in 2016 financials),

(iv) reduced headcount 40+% since Sep 2014 (with 35% overhead reduction in Canada this year and over 20%

redn. in Australia over the past couple years), (v) significantly reduced maintenance capex, and above all, (iv)

communicated transparently with investors on the state of affairs, issuing conservative, achievable guidance (theQ3 results came in at the top end of guidance and Q2 EBITDA results blew past guidance by 31%) and there’s good

reason to believe they will comfortably hit their FY2015 numbers ($530-545M in Rev and $131-143M in EBITDA)

given 90% of their 4Q15 Lodge Rev (over 75% of the business) is already contracted.

• Although I expect some near-term volatility, I believe CVEO can trade up around 130% above today’s levels to

$4.65 / share over the next 12-18 months, as the debt paydown, headcount reductions, lower taxes from the

redomestication and new contracts secured begin to reflect in the financials (as early as Q1 16) and the stock

reappears on institutional investor radars. Some recent notable activity:

o Since Sep 2015, the CEO and CFO have purchased collectively $500K of the stock.

o Fidelity’s small cap fund established an opportunistic position (Aug 10) and added to its position in Q3

(13% owned). It remains the largest institutional investor (ahead of Sterling Capital at around 5%).Centerbridge Partners took a 3% position in Q3 2015 as well. Despite general investor fatigue from having

gotten burned last year, I expect other small-cap focused value funds to follow suit.

o The sell-side has noticed – Sterne Agee upgraded the stock w/ a $4.00 PT on Sep 2 and Scotia Howard

followed with a $5.00 PT in a note published Sep 15.

• At a 32% 2015 Unlevered FCF Yield, CVEO still represents one of the more attractive value plays out there on th

eventual recovery of the oil and gas/met coal markets. FY15 earnings will be a key catalyst to this story.

CVEO Capitalizatio n($M, except as noted)Share Price, as of 11/18/15 $2FDSO 107.4Equity Value $220Debt Outstanding $416Cash Outstanding $12Noncontrolling Int $0Enterprise Value $624

Impl '15 Unlev FCF* $7Impl. FCF Yield 32

9/30 LTM EBITDA $196

EV/LTM EBITDA 3.

2015 Mgmt EBITDA $136EV/15' Mgmt EBITDA 4.

*EBITDA less Total Capex


2/13


CVEO Long Thesis

2

Business Model

• As mentioned above, CVEO provides permanent (Lodges) and temporary (Mobile and Open Camps) workforce

accommodations for oil and mining workers in remote areas of Canada, Australia and the US. The company also

provides associated catering, facilities management, and logistics services, basically functioning as a full-service

hotel for these workers (see pictures in Appendix).• CVEO has 13,400 rooms (ex camps) in Canada (63% of LTM EBITDA), 40+% market share among 3rd party provider

and 20% overall including operator owned), over 9,000 rooms in Australia (35% of LTM EBITDA,34% market share

overall) and over 900 rooms in the US (2% of EBITDA). On an LTM basis as of 3Q15, the business generated $640M

in Revenue and $197M in EBITDA (31% margin) and for 2015, CVEO is well on track to generate between $530-

545M in Revenue and $131-143M in EBITDA (~26% margin).

• CVEO’s facilities broadly fall into one of two categories: Villages/Lodges (77% of LTM Revenue) and Mobile/Open

Camps (23% of LTM Revenue). Villages and lodges are typically permanent styled structures with multi-year take-

or-pay contracts (typically 1-3 yrs) which help mitigate short-term commodity price exposure on new capital

(majority of CVEO’s contracts have termination provisions but customers incur a material termination fee).

o

CVEO’s lodge facilities are large high quality properties (they’re not dinky Howard Johnsons) where guestsreceive the amenity level of a full- service hotel plus three meals a day. And to get an order of magnitude

of these facilities, CVEO’s Wapasu Creek Lodge is the second largest lodging property in N. America

(behind a Vegas hotel, likely MGM). CVEO currently operates 7 lodges and 6 open camps in Canada, 9

villages (no open camps) in Australia and 4 open camps in the US.

o Mobile/open camps are smaller, more temporary facilities that can be quickly deployed on short-term

contracts (typically 16-18 months), usually to support transient drilling, pipeline, seismic work.

