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North American Energy Partners Inc. (NYSE:NOA)

F2Q09 (Qtr End 09/30/08) Earnings Call Transcript

November 7, 2008, 9:30 am ET

Executives

Kevin Rowand – IR Manager

Rod Ruston – President and CEO

Peter Dodd – CFO

David Blackley – VP, Finance

Miles Safranovich – VP, Operations

Analysts

Jamie Cook – Credit Suisse

Matt Duncan – Stephens Inc.

Jacob Bout – CIBC World Markets

Bert Powell – BMO Capital Markets

Julius Sanders – JS Investments

Operator

Good morning, ladies and gentlemen. Welcome to the North American Energy Partners fiscal 2009 second quarter earnings call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, there will be an opportunity for analysts, shareholders, and bondholders to ask questions.

(Operator instructions)

I will now turn the conference over to Kevin Rowand, Investor Relations Manager of North American Energy Partners Inc. Please go ahead sir.

Kevin Rowand

Good morning, ladies and gentlemen, and thank you for joining us. On this morning’s call, we will discuss our financial results for the second quarter and first six months ended September 30, 2008. All amounts are in Canadian dollars. Participating on the call are Rod Ruston, President and Chief Executive Officer; Peter Dodd, Chief Financial Officer; David Blackley, Vice President of Finance; Miles Safranovich, Vice President of Operations; Chris Yellowega, Vice President of Major Mining Projects; and Bernie Robert, Vice President Business Development and Estimating.

Before I turn the call over to Rod, I would like to remind everyone that statements made during our prepared remarks or in the Q&A portion of the conference call with reference to management’s expectations or our predictions of the future are forward-looking statements. All statements made today which are not statements of historical fact are considered to be forward-looking statements. Certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking statements.

The business prospects of North American Energy Partners are subject to a number of risks and uncertainties that may cause actual results to differ materially from a conclusion, forecast, or a projection in the forward-looking statements or information. For more information about these risks, uncertainties, and assumptions please refer to our March 31, 2008 Management’s Discussion and Analysis or Annual Information Form which are available on SEDAR and EDGAR.

As mentioned on our last call, the management will not provide financial guidance. After our prepared remarks, we look forward to taking your questions but we ask that you pose one question at a time in order to give everyone an opportunity to speak.

At this time, I will turn the call over to our President and CEO, Rod Ruston.

Rod Ruston

Thank you, Kevin. Good morning, ladies and gentlemen. It’s a pleasure to be speaking with you all this morning. I understand that we have a large number of listeners on the call today and with that in mind, Peter and I are going to keep our prepared comments very brief and give maximum time for Q&A.

I’ll start with a few comments about the nature of the oil sands business and how we’re affected in these times of economic uncertainty. Then, I’ll provide a brief overview of our consolidated and segmented results for the second quarter and the first half, and Peter Dodd will provide a financial overview in more detail, and then I’ll wrap up with our outlook. After that, we’ll be happy to take questions.

We believe from recent commentary regarding the oil sands that there’s a clear misunderstanding by the investment community, about the viability of the oil sands in general, and most specifically the stability of our business within the oil sands. When people think about the oil sands business, it’s very natural to think about the mega projects and expansions that have dominated the headlines in recent years. While these large capital projects have certainly contributed to growth in our business, they are not the only drivers.

Our business is about getting in at the various start of the project, helping to design it, building it, and then providing recurring services that fit the newly established business operating. This includes mining, overburden removal, coaling, and other services that are a daily part of the operations of any active mine including those in the oil sands. You heard me say before of our target to be first in and last out. That’s what this is all about.

Have we broadened our recurring services to us? Well, they represent 60% of our oil sands revenue in the last 12 months. That was up from 47% at this time last year and we expect the recurring services will become an even more dominant part of our business going forward, and here’s why.

First, there are more oil sands mines in operation today than ever before reflecting the majority of new development in recent years. Several more new mines and mine expansions are set to follow in the very near future, including Canadian Natural's Horizon mine, Suncor’s Steepbank mine expansion, and Albian’s Jackpine mine. At some stage, we would also expect to see Petro-Canada’s Fort Hills mine, Imperial’s Kearl mine, and Total's Joslyn mine coming online.

Our initial contact with customers is generally design and construction. But as a direct result of a new mine becoming operational, demand for recurring services, we provide growth. So you say, if not new mines start, our business doesn’t grow. That is also wrong. As oil sands mines move through what is typically a 40 year life cycle, the geographic footprint expands and with that expansion our market grows. That’s because, to access quick positive cash flow, operators start mining right next to the plant where they have the shallowest ore and the shortest transport business. But as mines age, they have to go further afield and dig deeper.

So, our second reason for being confident about our business performance is that the very continuity of the mining process depends on contractors like us to build new roads, move crushers, and expand (inaudible), et cetera. It is organizations like ours that provide the trucks, shovels, and operators into the mining operations of our customers and the construction expertise to build this critical infrastructure that is needed for the ongoing operation of the mine.

