North American Energy Partners' (NOA) CEO Martin Ferron on Q4 2015 Results - Earnings Call Transcript

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North American Energy Partners Incorporated (NYSE:NOA)

Q4 2015 Earnings Conference Call

February 17, 2016 09:00 AM ET

Executives

David Brunetta - Director, IR

Martin Ferron - President and CEO

Rob Butler - VP, Finance

Analysts

Maxim Sytchev - Dundee Capital Markets

Operator

Good morning, ladies and gentlemen. Welcome to North American Energy Partners Earnings Call for the Fourth Quarter ended December 31, 2015. 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 that this call is also being webcast concurrently on the Company’s Web site at nacg.ca.

I will now turn the conference over to David Brunetta, Director of Investor Relations at North American Energy Partners Incorporated. Please go ahead, sir.

David Brunetta

Thanks and good morning, Chris. Good morning, ladies and gentlemen. Thank you for joining us. Welcome to the North American Energy Partners fourth quarter conference call. I would like to remind everyone that today’s comments contain forward-looking information, and that our actual results may differ materially from expected results because of various risk factors, uncertainties and assumptions. For more information, please refer to our December 31, 2015 Management's Discussion and Analysis, which is available on SEDAR and EDGAR.

On today’s call, Rob Butler, VP of Finance, will first review our results for the quarter. And then he will hand the call over to Martin Ferron, President and CEO, for his remarks on our strategy and outlook. After the prepared remarks, there will be a question-and-answer session.

I will now turn the call over to Rob.

Rob Butler

Thank you, David and good morning everyone. Let’s now review our consolidated results for the fourth quarter ended December 31, 2015 compared to the quarter ended December 31, 2014. Revenue for the quarter was 65 million, down from 113.2 million last year. The current quarter revenue was driven by the completion of recent awards of summer overburden removal activity at the Steepbank and Millennium mines. The start-up of significant winter works programs at the Millennium mine, site development activity at the Kearl mine and the wrap-up of haul road construction at the Aurora mine, which complemented ongoing mine support activity at the Kearl mine.

The revenue contribution from the new awards helped to mitigate the drop in revenue from last year, as a result of the completion of prior year projects, including mine development and mechanically stabilized earth wall construction at the Fort Hills mine, Joslyn mine development closeout activities and road construction on the Highway 63 project. Prior year revenue also included activities related to the long-term Horizon mine contract, which expired on June 30th of this year.

Gross profit for the current quarter was 9.0 million or 13.8% of revenue, down from gross profit of 10.1 million or 8.9% of revenue earned last year. The lower gross profit in the current quarter is primarily a result of the aforementioned drop in volume from the completion of prior year projects, partially mitigated by improved gross profit margins resulting from lower equipment rental costs in the period.

Operating income for the current quarter was 0.5 million, compared to an operating income of 1 million last year. G&A expense, excluding stock-based compensation, was 6.1 million for the quarter, down from 8.1 million last year, reflecting the benefits gained from restructuring and cost-savings initiatives implemented over the past year.

Stock-based compensation expense increased 2.8 million in the quarter, compared to last year, primarily resulting from the benefit reported in the prior year liability classified stock-based compensation cost, driven by a decrease in the share price during that period. We recorded a net loss of 0.7 million in the current quarter with a basic and diluted loss per share of $0.02, compared to last year’s net loss of 1.5 million, with a basic and diluted loss per share of $0.04.

Total interest expense was 1.6 million for the quarter, down from 3.2 million last year. Interest on our higher-cost Series 1 debentures was 0.5 million in the quarter, which is down from 1.5 million recorded last year, driven by the redemption of 37.5 million of Series 1 debentures earlier this year and 16.3 million in redemptions at the end of last year.

Meanwhile, there was a slight decrease in current quarter interest on capital lease obligations, as a result of improved lease facility pricing, offsetting an increase in equipment secured crew capital leases for the year. We recorded a total income tax benefit of 0.3 million all in deferred income tax, this compares to a combined income tax benefit of 0.4 million for the same period last year. Of note, we ended the quarter with 32.4 million cash on hand.

That summarizes our fourth quarter results. I'll now turn the call over to Martin for his remarks.

