UBS Analyst Cuts North American Energy Partners' Price Target on Risk

The negatives outweigh the positives when it comes to North American Energy Partners Inc. (NOA), says UBS analyst Fadi Chamoun.

The analyst lowered his price target on the stock from C$23 to C$19, and maintained his "neutral" rating.

On the positive side of the ledger, Mr. Chamoun said the company, a resource services provider focused on the Canadian oil sands, trades at an attractive valuation and the company's revenue outlook remains strong "underpinned by continued development of the oil sands and general mining and commercial construction activities in Western Canada."  

He said the company is also expected to increase demand for the balance of 2009 from several new projects such as Petro-Canada's Fort Hills project which commenced operations in late fiscal 2008.

That said, Mr Chamoun believes North American Energy Partners has several risks standing in its way including increased competition, high operational risk and high financial leverage that may require an equity issue to help fund its capital program.

In a research note, he wrote:

Notwithstanding an inexpensive valuation, we believe that risk/reward is still not compelling given the risks.

He also told clients he is concerned about revenue uncertainty from the company's pipeline division, noting the company has yet to announce a new contract to replace segment revenues once the TMX project is completed in October of this year.

He wrote:

Although a number of potential bids were alluded to, there is no guarantee that these tenders will be secured by NAEP.

Management also indicated that should a tender not be secured by next fiscal quarter, equipment being used for the Pipeline segment could potentially be redeployed into other segments. We question to what extent this can be implemented and whether or not such a strategy would fully compensate for lost pipeline contract revenues/EBIT.