The third reason we are bullish about the recurring services is because this part of the oil sands business is largely immune to changing oil prices. A producer invests billions of dollars into getting an oils sands operation up and running. To cover this fixed cost, continuous operation at maximum capacity is critical. You’ll be aware that some producers have recently published their unit operating costs indicating a variable cost in the high $20 to low $30 a barrel. I will reiterate, these competitive unit costs are only achievable if the operation runs at full capacity.

Unlike other resources such as, for example, coal mining where you can stop production when the commodity prices are unfavorable and conversely bring production back online in a relatively short period of time when prices recover. Oil sands facilities do not possess this flexibility. You do not stop a bitumen extraction plant after it has started. Obviously, you do some level of maintenance which reduces capacity over short periods, but long-term continuous operation is a key to efficient extraction and low unit cost. So producers keep existing oil sands mines running. And as I’ve said before, when capital becomes constrained, they tend to increase outsourcing in the mining operations in order to reduce their demand for that capital. This favors the stability of our business.

Overall, we believe that our recurring services positions us to continue benefiting from the oil sands in both the near and the long term. We expect the growth in recurring services from existing and new mines will hope to offset the impacts of delays being announced in some of the downstream projects.

Accordingly, our expectation for a strong financial performance in fiscal 2009 remains unchanged. In terms of new developments and longer term opportunities, the market seems to be of the view that Kearl and Fort Hills will proceed with the construction and operation of their new mines and we share this view.

Turning now to our results for the second quarter and first half of fiscal 2009, we continue to achieve excellent growth right across our business with significant year-over-year gains in revenue, operating income, and consolidated EBITDA. Consolidated EBITDA which as you are aware we feel is a good measure of our operating performance grew by 30% to $36 million in the second quarter.

Turning to some of our divisional highlights, our heavy construction and mining segment, grew revenues by 18% in the second quarter, and by 32% in the first half compared to the same period last year. We were particularly active at Albian and Syncrude during the quarter as we provided recurring services under our Master Services Agreement with those customers. Construction activity at Suncor’s Voyageur and Petro-Canada’s new Fort Hills project also contributed to the segment’s strong results.

Our piling segment also made strong year-over-year gains with revenue climbing 15% in the second quarter and 17% in the first half. This reflects work upon a wide variety of projects including some major oil sands projects. Product margins were somewhat lower in both periods because of project mix favored lower risk, time, and materials context.

Over the pipeline, it was another busy quarter as we near completion of the TMX Anchor Loop project. This has been a very positive project for us with some great achievements on the ground and clear benefits to us in financial terms. Our second quarter pipeline revenue increased 78% and first half revenue was up 126% year-over-year as a direct result of this project.

Overall, our momentum is continuing to build and we are very pleased with what we’ve accomplished so far this year. At this point, I will call on our CFO, Peter Dodd, to provide more detail on our results. Over to you, Peter.

Peter Dodd

Thank you, Rod, and good morning everyone. I’m going to review results for the three months ended September 30, 2008 as compared with the three months ended September 30, 2007.

Rod just talked about the results of our three segments and putting those together, total revenue increased 25.4% to $280.3 million with all operating segments contributing to this growth. Second quarter gross profit increased 25.8% to $44.3 million reflecting higher revenue and a slight increase in average gross profit margin. Our gross profit margin was 15.8% similar to 15.7% a year earlier.

Turning to operating income, this increased 34.5% to $23 million primarily on higher revenue and a reduction in our G&A expense as a percentage of revenue. Eliminating the non-cash items from net income in both periods, our basic earnings per share would have increased to $0.30 from $0.20 last year.

Turning to capital, total acquisitions for the second quarter were $24.9 million. Included in this number is cash spending of $16.2 million, $7.4 million of which was growth and the remaining $8.8 million was sustaining capital. In addition to cash capital spending, approximately $4.8 million in new equipment was acquired under operating leases and $3.9 million was acquired under capital leases.

Looking at liquidity, under our $125 million facility, we had $10 million drawn on the facility and $21 million of outstanding and un-drawn letters of credit to support performance guarantees on our customer contracts resulting in approximately $94 million of borrowing availability as of September 30, 2008.

Our cash position as of September 30, 2008 was zero with a $10 million drawn on credit facility compared to $51 million in cash as of June 30, 2008. As disclosed last period, there were $43.5 million in accounts payable as of June 30, 2008 to capital expenditures acquired in the first quarter, which was subsequently paid in the second quarter. In addition, an increase in unbilled revenue in second quarter due to delays by several large customers in processing change orders and progress payment certificates led to the increase in working capital and reduced cash position in the second quarter. We’re working with these customers and expect to be currently change orders and progress payment certificates by the end of the third quarter.

On the Sox compliance front, we continue to make progress in developing, implementing, and assessing the effectiveness of new processes and internal controls, in accordance with our objective to have no material weaknesses by March 31, 2009.

That summarizes our second quarter results. I will now turn the call back to Rod Ruston to tell you about our outlook.