• CVEO’s largest customers include large, investment grade blue chip energy and mining names like Exxon

controlled Imperial Oil (10+% of its revenue), Fluor Canada and BM Alliance Coal Operations (an alliance between

BHP Billiton and Mitsubishi) –well-capitalized industry behemoths who are making multi- billion dollar investment

to develop their prospects which generally have estimated reserve lives of 10 – 30+ yrs; these investments are

therefore dependent on those customers’ longer- term view of commodity demand and prices. Existing projects

have costs closer to C$30/bbl to operate and cover overhead. I believe CVEO's clients, mostly big names, will

actually benefit longer term as small, leveraged players go out of business. For e.g., SunCor just announced a

capex expansion in the region and a commitment to the oil sands, which will bode well for CVEO.

• Demand for CVEO’s accommodations services generally originates from their customers’ projects, most

significantly during the development or construction phase and, to a lesser extent, the operations and production

phase. Demand for the company’s customers’ services is primarily driven by these customers’ capital spending

programs related to the construction and development of oil sands projects, mines and other resource

developments including associated resource delineation and infrastructure.

o

Demand in Canada will be driven by increased investment in the Canadian oil sands. Acc. to a WSJ article,

existing oil sands surface mines can make money at about $30 a barrel, and the most efficient

underground oil sands projects can stay in the black at $35 a barrel. That is still above the break-even

levels of many traditional oil wells, but below those of other unconventional sources of crude, including

most production from the Bakken Shale formation in North Dakota. Given the number of variables

http://www.wsj.com/articles/as-oil-slips-below-50-canada-digs-in-for-long-haul-1421114641http://www.wsj.com/articles/as-oil-slips-below-50-canada-digs-in-for-long-haul-1421114641http://www.wsj.com/articles/as-oil-slips-below-50-canada-digs-in-for-long-haul-1421114641http://www.wsj.com/articles/as-oil-slips-below-50-canada-digs-in-for-long-haul-1421114641


3/13


CVEO Long Thesis

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influencing oil prices, it is difficult to time the recovery but per a WSJ article (published 8/31), it appears

things will get better before they get worse as oil prices are already up 29% from their 8/24 low.

o Demand in Australia will be driven primarily by the outlook for met coal, whose pricing and growth in

production is influenced by levels of global steel production. Growth in worldwide steel demand

decreased from 3.8% in 2013 to 2% in 2014 on the back of a construction slowdown in China which is

beginning to change course as monthly home prices begin to climb back up (see here, and here). Met coa

prices have slumped to their lowest level in the last 3 yrs (see Appendix) to below $100/t but the Bowen

basin and Australia in general represents one of the lowest cost coal producers in the world.

• CVEO has had a number of recent wins demonstrating success at winning contracts despite commodity price

weakness and has a robust pipeline of opportunities it is pursuing. The company was recently awarded a contract

from LNG Canada (led by Shell Canada) to support development of Sitka Lodge (436 rooms, 4Q15) which could

expand to a ~2K room relationship (mgmt. alluded to this target on their Q2 call and latest Aug 25 investor

presentation). Other recent contract extensions announced totaling US$120M+ include:

o

Two contract awards for Moranbah Village totaling 260 room and $32 million over five years

o C$22 million contract to support redevelopment of Mariana Lake into a 526-room open lodge.

o

C$31 million extension at Wapasu Creek for an average of 500 rooms through the end of 2017

o C$64 million of contract awards and extensions in Athabasca, comprised of accommodations, operations

and manufacturing mandates.

Liquidity

• Understanding liquidity is absolutely critical to this investment thesis as this has been the biggest concern. CVEO

formally amended its credit facility on Jul 17, 2015, which in addition to permitting the redomiciling to Canada,

provided additional lending capacity in Canada, reduced both the existing U.S. term loan and U.S. revolver and

increased the maximum leverage ratio allowed under the credit facility.

• As of Sep 30, 2015, subsequent to the completion of the redomestication, CVEO’s total debt balance stood at

roughly $416 million (46% below 12/31 debt of $775M), with cash on hand of $12.6 million. This amounts to Tota

Debt/LTM EBITDA of 2.1x vs a Sep 2015 covenant of 3.5x which steps up to 4x in Q4 2015, 4.25x in Q1 2016 and

to 4.5x for the remainder of 2016.

o

Assuming the company hits its projected guidance of $20-25M in EBITDA for Dec 2015 and there are no

further debt paydowns, the leverage ratio would stand at 3.0x as of Dec 31, 2015 (off ~$137M in LTM

EBITDA) vs a 4x leverage covenant which is manageable.

o Looking out to 2016, Consensus LTM EBITDA is ~$108M for Q1 2016 and $92M for Q2 2016. The covenan

for Q1 2016 stands at 4.25x and 4.5x for Q2. This implies the company needs to have at most ~$460M in

