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North American Energy Partners Inc. (NYSE:NOA)

F4Q10 (Qtr End 03/31/10) Earnings Call

June 10, 2010 9:00 am ET

Executives

Kevin Rowand – Director, Strategic Planning and IR

Rod Ruston – President & CEO

David Blackley – CFO

Analysts

Matt Duncan – Stephens

Ben Cherniavsky – Raymond James Financials

Greg McLeish – GMP Securities

Kalpesh Patel – Jefferies & Co.

Todd Garman – Peters & Co.

Tatiana Thibodeau – Clear Bridge Advisors

Operator

Good morning ladies and gentlemen. Welcome to the North American Energy Partners’ fiscal 2010 fourth 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. The media may monitor this call in a listen-only mode. They are free to quote any member of management but they are asked not to quote remarks from any other participant without that participant’s permission. I advise participants this call is also being webcast concurrently on the Company’s Web site at nacg.ca.

I will now like to turn the conference over to Kevin Rowand, Director, Strategic Planning & Investor Relations 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 three and twelve months ended March 31, 2010. All amounts are in Canadian dollars.

Participating on the call are Rod Ruston, President and CEO, David Blackley, CFO, Chris Yellowega, Vice President Operations, and Bernie Robert, Vice President Corporate Affairs & Business Strategy.

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 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 information.

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 projection in the forward-looking information.

For more information about these risks, uncertainties and assumptions, please refer to our

March 31st, 2010 Management’s Discussion and Analysis, which is available on

SEDAR and EDGAR. As previously mentioned, management will not provide financial guidance.

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

Rod Ruston

Thank you, Kevin and good morning ladies and gentlemen. Thank you for joining us today. We achieved strong operating results in fiscal 2010, generating a 122 million of consolidated EBITDA despite significant economic challenges. Just as importantly, fiscal 2010 gave us the opportunity to demonstrate the robust long-term nature of the oil sands in general at our business in particular

Despite uncertain economic conditions and the low oil price environment, our oil sands customers continue to run their plants at or near full capacity as we expected they would. This resulted in a steady demand for our extensive range of mining services which in turn help mitigate the impact of the downturn in our construction-related business.

Out of adversity comes opportunity. And this was certainly the case in fiscal 2010. The challenging conditions created an opportunity to work more closely with our customers in order to improve planning and reduce costs. Our demonstrated commitment to safety, excellence, cost reduction and strong project execution culminated in three major contract renewals, two of which provided for increase scope of services.

To give you some examples, we renewed our services agreement with Shell and we’re able to offer this plant improved pricing as a result of extending this contract to a three-year term and identifying a base load of scope within the contract.

Early in the year, we either initiated mining services with Suncor under an agreement to provide a fleet of fully maintained mining equipment to supplement Suncor’s home fleet. In December 2009, Suncor renewed this agreement for an additional 12 months and requested larger size haul dredge thereby increasing the capacity.

More recently, we renewed outside services agreement with Syncrude in November 2010 and we continue to provide overburden removal services to Canadian Natural under our 10-year contract. So in other words, we were providing a carrying services to every operational mine site in the oil sands throughout fiscal 2010.

We are the only mining infrastructure contractor that can say that and it is a peak competitive advantage for us. It enabled us to provide valuable, operational flexibility to our customers and it brings considerable stability to our own operations.

Some of our competitors have not been so fortunate and were fallen by the wayside as competition in the market escalated over the past year. While we also felt the impact of the slowing economy in some parts of our business, overall, our oil sands business model has proven to be very sustainable.

Now, looking briefly at the segment results. Heavy Construction and Mining revenue was up 29% during the fourth quarter and down 7% on the full year basis compared to same period last year. This was largely driven by the 29% increase in recurring services revenue during the fourth quarter and a 12% increase on a full year basis.

The growth in our recurring services revenue reflects increased activity in Shell’s sites under our new three-year master services contract. It also reflect increased mine services to support Suncor along with increasing activity at CNRL, as we returned to planned production levels under our ten-year overburden removal contract.