Rod Ruston

Thanks, Peter. Our outlook going forward continues to be positive. To date, we’ve experienced no slowdown in demand for our recurring oil sands services. And as I indicated earlier, we expect demand will continue to increase as new mines come online. This is not to say we won't feel any impact from the recent volatility in commodity, equity and credit markets. We anticipate that our construction and piling businesses could experience some near term reduction in demand due to announced delays in upgrade of projects.

We also expect to see commercial construction cooling given the new economic realities. However, there are a lot of infrastructure projects waiting to get done in the West and we believe Alberta will take advantage of the lull to proceed with their $120 billion infrastructure improvement plan.

As we’ve announced previously, we also expect our pipeline revenue will decline sharply in the third quarter once TMX wraps up. We are currently looking at several new pipeline opportunities. So, some challenges ahead, but we believe we are well positioned to make them. A growing opportunity in recurring services, our strong competitive market position and our stable financial position should enable us to manage effectively through these uncertain times. Overall, our outlook remains positive.

With that, I’ll turn the call back over the operator.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Your first question comes from Jamie Cook, Credit Suisse. Please go ahead.

Jamie Cook – Credit Suisse

Hi. Good morning.

Rod Ruston

Good morning Jamie.

Jamie Cook – Credit Suisse

I guess my first question, I appreciate your color on the recurring revenue portion of your business, can you just break out for me what the recurring – if we look over the past 12 months, what the recurring revenue had been growing at generally versus what the more cyclical construction business is growing at so we can sort of look going forward if it ever impacts your business?

Rod Ruston

It’s difficult to actually break out the rate that it was growing. But I can say that the recurring revenue was certainly growing faster than the fixed construction type revenue. As we’ve said, we did go from around about mid 40% say up to 70% of our business being recurring revenue within that oil sands, sorry mid 40% up to 60% of our business growing as recurring revenue. And I expect also that that growth rate in recurring revenue will increase because what we will see and you’ve heard some of the big oil companies say that they are going to cut their capital spend. Suncore announced a cut by about $2 billion and I see the opportunity for further increases in recurring revenue so (inaudible) against the construction type revenue increasing even further because these companies will outsource more and more of their big truck, big dirt and small infrastructure work that's required for that ongoing mining operation.

Jamie Cook – Credit Suisse

When do you anticipate seeing then an increase their spending on that portion of the business? I mean is that something that will happen over – we start to see in the next quarter or do we see that 12 months from now as they (inaudible)?

Rod Ruston

Jamie, it is hard for us to say that there is a bit of increased revenue because of the current downturn in capital constraints and another point is, what they were going to do anyhow. But we are certainly continuing to see the opportunities for recurring revenue for us doing the services work on the mine sites expand, and it’s been expanding this year and it continues to do so.

Jamie Cooke – Credit Suisse

If you look at your revenue growth in the heavy construction and mining, that’s where the recurring revenue is – hello?

Rod Ruston

There's lot going on Jamie. Yes, I can hear you. Start again on that last question.

Jamie Cooke – Credit Suisse

Okay. Actually, let me switch to the pipeline side of the business. One of the larger pipeline companies –

Rod Ruston

Operator, I can’t hear a thing.

Operator

I’m sorry. You cannot hear her?

Rod Ruston

Yes, she’s cutting out.

Jamie Cooke – Credit Suisse

Hello?

Rod Ruston

Okay, I’ve got you, Jamie.

Jamie Cooke – Credit Suisse

Okay. Switching to the pipeline side of the business, what are the largest players on the pipeline side, yesterday, you said that they were seeing –

Rod Ruston

I can’t hear the question operator.

Operator

I’m sorry, sir. I can hear her perfectly clear.

Kevin Rowand

Well, it must be on your end. Why don’t you go ahead, Jamie, and I’ll take the question.

Jamie Cooke – Credit Suisse

Okay. The question is on the pipeline side. One of the largest pipeline players yesterday said that there’s the push-outs in projects related to the ability to get financing on some of these big pipeline jobs. Can you just talk about whether if you’re seeing the same thing and how we should think about that in passing your pipeline business going forward especially with the one larger pipeline business job ending this quarter?

Kevin Rowand

We still expect to see in the near-term more projects to proceed. And as you mentioned, the larger projects, for sure, their ability to go ahead are a function of the pre-sell demand and securing of the financing. But right now, we’ve got a number of pipeline bids in for medium size and larger projects, and we expect additional projects to come our way in the next month or two in terms of bidding opportunities.

Jamie Cooke – Credit Suisse

Okay, thanks. I’ll get back in queue.

Operator

Thank you. Your next question comes from Matt Duncan, Stevens Inc. Please go ahead.

Matt Duncan – Stephens Inc.

Good morning, guys.

Kevin Rowand

Hey, Matt.

Matt Duncan – Stephens Inc.