Debt in Q1 2016, and $415M in Q2 2016. It has about $13M in cash on hand right now and will generate in

excess of $50M in FCF over the next 3 quarters (based on my calculations). The debt balance is already

lower implying it should comfortably clear covenants up to Q2 2016, and for that matter all of 2016.

o FY 2015 earnings will be critical to this thesis to better understand 2016 contract value/guidance. In

general, over the next 12-18 months, I expect the situation to get better as debt paydowns continue and I

take comfort in that fact that management made it explicitly clear on their Q3 call (as well as investor

presentation in Sep 2015) that this was a top priority before any other value enhancing initiatives were

undertaken.

http://www.wsj.com/articles/oil-prices-rally-amid-lower-u-s-output-estimates-opec-article-1441037584http://www.wsj.com/articles/oil-prices-rally-amid-lower-u-s-output-estimates-opec-article-1441037584http://www.wsj.com/articles/oil-prices-rally-amid-lower-u-s-output-estimates-opec-article-1441037584http://www.cnbc.com/2015/08/17/china-new-july-home-prices-rise-03-mm-37-yy.htmlhttp://www.cnbc.com/2015/08/17/china-new-july-home-prices-rise-03-mm-37-yy.htmlhttp://www.cnbc.com/2015/08/17/china-new-july-home-prices-rise-03-mm-37-yy.htmlhttp://www.wsj.com/articles/blackstone-hunts-for-commercial-property-opportunities-in-china-1440582497http://www.wsj.com/articles/blackstone-hunts-for-commercial-property-opportunities-in-china-1440582497http://www.wsj.com/articles/blackstone-hunts-for-commercial-property-opportunities-in-china-1440582497http://www.crugroup.com/14716/15427/97980/AP-Chart1-june.jpghttp://www.crugroup.com/14716/15427/97980/AP-Chart1-june.jpghttp://www.crugroup.com/14716/15427/97980/AP-Chart1-june.jpghttp://www.crugroup.com/14716/15427/97980/AP-Chart1-june.jpghttp://www.wsj.com/articles/blackstone-hunts-for-commercial-property-opportunities-in-china-1440582497http://www.cnbc.com/2015/08/17/china-new-july-home-prices-rise-03-mm-37-yy.htmlhttp://www.wsj.com/articles/oil-prices-rally-amid-lower-u-s-output-estimates-opec-article-1441037584


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CVEO Long Thesis

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Valuation

• CVEO is one of the few accommodations providers that service the entire value chain from site identification to

long- term facility management and there are no real US listed comps. The company’s closest Canadian listed

comps are Black Diamond (BDI) and Horizon North (HNL), both of which are much smaller businesses which have

traded in the 7-9x EBITDA multiple range over the past 5 yrs

o BDl trades closer to the 9x multiple and is the more relevant comp as a pure play vs HNL which derives

85% of its business from camps (which I argue should be valued at a lower multiple given the shorter-term

nature of the contract and lower margin (23%) vs CVEO’s lodges (traditionally 30+%)) and 15% comes froma matting business which is essentially a solid surface over unstable ground conditions to facilitate heavy

equipment movement).

o CVEO has a greater share of the market vs both of these players and these competitors do not have the

breadth or scale of their lodge operations and should command a premium.

• Assuming 2016 FCF of $60M (off consensus trough EBITDA of $100M and $40M of stated maintenance capex) at a

12% FCF Yield (significantly below where it trades today), I arrive at a $4.65 target. Assuming the business pays

down an additional $30M in debt and no changes in cash/NCI, this equates to a ~$870M EV (8.7x ’16 EBITDA).

• My downside price, $1.52, is derived from an illustrative liquidation value analysis (see Appendix) where I’ve take

significant (50+% haircuts for the majority of line items) to all assets, with liabilities being paid out at face value.

Risks

• CVEO is highly correlated to the strength of the oil/gas/met coal markets and as the past twelve months have

shown, any bulls dismissing/underestimating commodities exposure have been proven dead wrong. This thesis is

predicated on the debt paydown and management navigating the downturn successfully, not on growth opps.

• Inability of mgmt. to renew additional contracts / customers shift workers to customer operated rooms.

• FX translation risk involving AUD and CAD which to an extent has been mitigated by redomiciling to Canada.