On a full year basis, project development revenue in Heavy Construction and Mining was lower compared to the same period last year as a result of delay in several major oil sands projects announced in late 2008. However, we began to see project development revenues come back in the fourth quarter of fiscal 2010.

We posted a year-over-year fourth quarter increase in project development revenue as a result of the work on McAllen [ph] refinery in Saskatchewan and several construction related projects in the oil sands.

Turning to Piling, revenues for both the fourth quarter and the full year periods continued to be negatively impacted by weak commercial and industrial construction markets as well as by delay in some of the new high volume oil sands projects.

We expect to face continued strong competition for the available work in this sector both in the near-term and the mid-term, particularly with commercial construction activity remaining weak in the western provinces. However, our expansion into the Ontario market is expected to help offset this impact.

Results in our Pipeline segment, also reflect a more competitive market environment, although we secured two new contracts during fiscal 2010 we ended the year with the fourth quarter loss as we work to maintain schedule on one lump sum contract despite adverse weather and ground conditions.

One of the outcomes of a very competitive market environment is the contractors are bidding out to accept more risk and in some cases those risks are being realized. In this case, the customer recognizes the challenging conditions we endured and our commitment to deliver their project safely and on time. Not only where we awarded the second phase of this project but this new project and contract structure (inaudible) mitigated the risks.

The second phase will get underway this summer and involves the construction of 30 kilometers of 24-inch pipeline in British Columbia. At about the same time we will start work on TransCanada pipelines, NPS Groundbirch Mainline project at 77 kilometers, and 36-inch pipeline also in British Columbia.

Overall, we are pleased with our fourth quarter and fiscal 2010 results and we believe that we performed well in the midst of challenging economic conditions. At this time I will call on David Blackley to provide more detail on our fourth quarter financial results. David?

David Blackley

Thank you, Rod and good morning, everyone. I’m going to review results for the fourth quarter ended March 31, 2010 as compared to the fourth quarter ended March 31, 2009.

Stronger volumes in our Heavy Construction and Mining and Pipeline segment bolstered revenues resulting in consolidated revenues of 220.6 million, a 26% increase from last year. Gross margin was 14.8% compared to 18.9% last year, resulting in gross profit of 32.7 million compared to 32.9 million last year. The reduction in gross margin reflects a loss on one pipeline contract during the period.

Turning to operating income, in the fourth quarter, we generated operating profit of $13.1 million or 6% of revenue, up from an operating loss of $129.2 million last year. Excluding the impact of goodwill impairment, last year’s operating profit would have been $14.2 million or 8.1% of revenue.

We recorded a net loss of $0.03 per share in the fourth quarter compared to a net loss of $3.80 per share last year. Backing out the impacts of various non-cash items, we would have posted zero net income in the current period versus $0.06 last year on a diluted per share basis.

Turning to capital – total capital spending for the fourth quarter amounted to $7.3 million, made up of $4.8 million in sustaining capital and $2.5 million of gross capital.

We also added 30.5 million of new operating leases in the quarter, including 930E come at 300 tons all truck used to support growth in recurring services such as our mine services contract with Suncor.

Looking at liquidity, as of March 31, 2010, we had approximately $80 million of borrowing availability and a cash position of $103 million compared to borrowing availability of approximately $104 million and a cash position of 99 million at the beginning of the fiscal year.

Subsequent to March 31, 2010, we executed a two step strategy that we had developed to restructure our balance sheet. This involves working with our financial advisors to execute to almost simultaneous transaction. First, we completed the private placement of CAD225 million of 9.125% senior debentures due in 2017. Secondly, we have restructured our existing credit agreements to extend the term to 2013 and increase the line of credit by approximately $40 million to a total of 163.4 million.

Net proceeds from the three financing together with a portion of our cash on hand we used to redeem our outstanding U.S. dollar denominated debt and liquidate the associated interest in currency swap. The new debt structure which reduced our outstanding debt by approximately 10 million is better aligned with the currency of our operations and will result in lower interest expense and decreased refinancing route. Pleasingly, we appear to have exited the debt market at just the right time. That summarizes our fourth quarter results.