Martin Ferron

Thanks, Rob and good morning to everyone. Following on from quarter three the start of quarter four was negatively impacted by general lack of late season construction work related to customer spending cuts and deferrals in the face of a steep cyclical downturn that grips our industry. Therefore, we made the most continued site development work at Kearl and the kick off of winter earthworks project at the Millennium mine. Again our projects and maintenance teams turned in another quarter of exceptional performance.

For the full year our revenues declined by 40%, but much of that was due to the completion of the long-term overburden handling contract of the Horizon mine and the closure of the Joslyn mine. Both of these events were unrelated to the cyclical downturn, therefore in a climate of drastic spending cuts on construction work and significant overall pricing concessions, we were able to build on our book of core recurring services work. We did this by gaining market share and benefiting volumetrically from the drive of our customers to grow production in order to lower operating cost per barrel. Despite the asset intensity of our business, our EBITDA of 2015 only fell by 25% from 2014 levels and was actually 10% more than achieved in 2013 from again 40% higher revenues then.

Our continued quest for operational excellence is really showing up in our numbers and helping us strengthen our work and relationships with our customers. I am very pleased that we managed to achieve savings on all cost lines of income statement to continue a trend of the last four years. Of particular note of the significant savings we made on equipment and G&A expenses as Rob mentioned, we also succeeded in meaningfully improving our balance sheet in the entire operating environment of 2015. Net debt was reduced by almost $50 million and again as Rob mentioned we ended the year with over 32 million of cash equivalent to almost $1 a share outstanding.

All of this was done while disbursing nearly $12 million on dividends and share purchases prior to cancellation of treasury purposes. These improvements have in both financial performance and position, achieved in tough circumstances have allowed us to strengthen our relationship with our banking syndicate such that we were able to negotiate a better credit facility during the course of the year, a revolving portion of our facility remains fully available to us.

So what will 2016 bring, it seems that operating circumstances will get worse before they get better due to a further step-down in oil prices at the start of the year. As I have written in my letter to shareholders, I believe that our supply response is slowing gathering momentum such that we will see better oil prices by yearend. However, the average WTI oil price for 2016 is likely to be $15 to $20 per barrel less than it was in 2015. Therefore we will remain in hunker down mode for the rest of the year, focusing on our cost and job execution, while continuing to help our all-time customers to reduce their operating cost per barrel of production.

Our winter earthworks program is likely to continue through Q1 and we hope to post a similar result for last year. Although some unusually warm weather has periodically slowed operating execution. Beyond that we have already secured some project work for Q2 to supplement our base load of recurring work, although maintenance shutdowns at one or two mines could have a negative impact. Beyond that visibility of work load outside recurring activity is limited but that's not unusual for this time of the year.

Outside of the oil sands we completed our first significant provincial road project in 2015 and have stepped up our business development efforts to establish effective partnering relationships and develop better systems to track and win federal provincial and municipal infrastructure projects. We are encouraged that both the provincial and federal governments are planning major increases in spending on infrastructure projects and we need to participate.

Also in 2016, we hope to use our strong balance sheet to take both organic growth and tuck-in acquisition opportunities, drive the strength and our position in the oil sands, will provide some measure of revenue diversification. We are deliberately being very patient in this regard so far and believe that this approach will service well. In closing, I want to mention say at least by transaction that we made in Q4. In raw numbers we took five trucks with a combined book value of $5 million and added 5 million of overall maintenance capital. We then sold at least buy the assets in a $10 million deal, so why is that important or relevant you may ask, while the trucks were valued at around $2 million or $1.40 in terms of our stock price. I think that this demonstrates the negative sentiment rather than operating performance and valuation is driving our market value right now.

With that, I will pass the call back to the operator, Chris, for the question segment, thank you.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] To allow others the opportunity to ask questions, please limit your enquiry to one question and one follow-up question only. [Operator Instructions] The first question is from Maxim Sytchev with Dundee Capital Markets. Your line is open.

Maxim Sytchev

Martin just a quick question to clarify, so when you talk about the winter work to be at a similar level as Q1 '15, I assume this is one -- we are adjusting for the CNRO contract correct?

Martin Ferron

Yes but last year we only have the labor part of the CNRO contract going anyway. So it wasn’t such a big contributor in Q1 last year.