First question I’ve got, and I know backlog can be a little bit of a tricky number for you guys since not everything you work on flows through there, but I see backlog is down about 25% –

Rod Ruston

Operator, I’ve lost this caller altogether. All I hear is a hollow buzz in the background. I'm going to dial in, if it’s okay.

Operator

Okay.

Matt Duncan – Stephens Inc.

Can you guys just maybe address what’s going on with backlog there?

Rod Ruston

David, why don’t you answer that?

David Blackley

Yes, certainly. Keep in mind that the backlog is only in those particular projects that we can clearly identify and define as backlog in terms of the accounting rules.

Kevin Rowand

I am on another phone and I can't hear (inaudible) dialing in by a different phone. We can hear you in the background. Thank you. Sorry mate. David, why don’t you start again?

David Blackley

Obviously, we know that our backlog is fairly limited in terms of how we can define it based on the accounting rules. Essentially, what you see is the adjustments there in backlog is mainly related to our long-term overburden projects. We knew at some point that the customer was actually going to take back the fuel components of that project, so they did that this last quarter. It was revenue at zero margin for us anyway, which really is just a flow through. So as a result of that, we’ve now adjusted our backlog down to reflect that change and that was all we’d anticipated in terms of the contract.

Matt Duncan – Stephens Inc.

And David, how much of your revenues so far this year from CNRL has been related to that fuel component, do you know that?

David Blackley

No, I wouldn’t have that off the top of my head.

Matt Duncan – Stephens Inc.

Okay.

Rod Ruston

But that zero margin is pass through.

Matt Duncan – Stephens Inc.

Sure, absolutely. So other than taking that out, was there anything else going on there?

Peter Dodd

No, that was the major adjustment there. And obviously, you just see the other decline is in the pipeline side as TMX starts to go down to a close.

Matt Duncan – Stephens Inc.

Okay. And, Miles, on the pipeline side, I know you addressed this a little bit on. It sounds like you’ve got some bids out for pipeline work. For the third quarter, so for the December quarter, is the only pipeline revenue you will have the remaining piece of TMX, or do you expect that by the end of the quarter, you might be working on another project?

Miles Safranovich

It’s our expectation that at the end of the third quarter, we should be working on another project. It all depends on our ability to win the projects in the upcoming bid season that we’re currently involved in.

Matt Duncan – Stephens Inc.

Okay. And the last thing and again I’ll jump back in queue, looking at the equipment cost line, I know you guys have said that you were busy enough in the June quarter, but you did not do as much equipment maintenance as you expected, but that line jumped about $15 million sequentially. I’m curious if you can talk about that jump and then what we should expect on a go-forward basis for the next couple of quarters here for a dollar amount for that expense line?

Miles Safranovich

Okay. In terms of why it’s jumped, obviously, the timing issue as we talked about in Q1, we deferred some of that maintenance. We saw more of that maintenance work being picked up in Q2 here as we try to get ready for the next part of our busy season. I think we’re going to be seeing similar kind of numbers in terms of both maintenance costs going forward. Obviously, we expect it to tie in closely with our revenue and we expect strong revenue. So obviously, as that moves, the equipment maintenance cost goes with it.

Matt Duncan – Stephens Inc.

Well, David, given that you guys are on a preventative maintenance program, with the September quarter now that this very high level, would that not be kind of the high watermark for the year and maybe it goes back down to the mid 40s like it was in the June quarter? Or are you saying that –?

David Blackley

I would expect so. We feel we have probably the best setup for our third and fourth quarter around that we have been for quite a while. That’s what everything under the preventative maintenance, so at this stage, we have been putting that in. It's not fully installed yet, but we certainly think that the work we've done has set up us well for the next two quarters.

Matt Duncan – Stephens Inc.

So then we would not expect another $60 million line item there for the rest of the year?

David Blackley

No, I wouldn’t think so.

Matt Duncan – Stephens Inc.

Thanks, guys. I’ll get back in queue.

Operator

Thank you. Your next question comes from Jacob Bout, CIBC World Markets. Please go ahead.

Jacob Bout – CIBC World Markets

Good morning. A question on the piling side. Talk a little bit about just how sensitive it is to what’s been going on recently. I know you talked a bit about the infrastructure build in Alberta. But can you talk a bit about capacity utilization, where is that currently and what you’re expecting going forward?

Rod Ruston

Jacob, our forward view of the piling work was that there was going to be a small slowdown in the 2009 calendar year regardless of the issues that have occurred just recently in the economy. So because of the then timing of all the big work, we certainly do believe that there will be a slowdown in the driven pile work of – I’m sorry, the drilled pile work that we do. But I was talking to our general manager of our piling division just the other day, and he said that every one of our cranes is fully booked out until around about July/August next year, so a large proportion of our equipment will continue operating. The only area in that business we’re looking to expand our backlog is in the drilled pile work, and we believe that the opportunities will mostly present themselves although we do expect some slowdown.

Jacob Bout – CIBC World Markets

Okay. Do you quantify that at all or –?

Rod Ruston

I can’t actually quantify, no, to give you an actual number.