I will now turn the call back to Rod who will tell you about our outlook.

Rod Ruston

Thanks, David. As we move into fiscal 2011, we are encouraged by signs of economic recovery in the market. While we are still cautious in our outlook there are significantly more opportunities available to us now than they were a year ago. In our oil sands recurring services business we expect steady demand overall with some short-term variability while shell transitions to a two mine operations.

On the project development front, recent announcements signal a return to more favorable market conditions and increased demand for service provided and construction contractors. Suncor, ConocoPhillips and Husky have all announced that their respective projects will commence construction in 2010.

More recently, they are also indicating that CNRL will green light Phase II of the Horizon mine and provide go ahead to the Kirby SAGD project. These projects are expected to get underway later this year. Meanwhile, projects continue on construction of Imperial oil Kurl mine and we continue to pursue construction opportunities on the site.

We also see interesting opportunities related to oil sands tailing in management. The Alberta government recently introduced Directive 74 which lays out the new regulation for handling tailings disposal in two stages. In the first stage, all oil sands operators will be required to reclaim new type material to attractable size within five years, which is a significant change from the 20 plus year timeframe they have been working with previously and significantly changes the way in which producers will manage tailings.

The second stage producers are required to submit a plan to reduce legacy filing within an acceptable timeframe. Producers are to submit their plans for approval by the regulator during 2010.

To make the new requirements, producers will need to do two things. First, they need (inaudible) alternative to the single mega size 20 plus year dam. Secondly, they will need to develop a technique for consolidating the mature fine tailings known as MFT which consists of micron size particles held in suspension in waste water.

While the actual process has not yet been fully developed we noted every one of our clients is working very hard on a solution and we know the solution they are developing will involve a number of services many of which we provide today. The services required include engineered earth works, pipeline corridors, piling, dredging, centrifuging, mud balming and reclamation.

Importantly, both the construction and new tailing forms and the handling of MFT are ideally suited for outsourcing to organizations like North American, because I have no impact on the production of oil.

Near-term reduces our under pressure to put the new projects is in place and provided the output and proved they are viable. This is creating opportunities for us to provide constructed services and we have recently secured some contracts in this regard.

Long-term we have developed and our marketing and end-to-end tailing management service offering to our customers. Based on the aggressive timeline set out produces to achieve compliance the amount of space pilings material already in existence and the piling material generates for future production we expect this to be one of the largest growth opportunities for the Heavy Construction and Mining segments.

Turning to the outlook for our piling business we expect that weak commercial and industrial construction markets and the strong competition for contract will continue to put pressure on revenue and margins in fiscal 2011. Although we do expect year-over-year improvements in this market, and as I said previously, the oil sands project development site of our business is starting to look more promising and all of our divisions stand to benefit from this activity.

In addition, the piling business we acquired in Ontario is really starting to ramp up. We are bidding on infrastructure projects, and making in-roads in that region. This will offset some of the impact of reduced commercial construction opportunities in the western provinces. We expect to continue positive contribution from our piling team in fiscal 2011.

For every pipeline we have two new contracts we are working on and we are continuing to feed on additional opportunities. To-date we have had a good success winning mainline projects related to the Northeastern BC gas field. And it continued to be an area of an opportunity for us. With all of our pipeline contracts we are focusing very closely on risk and have made some service changes to our reporting consultants in amount of these projects.

Looking at the business as a whole, while market conditions remain challenging and competition for contracts continue to put pressure on our revenue and margins, overall, we see opportunities in all areas of our business including growth in all of our market segments both organically and through acquisitions.

Going forward, our focus will remain on safe and cost-effective execution of the work we have, identifying and winning projects that leverage our strength and offer reasonable return, developing new markets in environmental services and utilizing the new financial structure of our business to grow and be successful.

With that I will now turn the call back to the operator.

Question-and-Answer Session

Operator

Thank you. (Operator instructions). Our first question is from the line of Matt Duncan with Stephens. Please proceed with your question.