CVEO Debt Profile

($ in MM) Dec-14 Mar-15 Jun-15 Jul-15 Sep-15Cash $263.3 $279.8 $315.2 $50.5 $12.6

Current Debt* $19.4 $29.1 $38.8 $18.8 $18.2US Term Loan $755.6 $745.9 $736.3 $47.5 $50.0Canadian Term Loan** $308.8 $295.9Revolving Credit Facility $125.0 $52.0

Debt With Oil StatesTotal Debt $775.0 $775.0 $775.1 $500.1 $416.1

% Change 0% 0% (35%) (46%)(since Q2)

Net Debt $511.7 $495.2 $459.9 $449.6 $403.4% Change (3%) (7%) (2%) (12%)

(since Q2)

Total Stockholders' Equity $860.1 $750.8 $755.3 $755.3 $569.6

Total Capitalization $1,635.1 $1,525.8 $1,530.4 $1,255.4 $985.7

Total Debt/Capitalization 47% 51% 51% 40% 42%

Total Debt/LTM Adj EBITDA 1.8x 1.5x 2.6x 1.9x 2.1xNet Debt/LTM Adj EBITDA 1.2x 1.0x 1.5x 1.7x 2.1x

*PF current debt includes current portions of botht the US and Canadian Term Loans

**Assumes current portion of debt outstanding for 3Q15 is on Canadian Term Loan


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CVEO Long Thesis

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Disclaimer:

The above text is the view of the author alone and is for informational and educational purposes only. It should not be

construed as investment advice or a solicitation to buy or sell securities. The author may hold a position in the securities

mentioned, and does not have to provide updates for changes to his view. The author does not warrant his work for

correctness or accuracy. Perform your own due diligence before making investment decisions.

I do not hold a position of employment, directorship, or consultancy with the issuer.

I and/or others I advise hold a material investment in the issuer's securities.


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CVEO Long Thesis

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Appendices

Stock Price Performance (Since CVEO began trading in late May 2014)

CVEO Market Share (Per Mgmt. Estimates – CVEO Investor Pres- note this is as of Sep 15)

Sep ‘14: CVEO board

announces decision

to redomicile vs

converting to a REIT

Dec ‘14: CVEO

issues weak 2015

guidance given

market weakness

Jun/Jul ‘15:

Successfully

amends facility

and completesredomestication

Sep/Oct ‘15:

CEO/CFO buy

~$500k of stock

Analysts

upgrade CVEO

w/ $4-5 PT


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CVEO Long Thesis

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Liquidation Value Analysis

CVEO Balance Sheet Recovery / Liquidation Value Analysis

Impact of Accomodations Assets Recovery % on L iq Value Estimate

30% 35% 40% 45% 50% 55%1.52$ 0.14$ 0.83$ 1.52$ 2.21$ 2.90$ 3.59$

$ in MM Estim Liquidation

12/31/14 09/30/15 Recovery Value

AssetsCash and cash equivalents $263.3 $12.6 100% $12.6

Accounts receivable, net 160.3 63.7 25% 15.9Inventories 13.2 5.6 25% 1.4Prepaid expenses 20.7 20.4 25% 5.1Other current assets 6.5 7.2 25% 1.8

Assets held for sale 0 8.9 50% 4.5Total current assets $464.0 $118.5 $41.3

Estimated Useful

Property, plant and equipment, net: Life (in years)Land $55.4 $48.2 40% $19.3

Accommodat ions assets 3-15 1,687.0 1,485.5 40%


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CVEO Long Thesis

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Additional Liquidity Related Data


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CVEO Long Thesis

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CVEO Summary P&L

CVEO Summary P&L / Operating Stats

Historical Mgmt Consensus2011 2012 2013 2014 YTD15 2015 2016

Revenue

Lodge/Village RevenueCanada 413 550 549 497 214 Australia 196 274 256 213 109Total Lodge/Village Revenue 609 824 805 710 323

% of Total 70% 74% 77% 75% 77%

Mobile & Open CampCanada 167 167 162 164 65 Australia 1 3 0 0 0US 88 116 75 68 33Total Mobile/Open Camp Revenue 256 286 237 232 97

% of Total 30% 26% 23% 25% 23%

Total Canada Revenue $580 $717 $711 $661 $278 $365Total Australia Revenue $197 $277 $256 $213 $109 $135Total US Revenue $88 $116 $75 $68 $33 $38Total Revenue $865 $1,110 $1,042 $942 $421 $538 $481

% Growth 28% -6% -10% -43% -11%

Canada % Growth 24% -1% -7% -45% Australia % Growth 41% -8% -17% -37%US % Growth 32% -35% -9% -45%