Jacob Bout – CIBC World Markets

Okay. Just maybe more of a macro question on your ability to rein in costs, I mean we’ve seen a significant decline obviously in oil prices, but if we are to see that fall even further, can you talk a little bit about your ability to reign in your capital spend?

Rod Ruston

Yes, we’ve already done a review of our forward – over the next three months to six months, we’ll have a runoff of equipment that we already have and that’s largely for CNRL, which we need to buy anyhow. But the equipment that we’re buying now for CNRL, which will be delivered over the December/January/February, and some of it might even go into next year, so into April or May. So we’re not sure at the present time whether it’s going to be delivered in March or April. But that’s the last of the major truck purchases for CNRL for some time and it takes us up to full capacity there, which we’re going to need to be as CNRL as ramps up.

We’ve already sent back a significant amount of rental equipment that we had on the books because we just don’t need it anymore. That large pipeline which we’ve said before has a very hard proportion of rented equipment, and we believe that we’ll be reducing out capital spend quite substantially as we go forward. But where we are is we’re in what I would recall the ideal position.

We have spent a lot of capital over the last two years. We’ve built our fleet to a very formidable force in the oil sands. As I’ve said, we believe that there’ll be more outsourcing of the type of work we do, and I think we’re going to be joining on the spot with the right equipment at the right time and be able to take up those opportunities. And we believe, we certainly believe there’s some utilization capacity in our equipment that we can bring to bear in this.

Jacob Bout – CIBC World Markets

And then last question is just more of a housekeeping and maybe you can talk around your funded status of your pension and the percentage of the defined benefits.

Rod Ruston

You should have given us that one a two days notice in advance.

Peter Dodd

We don’t actually have any pension liability. We don’t have other defined benefit or defined contribution there.

Jacob Bout – CIBC World Markets

Thank you.

Operator

Thank you. Your next question comes from Bert Powell, BMO Capital Markets. Please go ahead.

Bert Powell – BMO Capital Markets

Thanks. Hi Rod.

Rod Ruston

Before you ask the question, I have to correct that. We do contribute an amount to pensions for the defined contribution for some of our staff. So, it’s not we don’t have any, we have a small contribution that we do do, but it doesn’t – it’s got no big liability or anything like that. It's worked through an external provider.

Peter Dodd

Yes, that’s essentially a matching contribution to an RFD [ph] program?

Rod Ruston

Yes.

Bert Powell – BMO Capital Markets

Alright, you are ready?

Rod Ruston

Yes, go.

Bert Powell – BMO Capital Markets

Okay, and just back to the heavy construction and recurring revenue, 70% was recurring I guess year-to-date or in trailing 12 months which would kind of indicate $500 million is your recurring base. If you look at the characteristics of the work that you’ve done, the status of the mines, where they are, Rod and I think you've said in the past, the first shovel is the cheapest and then it gets more expensive, if you looked at how those things are progressing out as the miners start to expand the mines, on an absolute basis, what do you think happens to that number next year?

Rod Ruston

I think it will continue to grow. There’s no mines up there that are nearing their complete limit of operations. Even the oldest mines will continue to operate and continue to grow. And at the same time, we’ve got a number of new mines that are going to be coming on. So, CNRL will start operation at full capacity over the next 12 months. And as it starts, we will get the – I expect to get all the services that are provided to help that mine extends its growth. If you look in the next one after that, we will be probably be Jackpine mine and it will be right at that start point and expanding rapidly. And then you can go to the other end of the scale. Albian’s mine would be across Albian.

Bert Powell – BMO Capital Markets

And Rod, Jacobs had a relationship go bad in the oil sands. Is there any opportunities there that would more immediately accrue to North American?

Rod Ruston

Yes, we think that our relationships are going to be very key to our business. We’re talking to every oil sands producer, I should say, about the opportunities to expand future work; we’re doing that all the time. And I think our relationships with all of the current producers are very, very strong. And the acceptance by the producer that we do deliver what we say we’re going to deliver is well recognized. So, I think there’s great opportunity out there for our business to expand.

Bert Powell – BMO Capital Markets

Okay, last question. Going forward on CapEx, I think the high watermark that you’ve been indicated around $200 million. I think your $30 million of that has been what you classify as maintenance CapEx. So, when you talk about your CapEx budget being scrub for next year, given an indication of what that’s going to be after you’re done with the CNRL equipment, what does that $200 million look like? Does it start to look like no new purchases, just the base maintenance capital that you’re going to have to buy?

Peter Dodd

I’ll take that one, Rod. As we said before, Jacob, that’s in that $120 million to $200 million is what we typically would acquire in capital equipment. But we made a point in the MD&A as you’ll see that it depends very much on the production schedules. Sometimes, production slips out and – like last year, we had some equipment we thought was coming at the end of last year, it came in the first quarter of this year. And quite a big traction of equipment (inaudible) so long that the production schedule can vary. Also, we got, because of our strong position with these equipment companies, we often get opportunities to bring something forward when the production schedule change. And if we see the work, therefore it will take us straight away.