Matt Duncan – Stephens

Good morning, guys.

David Blackley

Good morning, Matt.

Matt Duncan – Stephens

The first question I’ve got is sort of looking at gross margins for a moment. I’m trying to get a sense of how much mid shelf is to blame for a little bit lower margins, have a construction, the Mining segment obviously overburden removable is the lower margin business for that segment, CNRL is now kind of backed up to full speed. And then you mentioned you are seeing some prize competition and just increased competition in general. Is that sort of new this quarter or is that just something you really been seeing over the last year?

Rod Ruston

The increased competition has been around for a year and let us say it’s grown more deeply in the latter part of the year. And the ultimate result of that is that we’ve actually seen three of our competitors going out of the market because the couple license we got to a point where we just either wouldn’t see it or we were very happy that we didn’t win the particular bid. So we’ve seen Adcon [ph] and Cross [ph] both lead the market and currently Cow Harbor is in bankruptcy protection. It’s been a push to get work as the construction site going off and people have been pushing through the more recurring revenue side work and there have been magnitudes that are basically the low cost obviously. With the demise of those organizations we see a more sensible return to the market.

Matt Duncan – Stephens

Okay. That’s very helpful. And then the second question I’ve got and I’ll jump back in queue is with regard to the pilings mines opportunity and you’ve spent a lot of time obviously talking about sort of what that is and giving us some detail, is it too early to try and size how big that opportunity is in relation to your business?

Rod Ruston

I can only give you an anecdotal size of it in relation to our business and that is that factually not anecdotally, the CNRL over the contract remove around 400 million cubic meters of earth over a 10-year period. Anecdotally, we understand that its round about 800 million cubic meters of mature fine tails in tailing dams in (inaudible) as we speak. That’s assuming they don’t add any more. That’s more than twice the size of the CNRL. And the other interesting thing about it is that there is a significant amount of that material will have to be moved, exited twice because they had to be removed out of the dam, drive and then put back in. So obviously, a very, very large opportunity for us. We’re working with all the clients to indicate to them what our service offering is. We’ve already got a contract with CNRL to do some work on their tailings that work. We’ve got a contract with Shell to do some work with them and we’re working within I believe close to getting some contract with Suncor.

Operator

Thank you. Our next question is from Ben Cherniavsky with Raymond James Financials. Please proceed with your question.

Ben Cherniavsky – Raymond James Financials

Good morning, guys.

Rod Ruston

Hi, Ben.

Ben Cherniavsky – Raymond James Financials

Just going back to the margins and the competitive pressures you made some mention of pending change orders in the piling group. Does that suggest it will be potential recovery in the margins to reflect that may in the upcoming quarters?

David Blackley

Yes, that’s correct. And there will be a pick up but I think what’s important to understand with piling is that we’re not expecting margins to go back to the low 20s that we experienced two years ago. We’re continuing to see a lot of pressure on pricing still. The construction activity still a little low of we expect margins to continue to track and for those low to the mid teens over the coming quarters.

Rod Ruston

Ben, we are seeing some very large piling drills potentially coming to the market and the size of the piling drills by sizing of typical size of the actual pile that have to be installed, actually limit the market quite substantially to only a very few players. And as those projects come then we expect some margin growth and obviously a lower competitive environment.

Ben Cherniavsky – Raymond James Financials

And where were those opportunities be? Were they oil sands or infrastructure?

Rod Ruston

Predominantly in the oil sands. The other thing that we could mention here is that we’re now doing quite significant piling drill at Kurl.

Ben Cherniavsky – Raymond James Financials

So just to be clear then the competitive pressures that you mentioned are they primarily isolated to piling outside of the oil sands or has the all oil sands opportunity in piling and earth moving and everything, has there been new entrants there or new competitive pressures where you always thought that was more of a higher vary entity business?