EBITDACanada $217 $298 $279 $236 $82 $96 Australia $107 $156 $142 $109 $52 $62US $32 $47 $13 $13 $1 $3Corp/Other ($3) ($7) ($8) ($18) ($16) ($24) Adjus ted EBITDA $353 $494 $425 $340 $119 $137 $100

% Margin 45% 41% 36% 28% 25% 21%

Canada % Margin 37% 42% 39% 36% 29% 26% Australia % Margin 54% 56% 55% 51% 48% 46%US % Margin 36% 41% 17% 19% 3% 8%

Avg. Available Lodge/Village RoomsCanada 8,985 10,660 11,541 12,557 13,433 Australia 6,012 7,761 8,925 9,271 9,064 Total Lodge/Village Rooms 14,997 18,421 20,466 21,828 22,497

RevPARCanada $126 $141 $130 $108 $87 Australia $89 $97 $79 $63 $66Total RevPAR $111 $123 $108 $89 $79

Occupancy in Lodges/VillagesCanada 81% 93% 92% 85% 63% High 40s/ Australia 96% 93% 83% 68% 58% Low 50sTotal Occupancy 88% 93% 87% 78% 61% Guidance

Avg Exchange RateCAD/US 1.0117 1.0006 0.971 0.906 0.795 AUD/US 1.0324 1.0359 0.965 0.902 0.763


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CVEO Long Thesis

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CVEO Facilities Overview

Canada

Extraction Room Count

Lodges Region Technique 2010 2011 2012 2013 2014 3Q15*

Wapasu N. Athabasca mining 4,013 5,174 5,174 5,174 5,174 5,174

Henday(1)

N. Athabasca mining/in situ - 120 1,698 1,698 1,698 1,698

McClelland Lake Lodge N. Athabasca mining 1,888 1,997 Athabasca

(1)N. Athabasca mining 1,537 1,776 1,877 1,557 2,005 2,005

Beaver River N. Athabasca mining 732 732 876 1,094 1,094 1,094

Pebble Beach Lodge Sitka 432

Conklin S. Athabasca mining/in situ 608 584 948 1,036 700 700

Anzac S. Athabasca in situ 526 526 526

Lakeside(2)

N. Athabasca mining 510 510 510 510

Total Rooms 7,400 8,896 11,083 11,595 13,085 13,626

Open Camps Province 2010 2011 2012 2013 2014 3Q15*

Mariana Lake Alberta 247 478 478 486 435 435

Boundary Saskatchewan 346 346 346

Waskada Manitoba 196 196

Antler River Manitoba 212 212

Red Earth Alberta 92 114 114 114

Redvers Saskatchewan 102 102 102 102

Geetla British Columbia 135 81 81 81

Christina Lake Alberta 10 65 35 35

Total Rooms 247 478 1,013 1,390 1,325 1,325

Aus tralia

Resource

Villages Basin Commodity 2010 2011 2012 2013 2014 3Q15*

Coppabella Bowen met coal 1,654 2,556 2,912 3,048 3,048 3,048

Dysart Bowen met coal 1,249 1,491 1,912 1,912 1,798 1,798

Moranbah Bowen met coal 889 1,180 1,240 1,240 1,240 1,240

Middlemount Bowen met coal 690 816 816 816 816 816

Boggabri Gunnedah met/thermal coal 508 662 662

Narrabri Gunnedah met/thermal coal 242 502 502 502 502

Nebo Bowen met coal 490 490 490 490 490 490

Calliope — LNG 300 300 300 300 300

Kambalda(3)

— Gold 238 238 238 238 232

Karratha Pilbara LNG, iron ore 208 208 208 208

Total Rooms 5,210 7,313 8,618 9,262 9,296 9,064

United States

US Open Camp Rooms State 2010 2011 2012 2013 2014 3Q15*

West Permian TX 166 310 310

Three Rivers TX 106 274 274 274

Killdeer ND 126 235 235

Stanley House ND 199 199 157 157

Total Open Camp Rooms 305 765 976 976

Source:CVEO Investor Presentation (Aug 25, 2015)

*Data as of 3Q15 not available currently. Best guess estimates. The room count is likely off by a few rooms (and would be revised downwards 100-200 rooms)

(1) Temporarily closed due to lower expected activity in the region.

(2) Permanently closed in Q4 2014.

(3) Permanently closed in Q2 2015.


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CVEO Long Thesis

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Industry Stats (Per latest CVEO Investor Pres)


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CVEO Long Thesis

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Facility Pictures (Per CVEO website)

CVEO Investment Thesis - 11.18 Update

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