So, this year, as Rod said, the next four quarters are our peak time for the CNRL contract and that this year will be at least the top end of that range. It could be a little more this year because of the production schedule changes and the big equipment fleets, but the cost crunch would be that the following year would be substantially down. We’d expect that the following year, irrespective of the production schedule without the equipment requirements would be toward the bottom end of the range, which would mean that over the three years, you are going to be getting the midpoint of the range.

Bert Powell – BMO Capital Markets

So, when you say this year, you mean fiscal year end at March?

Peter Dodd

Yes.

Bert Powell – BMO Capital Markets

So, be at or above the top end of the range and then post – heading into the next fiscal year, look for that to be down.

Peter Dodd

Yes, and of course, remember that the CNRL, the heavy equipment contract, we’ve got the second big shovel from (inaudible) coming in December. The big truck to support that and that's all lease equipment with the quality [ph] in CNRL contract. So, in terms of our cash spend going forward, that is fairly much reduced. And in 2010, we’ll need some growth, we don't just sit on our sustaining CapEx, but with the – like Rod said, with our fleet down being so well positioned for the last of couple years, we think we are in a very good state to capture the benefit of that fleet.

Bert Powell – BMO Capital Markets

Thanks. I'll get back in queue.

Operator

Thank you. You’re next question comes from Julius Sanders of JS Investments. Please go ahead.

Julius Sanders – JS Investments

Hello. How are you? This is the fourth, if I’m not mistaken, the fourth quarter in a row where you beat your numbers and give an upbeat forecast. Can you explain to me who are the sellers, the institutional sellers are? Do you have any (inaudible) in those years? It has been a very quiet period in a very historical timing in the economy. But at the same time, we train as we (inaudible). So, can you give me some kind of an idea who or why – I know you sort of mentioned that in the introduction, but who are these institutions that seem to be paying back that the company that are going in the wrong direction? Also, my other question would be if possible future conferences that we can have our calls prior to the market opening, because I being a broker and are pretty busy covering a lot of other companies.

Rod Ruston

I understand your second question and we’ll certainly try and accommodate that. On the first question, we don’t know who was selling off. We've had a couple of occasions now where we know it’s a single shareholder at the end of the quarterly announcement or within a couple of weeks of the end of the quarterly announcement, have been dumping off their shares. And on each occasion that they've done that, we’ve announced very good, very solid results. We are very, very strict on our communications with you guys and the market in general prior to releasing our results and we literally don’t communicate outside. So, they’re selling because they just haven’t got as many brains as the people that are buying.

Julius Sanders – JS Investments

I agree on that. Do you know when you have a heavy short position as well in the company this time?

Rod Ruston

I didn't get that question. Did you get that question?

Julius Sanders – JS Investments

Are you aware whether we have a huge short position that can be somewhat manipulative to the (inaudible) in the stock?

Peter Dodd

Not that we’re aware of.

Rod Ruston

Not that we’re aware of one way or the other.

Julius Sanders – JS Investments

So, we consider – are we considering doing road shows to try to get more of an understanding or explaining to those who don’t quite understand your business, that they are using the wrong indicators to determine whether your company has been following the oil industry (inaudible) oil drop, our stock drops.

Rod Ruston

Certainly. And Kevin, you might just point out the road shows that we’ve got coming up, please?

Kevin Rowand

We’ll be doing some marketing following the reseller results here, in the latter part of November and early part of December, we plan to do some marketing.

Rod Ruston

Wait. If you are not aware, we go every quarter on road shows to the major capital financials in the US and Canada. We haven’t done that since we were floated and we'll continue to do that.

Kevin Rowand

We’ll be going to New York, Boston, Mid Atlantic, Midwest, and over to the West Coast as well. So, we’d be happy to come and see you guys. So if anyone is interested, give me a call and we can arrange.

Rod Ruston

Kevin, you’re allowed to release the names of the two conferences we’re actually talking at, please.

Kevin Rowand

Okay. Stephens is holding a conference down in New York and there’s a Keybanc conference in New York in early December. I don’t have the dates in front of me right now but they are on our website.

Julius Saunders – JS Investments

Thanks. I appreciate it and keep up the good work. Unfortunately, you’re not getting the credit that you deserve.

Peter Dodd

Thank you very much.

Rod Ruston

And your comments are one of the reasons why we've gone into extensive detail to explain exactly how a mine and the process of mining works.

Julius Saunders – JS Investments

Thank you very much.

Operator

Thank you. Your next question is a follow up from Matt Duncan. Please go ahead.

Matt Duncan – Stephens Inc.

Hey guys. Just a couple of things. First of all, I guess we saw some news in the last few days that CNRL has been talking about maybe cutting back on their capital expenditures at Horizon. Is that going to impact you at all?

Rod Ruston

Again, we go back to the situation of these plants. Canadian Natural has just built a plant. They haven’t got their first oil out yet. There is no way they are going to stop that plant from getting started. And so we don’t see any slowdown in the type of work that we do there.