David Blackley

Yes, generally with the piling business the main grades have been in the commercial and the industrial construction outside of the oil sands. We’re still a major player with piling in the oil sands and the number of players up there; tend to be lot more limited. The earth moving side, as I mentioned these three competitors that are basically going out of the market in the last 12 months. There is one new that’s come in. That’s Graham Construction. In fact, they’ve been a player in the oil sands for a long time on a construction side in the business and basically what they’ve done is they’ve expanded their construction offering by getting into the smaller truck size, up to 240 tons truck. Their first step and there’re not really new entrants and they’re working there for long time, they just expanded their offering.

Operator

Thank you. Our next question is from Greg McLeish with GMP Securities. Please proceed with your question.

Greg McLeish – GMP Securities

Hi, guys. Just wanted to if we could drill down on the earnings that you just highlighted. In the report you got $0.57 of earnings and then I sort of calculated that with taking out the unrealized and realized FX change and losses I end up getting about $0.87. Am I missing something there? I sort of view that you had a realized losses of one-time item.

David Blackley

Yes, Greg, that’s correct. There are some one-time realized losses with respect to the derivatives on the swap. It’s the fact (inaudible) that I believe the after-tax impact for the quarter, it’s about $0.09 on an EPS basis and for the full year it’s about $0.32 impact.

Rod Ruston

And of course, our refinancing has meant that issue has gone away.

Greg McLeish – GMP Securities

Yes. Okay. And then I just sort of on the pipeline side. I understand you did take a lot there. I mean was it strictly weather related, I mean it was just an underbid contract, what exactly happened on that loss?

Rod Ruston

Weather related and ground conditions. We don’t believe we underbid the contract. Of course, we did and the fact we made a loss. When we bid the contract we count for a certain number of weather delays and certain how the ground conditions that we, we do away from a sign that we can achieve a certain amount of pipeline distance laid per day or around which way we measure it. We didn’t achieve that productivity. And we didn’t achieve the productivity because we’re impacted by significantly poorer weather and ground conditions that we’ve been in the past than we expected in the contract.

The important thing there was that we did recognize that we were behind the schedule. We took a decision because the finish date of that drill was very, very prone to decline. So we took a decision and said we just (inaudible) continues to single time because our reputation is very much built on the fact that when someone ask us to do something we will deliver and this was important part to maintain our reputation.

Operator

(Operator instructions) Our next question is a follow-up question from Matt Duncan with Stephens. Please proceed with your question.

Matt Duncan – Stephens

Hi, Rod, just sticking on the pipeline segment for a moment. The $6 million in revenue there this quarter seemed often low for a normal March quarter. Was that also the weather impact there kind of slowing you down?

Rod Ruston

Yes. We only picked up two drills in the year. One of those drills, the revenue earning has been delayed and the other drill as you are aware in fact the loss. It was a very small pipeline stage of course.

Matt Duncan – Stephens

Okay. And then on the second specter contract, what sort of different between the first and the second is going to give you a little bit better margin protection on this one?

Rod Ruston

We reduced our bid production rates. And that was a safety product line. So we were less aggressive, let’s say on how much we could achieve by reducing the amount of pipeline to data we would put in.

Matt Duncan – Stephens

Okay. That’s helpful. And then back to the tailings pond, just for a second, when do you think sort of the more meaningful revenue may start? I guess my understanding is the contracts you got now are sort of smaller kind of trial contracts, when do you think the bigger revenue numbers can start to flow in from the tailings pond opportunity?

Rod Ruston

It is just starting at the present contract. Out of the contracts that we’ve got now, one is a design build for trial process for one of their lines. The others are focused towards main pipeline and (inaudible) transport systems let’s say to the potential dry areas. We’re going to have the planning and approved by the end of 2010 and we expect a pretty substantial ramp up probably starting in calendar 2011.

Operator

Thank you. Our next question is from Kalpesh Patel with Jefferies & Co. Please proceed with your question.

Kalpesh Patel – Jefferies & Co.

Hello, good morning.

David Blackley

Good morning.

Kalpesh Patel – Jefferies & Co.