Maxim Sytchev

Okay.

Martin Ferron

So, I think we are saying that we are hoping to post a similar result in Q1 all things considered. And as I mentioned the weather has been warmer than anybody could have expected slowed us down a little bit but we hope to make up for that in other ways.

Maxim Sytchev

Okay, no that’s helpful. I appreciate that. And then an interesting commentary in your outlook when you talk about some additional outsourcing opportunities for equipment maintenance refueling things like that, so can you maybe please expand on the topic specifically how tangible it is and maybe the timing and potentially how we should be thinking about the margin profile on that type of endeavor?

Martin Ferron

Yes our customers are reviewing their supply chain in view of this downturn that we are all faced with and they are trying to do certain things in different ways and that’s bringing some more outsource work our way potentially. And we mentioned one of them refuel and loop servicing effort, I think we would be bidding that this year. And it should have a margin profile similar to what you see in the rest of our business.

Maxim Sytchev

Okay, that’s helpful. And then is there an update Martin, in terms of when we could hear in terms of what's going to be happening on Fort Hills, in relation to if they are going to be outsourcing over the removal services and things like that and if you are in a process of bidding on that work as well?

Martin Ferron

Yes, I think later this year maybe third quarter we will start hearing about that and get a view on the bid for that efforts. I think all due to timing. Some of that will be tied up with an overall Suncor Master Service Agreement though. So we expect to be bidding that in Q2 probably. So that bid is again as we mentioned our outlook is going to be very significant to much higher value than last time around when we did it. So yes, it is great opportunity for us I think because our relationship with that particular customer is very-very good.

Maxim Sytchev

Okay excellent. And then I was wondering if you can provide may be a bit of color if you are bidding on any MSE walls some large scale construction over the coming 12 to 15 months, or is it pretty quite on that front right now?

Martin Ferron

The visibility on that side of work is always just three to six months and generally in January/February, as I mentioned visibility is limited any year and particularly this year we are tracking a few things that could happen and we hope to be bidding them shortly. Construction work is generally good in the March April timeframe and kicks off in May.

Maxim Sytchev

Right, and then in your outlook sessions well Martin you were talking about the ability to perform as a subcontractors to maybe some of the projects you were not originally successful on, I was wondering if maybe you can clarify if there is some spillover work on Site C or some other large scale project that you are bidding on so -- because this appears to be sort of a new opportunity that you have highlighted relative to prior commentary?

Martin Ferron

Yes, I am not sure there is going to be much spillover on Site C, we will see the execution plan there but we are tracking it if they need our expertise and surely we will offer it on a subcontracted basis. And on these large infrastructure projects we are being up where it is appropriate to try and win the overall job. But another circumstances we will just try a subcontractor observes this just depends on overall what our contribution can be to the particular project. So on the Calgary Ring Road for example we are trying to subcontract our services there.

Maxim Sytchev

Okay, are there any additional infrastructure projects that are in the pipeline right now that we should be tracking specifically?

Martin Ferron

Yes, there is a fab mitigation project the sites like Calgary that we are expecting to be bidding on very shortly it is called the Spring Bank project. So that’s a major infrastructure that the province is going to build for fab mitigation. So that’s right up our alley because it's major earthworks and Site C was 20% of earthworks whereas this one could be 80% earthworks and this type of project is attractive to us.

Maxim Sytchev

Right, okay excellent, and then maybe just last question from me, in terms of I mean obviously there is lots of stress in terms of valuation is kind of across the board, I was wondering where is your hat at in relation to potentially thinking about M&A, the environment there or are you really waiting right now for some failures from maybe some of the competitors right now?

Martin Ferron

Yes, I think we're at the stage of the downturn where the stress is starting to emerge. So, I do think unfortunately some assets and companies will come up for sale on a distressed basis and we are trying to keep our powder dry to take advantage of that situation and provide downturn as always managed to do that another companies that I've worked with and I see the same path unfolding here, so, locations will hopefully payoff.

Operator

[Operator Instructions] Showing no further questions at this time, I'll turn the call back over to the presenters.

Martin Ferron

All right, well thanks everyone for joining us today. And I look forward to talking to you again next time, thank you.

Operator

Thank you. This concludes the North American Energy Partners conference call. You may now disconnect.

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