Matt Duncan – Stephens Inc.

Great. That’s good feedback. And Rod going back to your comments about the recurring revenue is increasing as a piece of the whole. Would you care to maybe venture a guess if ultimately where you think recurring revenue would be in the percentage of your revenue strength maybe 12 or 24 months from now, what’s your goal there?

Rod Ruston

Our goal is to get involved with every piece of construction that we can get involved with and then feeding off that construction to get involved with the recurring revenue side of that construction and basically that’s the way it works. So if you think about what’s going to happen in Fort McMurray, you’ll see I believe Kearl will go ahead. And once Kearl has gone ahead and built, then we’re going to be jumping in there as hard as we can to help them with their recurring revenue. Petro-Canada will then get built, Jackpine will then get built and also in my personal opinion, I believe that if you look out to the future, you’ve got Total that is talking about building a mine in 2014, to start in 2014, so I think that you will still hear that they project to go ahead. As each of those big mines start, our recurring revenue market expands. As, as I also said in my talk, even if not one new mine was to come on for the next 12 or 18 months, our recurring revenue would expand just as a result of the mines getting bigger.

Matt Duncan – Stephens Inc.

Okay. That’s very helpful Rod. I appreciate the comments. Two more questions, do you have any update on the expected timing of TMX Phase II and sort of where are you in the process of trying to win that business?

Rod Ruston

My understanding is Kinder Morgan themselves haven’t got any specific plan for starting TNX stage two. And as I said before, we don’t – well, we haven’t listed on the projects that we will certainly target when the fund comes. We don’t – haven’t specifically settled the date and the paperwork that we’re going to get. We will be tendering for that project in the same way as we would tender for any other ones. There is a quite a number of pipeline opportunities on the horizon. The advertising queued off and build up of reputation that we’ve received out of our achievement of TMX has been immense. And we believe that we will certainly get additional work in our pipeline division and continue to be a significant player in the pipelining business. In fact, they’ve been growing a little bit. Certainly, when TMX2 does come possibly growing the orders, be ready to get going, then we believe that we would have as good an opportunity if not better than (inaudible) be a part of that.

Matt Duncan – Stephens Inc.

Okay. And you talked about visibility already and I know we’ve asked this question on past conference calls, but as you look at oil at around $60 a barrel, I mean, I guess my understanding is that you are going to go back to this recurring revenue stream. That the more mature mines, it maybe high 20s or low 30s a barrel where they are kind of making, where they are I guess breakeven. Can you talk about maybe how $60 oil impacts the way your customers think about what they plan on doing for each of your three segments? So looking at heavy construction of mining, looking at piling, and then looking at how it might impact the pipeline business.

Rod Ruston

Our customers, I'd almost be surprised to put it simply, if they even bother looking up the pipe to see what today’s oil price is when they’re doing their planning for their projects. My understanding is, if you take an Exxon, for example, they look at a projected oil price over the next 25 to 30, 35 years. And so – and in fact, John Lau from Husky, just two weeks ago in the newspaper made a statement. "Hey guys, this is a 40-year mine life we’re talking about. I’m not going to look at the oil price of today and make a decision what I’m going to do over the next 40 years. I’m going to take some forward projection." So my belief is that the oil sands people are looking in the – if the oil price runs between $70 to $90 a barrel, we’re in good shape; if it happens to pin down to $60 every now and again, that’s not going to hurt us.

I was asked a question the other day from someone who said that they’d heard that oil prices might go down to $50 a barrel. And my response to that was, first of all, I think – my opinion is that it’s unlikely. If (inaudible) at $50 a barrel, it would be there for about 10 minutes. And because the oil sands are the second biggest resource of oil in the world, they are in an area that’s geopolitically stable for the United States; and I think that they are going to become a baseline supply of oil into the world market. And because of that, they will be – the cost of that will be governing the long-term per barrel price of oil. The other thing about it is, even if you take the Middle East now, my understanding there is also that the Middle East can’t sustain $50 oil, and they’d still want to do the, in construction of (inaudible) in that area; and so oil prices will go up because of their requirements as well.

Matt Duncan – Stephens Inc.

Okay. Thank you for the commentary, appreciate it.

Operator

Thank you. Your next question is a follow-up from Burt Powells, BMO Capital Markets. Please go ahead.

Burt Powells – BMO Capital Markets

Thanks. David, just a couple of questions for you. Just on the depreciation expense for this quarter, I think you had $3 million in, at least in the six-month period for accelerated depreciation equipment that's not in service. Was that all Q1 – can you just give me a sense as to what was in this quarter, if anything?

David Blackley

There wasn’t that much this quarter. Most of our depreciation increased. Obviously, we’ve increased our asset base in terms of our owned equipment, and that’s much more a function of our equipment utilization.

Burt Powells – BMO Capital Markets

Okay. So how was that $3 million spread between Q1 and Q2?

David Blackley

Most of that was in Q1, I believe.