Some more detail on the tailings opportunity. I guess you said that you’re going to see the opportunities in 2011. How big are these contracts? Are we talking about $100 million contracts or $25 million contracts? I just want to get a sense of the range of these contracts.

Rod Ruston

It’ll be hard to say at this time, because basically the tailings clean up exercise, let’s say requires around five stages and it is possible for some of those stages done by different contracting groups, it’s also possible for some of those stages to be done by the client. What we’re working on is (inaudible) sensible for all of those stages to be done by single supplier and as far as I am aware we’re the only organization that has put together a group that can give head to head ability to supply all of those five stages.

If all five stages are made to a single contractor, I wouldn’t be able to say exactly how much it’d be whether it’d be a long life like five years to seven years lease contract, just saving up the old materials on any side and then an ongoing contract treating the materials as they come out in the plant, every producer out there will have a requirement for this type of work. That’s the best I can give you the exact size of the outcome I’ll be taking a wild guess at this stage.

Kalpesh Patel – Jefferies & Co.

Okay. So you’re saying about a five to seven year contract.

Rod Ruston

That’s all we expected could implies. The process requires significant dredging and we’ve tied up with the joint venture with one of the largest and most experienced dredge companies in the world and it then requires a significant pipeline work, it requires dowser and dowser work to spread the material as it can drive it requires work to pick up the material under head drive and putting that back to truck, then it requires truck haulage back to where it had to be putting to the old dams where we’ll be requiring and then of course the reclamation work of shaping it to the landscape and everything else getting ready to see.

Kalpesh Patel – Jefferies & Co.

Got you. You mentioned competition in tailings. You said your clients can do some of this work. What are the companies out there where you’ll be competing with for the tailings?

Rod Ruston

There are two other companies out there that do a small part of the type of work and as we talk about.

David Blackley

Canadian Dewatering is one company and CEDA is another does the work in oil sands.

Kalpesh Patel – Jefferies & Co.

Canadian Dewatering and what’s the other one?

Rod Ruston

CEDA. They can do waterings as subsidiary mount group.

Kalpesh Patel – Jefferies & Co.

Okay. And I guess also in terms of the Surmont and the Sunrise and the Firebag, what is the timeline for bids on those projects and I guess where are you in terms of pursuing those opportunities?

Rod Ruston

The initial bids for current as well as similar projects are already in. The initial work there is not an area that we are highly competitive in a type of work we don’t operate greatest. That’s the initial work whereas there will be a further rework after that and that probably still six months to nine months way before that goes out. The Firebag and Husky Sunrise is….

David Blackley

Firebag is under construction right now and we will see some packages come out of that site in the next few months with a significant construction on that project is already underway and Sunrise would be somewhere along the tail end of (inaudible), so six months to 12 months away.

Operator

Thank you. Our next question is from Matt Duncan with Stephens. Please proceed with your question.

Matt Duncan – Stephens

Hey guys, just two final things from me. First on sort of what we ought to be thinking about for the June quarter. It sounds like you’re expecting the year to get off to a little bit of a slow start. I know that there is normally a slow start due to seasonality. Are we expecting a little bit more seasonality than normal this year?

Rod Ruston

In fact, seasonality started early, the spring right up latter part of the full quarter of last year and so we’re impacted by the fact that we couldn’t operate a big equipment right through until the end of the quarter. The other thing that happened towards the end of last year was Suncor had a fire in one of their plants and had also made some significant opportunity lost and that opportunity was lost for two points.

Number one is that there was some overburden removal opportunities (inaudible) of time, so that was missed, but secondly because of the time taken to get that plant back into full operation during that period, Suncor doesn’t require oil sands so they put their own trucks into the overburden removal and they pulled up on a fair bit of a overburden removal. So that was an expectation that we had early in the year, which we think will still become a viable opportunity for us a little bit later in the year. It actually kicked into the year reasonably well in the first half of the month, yet it is seasonal, but I think it will be a pretty standard seasonal year.