Burt Powells – BMO Capital Markets

Most of it in Q1. Okay. And then can you just talk a little bit about the $16 million claims proposed, just so we understand exactly what’s going on there?

David Blackley

Sure. Essentially what that $16 million relate to, it’s revenue that we recognized and sold [ph] to the customer. That customer’s disputing some of that billing, so obviously the accounting rules require that we disclose disputed invoices. It’s claims revenue and we have to do that regardless of the validity of the customer’s claim. Once we cause them [ph] to dispute, we have to identify this claims revenue.

Burt Powells – BMO Capital Markets

So, is this related to one specific project?

Rod Ruston

It is.

Burt Powells – BMO Capital Markets

Okay. And can you disclose which division is this? The pipeline, the construction?

Rod Ruston

Yes, we’d prefer not to disclose it right now because we’re obviously in negotiations with the customers to resolve.

Burt Powells – BMO Capital Markets

Okay. And, Rod, last question for you, just in terms of your G&A line. I know the intention was to get that down I guess closer to 5% and I think part of the assumption obviously there may be a stronger growth environment than we have today. Can you just maybe talk a little bit about what your opportunities are on your G&A line to maybe manage that a little better and also maybe just on the operating lease side. Peter mentioned the (inaudible) is coming on line. What's a good normalized operating lease expense on a quarterly basis assuming just net recurring revenue expansion next year for the most part?

Rod Ruston

Yes, I’ll just add one phrase too the last of question that you asked also and that is that we wouldn’t have had – tightened $6 million [ph]. We’re talking about (inaudible) no accounts unless we were very confident of securing the – have very positive results, let’s say, in those negotiations.

The second part of your question is, yes, we do see a good opportunity now to attack our G&A. You've seen us over the last three years, we’ve been growing at 30%, 35% per year and at the same time while growing to 30% to 35% per year, we’ve been converting what was once a family company into a New York listed, so to get (inaudible) everything else, that's a price we needed to do so. We’ve had a very high years of consultants; we’ve put on a lot of labor that’s been utilized for taking controls as we’ve been putting in the systems to make sure that we’re hitting our numbers right and doing our prices as well. What we can see going forward is a slight slowdown in our growth rate. Although we do still expect to grow. I will say that (inaudible) saying in the market now for the last two and half years, that a slowdown in the oil sands I believe would be positive for North Americans because what it does is it spreads the workload and allows us to do more with the dime [ph] rather than having to put additional G&A, additional people and additional consultants. So I think you will see it declining as we go forward.

Burt Powells – BMO Capital Markets

Just to interrupt you at that point, Rod, would you given that some of the work that you’ve been doing is getting ready for public status and compliance, is there a point where you see, and I think it was mentioned in your MD&A that you should be compliant by the end of March. Is there kind of a step drop in the G&A once the resource is employed to meet those objectives, can we see one quarter where all of a sudden G&A is down just a couple of million dollars just because you have that done?

Rod Ruston

I think you’ll say it more as a tapering off versus jump because as you get near the end, we’ll be reducing the number of consultants we get there. As we go past the end of October, (inaudible) that will tend to be more of a tapering effect.

Burt Powells – BMO Capital Markets

Okay.

Rod Ruston

The second part of your last question and (inaudible) but I can’t remember what it was.

Peter Dodd

It was on the lease commitments. Actually we did suggest that in the MD&A what our current lease commitments are, in terms of the thick and shovel [ph] and the additional trucks coming in. You will see a bit of a pick up once those come in. It will be somewhat similar to what we have experienced this year compared to last year, and then it should (inaudible). Apparently, we are projecting out for 2010, $33 million in terms of operating lease commitments. We will see that step up a little bit in 2010, but then it should come back down into those levels of sort of $35 million or $40 million.

Burt Powell – BMO Capital Markets

So in terms of thinking about the lease operating expense line, think about that at $35 million to $40 million for 2010?

Peter Dodd

Yes, it might be a little higher in 2010 just because we – as you will see the numbers there at 2010, it’s $33 million and then it actually drops off the following yet to $23 million. You will see it step up a little bit higher in 2010 and then go up to (inaudible) again.

Burt Powell – BMO Capital Markets

Okay. Thanks very much.

Operator

Thank you. (Operator instructions) Gentlemen, there are no further questions at this time.

Rod Ruston

Okay, thank you everybody for joining us. It’s been a very good discussion and I hope you've got all the feedback and information that you wanted. I reiterate, we have had a strong quarter and we expect our ability to perform to continue delivering strong quarters as we go forward. We’ll sign up now with (inaudible). We’ll be talking to you in late November and early December. If you contact Kevin Rowand, our Investor Relations Manager, we’d be more than happy to come by and see you. We will also be, as he said, attending two functions where we will be presenting. As you are aware, the transcript of this –- a replay of this call will be available on our web site.

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Source: North American Energy Partners Inc. F2Q09 (Qtr End 09/30/08) Earnings Call Transcript
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