Matt Duncan – Stephens

Okay, Rod, thanks and then last thing I’ve got is, Dave, when you look at your balance sheet, after the new bond is put in place, can you kind of pro forma what your debt and cash balances would look like in that world?

David Blackley

We used about $10 million of our cash to reduce the debt. I think there was about another $6 million or $7 million which is the associated fee for the refinancing. So that obviously pulls the cash side of it down. When you look at the debt side of it, the $225 million on the new notes, there is about $50 million in terms of additional term loan under our facility as well as the existing term loan that we had on our balance sheet at March 31st. So that’s the kind of structure you can expect to see.

Operator

Thank you. Our next question is from Todd Garman with Peters & Co. Please proceed with your question.

Todd Garman – Peters & Co.

Good morning. Just regarding the upcoming aspirations of Suncor and Syncrude. What should we think about in terms of price increases going forward for those agreements into '11 just given the activity in the area over the next couple of years?

Rod Ruston

Syncrude has in November of last year awarded new set of contracts for site reclamation, overburden removal and muskeg removal on the basis of five-year contracts. The contract that that was meant to and we won one didn’t perform particularly well and in fact that’s where Cow Harbor was up until a short while ago operating. And the result of that was that they didn’t achieve anywhere near the expected reclamation muskeg removal and overburden removal in the last week of period.

Our understanding is a pretty strong indication from Syncrude they have extended their contract by a year and they are reviewing their haul supply basis that they go in (inaudible). That will happen in November this year and we expect the pricing to be competitive, but certainly reasonable and certainly something that we would be able to completing quite well and make a good margin.

At Suncor, they used to work with Cow Harbor. Cow Harbor no longer works from their side. They are currently operating now with a single overburden removal contractor. They tend to like to have a balance on their side. We expect that they will go up for change later on. We estimate time frame actually for Syncrude and again we expect that to be a bid that will be reasonable and fair margins and one that would be very competitive with and one that we can certainly make a profit.

Todd Garman – Peters & Co.

And if you had to think about where that bid might fall in November or December of this year, where the bid might fall price wise, you think that those prices will be higher than what were submitted year-over-year?

Rod Ruston

Actually I think it is more likely to be (inaudible) what we submitted year-over-year, but then we didn’t get any other contract last year because the Cow Harbor in particular and also a couple of other contractors went in basically with bids that were unsustainable and we’re seeing the fact that they are unsustainable and the fact that Cow Harbor no longer bids. We would never go into the level of I think Cow Harbor is a completely noncommercial business as far as Cow Harbor went. That will be out of the business by the end of the year.

And so the bidding will probably be more on the level that we did last year, but the number that we did last year was perfectly reasonable and one that we made reasonable margins on and, of course, it’s a pride like Syncrude getting a fees of 10% or 15% below the sort of the level that we’re bidding and they’re obviously going to look at it very seriously and they did and they took low price. Unfortunately, for Syncrude, (inaudible) of that very low price bid has ultimately cost them and I think they are very much looking at reviewing the strategy for bids and they will be going out again as I said in November.

Operator

Thank you. Our next question is a follow-up from Greg McLeish with GMP Securities. Please proceed with your question.

Greg McLeish – GMP Securities

Hi, guys, I was just wondering if you gave us any order of magnitude on the two pipeline contracts that you are awarded?

Rod Ruston

The overall value of those two contracts would be about $70 million.

Greg McLeish – GMP Securities

They will be completed within the year?

Rod Ruston

Yes.

Greg McLeish – GMP Securities

Okay and just finally just looking at Shell Albian and there typically will be to some short-term demand variability. How much is that going to impact you early in the year?

Rod Ruston

The impact is mostly earlier in the year. We’re still doing a lot of work on that site. They started there and shut down right around the end of March and the whole exercises what they are building, they have second mine pool and of course they’ve got a initial processing plan and everything else, but ultimately everything ties into their MRM operators and the ones who tied in and they actually shut down their entire oil sands production stream from Fort McMurray right through to Edmonton. And they are commissioning all the various new parts that have been helping them build over the last couple of years. They expect to be getting back on line, back to full production probably in the next month or so.

Operator

Thank you. Our next question is from Tatiana Thibodeau with Clear Bridge Advisors. Please proceed with your question.

Tatiana Thibodeau – Clear Bridge Advisors

Hi, guys.

David Blackley

Hi Tatiana. How are you?

Tatiana Thibodeau – Clear Bridge Advisors

I am good. My question was on the mining and site preparation segments. When we talk about the higher pressure, competitive pressures in this segment, how do you think about long-term sustainable operating margins for this division?

Rod Ruston

The sort of site preparation and site construction site work long-term sustainable margins should still be in the 14% or 15%.

Tatiana Thibodeau – Clear Bridge Advisors

Okay. And then a similar question on the two pipeline contracts. So they all will be finished next year, right or this year?

Rod Ruston

Fiscal year.

Tatiana Thibodeau – Clear Bridge Advisors

Yes and then, so you said $70 million in revenue or so, how should we think about margins in those two contracts?

Rod Ruston

You should think that the pipeline business is very competitive. So the margins in that sort of a contract is in the sort of 11% to 12%.

Tatiana Thibodeau – Clear Bridge Advisors

Alright, similar to what you’ve been talking in the past?

Rod Ruston

Yes.

Tatiana Thibodeau – Clear Bridge Advisors

Okay, thank you.

Operator

Thank you. Our next question is from Matt Duncan with Stephens. Please proceed with your question.

Matt Duncan – Stephens

Hey guys, just another real quick number of questions. It’s kind of difficult to see what the quarterly P&L looks like given the accounting change. I want to make sure I'm kind of looking at these line items correctly. On the G&A expense line, what was your quarterly G&A expenses quarter?

David Blackley

The G&A was a little bit higher in the quarter. It was $19 million. There were just a few year-end adjustments as well as some increased costs on the stock-based compensation side. The variability that we have seen in our share prices has played out in terms of how we value some of that stock-based compensation so that impacted the number. So that’s what happened in the quarter.

Matt Duncan – Stephens

Was that a one-time impact in or is that going to kind of sit going forward. I’m just trying to get a sense of what those quarterly costs ought to look like, in the $14 million to $15 million range or is it now $19 million?

David Blackley

No, it wouldn’t be as high as $19 million. I would say that that was a one-time. We sort of targeting in that $15 million to $16 million range.

Matt Duncan – Stephens

Okay. That’s helpful. And then from a gross margin perspective, obviously, there were a couple of things that negatively impacted you just cooked this quarter. I think in the past, you guys have felt like an annual gross margin between 16% and 17%. What’s doable on an annual basis? Would that still be the case right now or are competitive pricing pressures maybe weighing on that?

David Blackley

No I think overall the margins that we typically talked about and sort of the 14% to 15%, 14% at the lower end, 16% is reasonable. There will be periods obviously where it may go a little bit up or down depending on the type of projects that we do and we’ve had some very successful projects with higher margins in the past.

Matt Duncan – Stephens

Sure. Okay, thanks guys.

Operator

Thank you. Our final question comes from Greg McLeish with GMP Securities. Please proceed with your question.

Greg McLeish – GMP Securities

Hi, guys, if I can just again drill down on the earnings for the year. You said $0.57 and David I think you indicated that you would add back the $0.32 which would be a non…

David Blackley

One-time item.

Greg McLeish – GMP Securities

Item?

David Blackley

Yes.

Greg McLeish – GMP Securities

So it would be a $0.89 year then?

David Blackley

Yes, that’s probably about right.

Greg McLeish – GMP Securities

Perfect, okay, thanks guys.

Operator

Thank you. There are no further questions at this time. I’d like to turn the floor back over to management for closing comments.

Rod Ruston

Thank you very much everybody for joining us in the conference call today and we look forward to talking to you again in the near future.

Operator

Thank you. And this concludes the North American Energy Partners Conference Call.

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Source: North American Energy Partners Inc. F4Q10 (Qtr End 03/31/10) Earnings Call Transcript
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