David Brunetta - Director, IR Rob Butler - VP, Finance Martin Ferron - President & CEO.

Greg McLeish - GMP Securities Ben Cherniavsky - Raymond James.

Good morning, ladies and gentlemen, and welcome to North American Energy Partners' Earnings Call for the Second Quarter ended June 30, 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 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 website at nacg.ca.

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

Thank you, Linda. Good morning, ladies and gentlemen, thank you for joining us. Welcome to the North American Energy Partners second 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 June 30, 2015 Management's Discussion & 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..

Thank you, David. Good morning everyone. Let's now review our consolidated results for the second quarter ended June 30, 2015, compared to the quarter ended June 30, 2014. Revenue for the quarter was $64.4 million, down from $116.2 million last year.

The decrease in this quarter's revenue was primarily the result of the completion of mine development and mechanically stabilized earth wall construction activities at the Fort Hills mine and the suspension of mine development activities at the Joslyn mine.

The award of an overburden removal project at the Steepbank mine, site development from a new project secured at the Kearl mine, and mine support work performed as part of our return to the Aurora mine could not fully replace these previous projects.

Also, contributing to the lower revenue in the quarter was the assumption of reimbursable ownership and maintenance costs by the customer on the Horizon mine overburden removal contract, which was anticipated with the expiration of this long-term contract at the end of this June.

Gross profit for the current quarter was $4.6 million or 7.1% of revenue, down from a gross profit of $9.3 million or 8% of revenue earned last year.

Normalizing gross profit to exclude the previously mentioned elimination of activity at the Joslyn mine and the lost profit contribution from the previously mentioned reimbursable costs of the Horizon mine, we generated gross profit that was comparable to last year and gross profit margin that was 2% stronger than last year.

This year's comparable results during spring break-up season benefitted from lower project costs with a reduction in equipment rental costs and lower sub-contractor costs. Operating loss for the current quarter was $0.8 million compared to an operating loss of $2.2 million last year.

G&A expense, excluding stock-based compensation was $5.1 million for the quarter, down from $7.9 million last year, which reflects the benefits gained from restructuring and cost-savings initiatives implemented over the past nine months.

Stock-based compensation expense was down $2.1 million in the quarter compared to last year, driven primarily by our lower share price and its effect on the related liability. We recorded a net loss of $4.1 million in the quarter with a basic and diluted loss per share of $0.13.

This is comparable to last year's net loss of $4.1 million with a basic and diluted loss per share of $0.12. Total interest expense was $2.6 million for the current quarter, down $3 million last year.

Interest on our higher cost Series 1 debentures was $1.3 million in the quarter, which is down from the $1.5 million reported last year, driven by the redemption of $16.3 million of Series 1 debentures last year.

Meanwhile, there was a slight increase in current quarter interest on capital lease obligations with the year-over-year increase in the balance of equipment finance through equipment leases.

Total income tax expense in the current period was higher as a result of an increase in the statutory tax rate, and the reversal of certain temporary timing differences in the current period. Of note, we ended the quarter with $40.7 million of cash on hand. This is up $15 million from our Q1 balance.

As we announced on July 8, of this year, we entered into an amended credit facility with our existing banking syndicate. The credit facility provides borrowing of up to $100 million contingent on the value of the borrowing base defined in the credit facility.

The facility is composed of $70 million revolver that was for borrowing the letters of credit and $30 million term loans to support the redemption of a large portion of our Series 1 debentures. Credit facility will provide an increased borrowing base determined by the value of receivables, inventory, unbilled revenue, and equipment.

Using this enhanced borrowing base, our maximum allowable draw on June 30, would have been almost $53 million greater than the allowable draw under our previous facility. Credit facility should give us 125 basis point improvement to pricing on borrowed funds, assuming that our total debt to trailing 12-month EBITDA remains below 2.25 to 1.

Connected to entering to this new facility, on July 08, we announced the decision to redeem $37.5 million of our Series 1 Debentures financed by $30 million from the lower cost term loan and the remainder finance through available cash. We expect to realize $2.3 million savings on our annual interest expense with this transaction.

Finally, on August 5, we announced that we intend to purchase and subsequently cancel in the normal course in Canada through the facilities of the TSX. Up to 532,500 of our common shares, voting common shares, which represents 2.3% of the public float as defined in the TSX company manual. Previously under U.S.

share repurchase program, we purchased and subsequently cancelled an aggregated of almost 1.8 million shares, which when combined with the plan purchase on the TSX would represent approximately 6.8% of the issued and outstanding voting common shares as of July 31. That summarizes our second quarter results.

I'll now like to turn the call over to Martin for his remarks..

Thanks, Rob, and good morning. Well, we've come through the first half of the year with just about the same in minus EBITDA, as we made in the corresponding period last year. Not many, if any oil service companies will be able to state the same claim.

We achieved it despite the profound impact of a deep cyclical downturn that grips our industry, on the coincidental end of the bulk of the long-term overburden removal contract up at the Horizon mines. Overall, revenues were down by 33% year-over-year, and yet we improved EBITDA margins from 11% to 15%.

Unfortunately, the second quarter commenced with an early start at spring break-up. And so our winter earthworks program was curtailed leading to an extremely slow April, where we only made about 20% of the quarterly revenue, and a rare monthly EBITDA loss.

Therefore, we had to play catch-up for May and June at a time when we were negotiating pricing concessions with our customers and facing a continued pause in their spending in relation to construction work. Activity levels related to recurring mine services remain reasonable.

And in fact we managed to improve our penetration on a couple of the mine sites. That is still the case that customers that have rained in spending on construction work, especially where there was an element of discretion in relation to volume and timing. Such spending pauses at the outset of cyclical downturns and not unusual in my experience.

And in spite of these circumstances, we still managed to meet our EBITDA objectives for the quarter. The more recent second retrieve in oil prices after a seemingly encouraging rebound has caused the customer spending pause to continue such that we now must tamper our outlook for the second half of the year.

This is explained in more detail in our press release and filings. For Q3, we will get by fine with a reasonable level of recurring mine sources work, the construction project we won at Kearl late last year, and several smaller construction jobs we have secured more recently. Our fortunes in Q4 will depend as always on how quickly winter sets in.

As again the cold season volumes of earthworks looks normal at this stage. On bonds, although much downturn uncertainty seems, we hope to produce approximately the same level of EBITDA for Q3 and Q4, as we did in Q1 and Q2, but with a more even spread.

We regard this as a balanced assessment on the situation with equal regards to potential upside and downside. In terms of our quest for revenue diversification, we are busily working our way at our bid for the Site C main civil works as part of a strong team, now led by the impressive [indiscernible].

Our team now appears on a very solid mix of local knowhow and mega project experience on an international stage.

We also hope to participate in a bidding team for the next section of the Calgary wrangler to be built, and we're already assisting main contractors with pre-engineering and feasibility studies related to a couple of potentially LNG projects in British Columbia. Next, I would like to comment on the amended credits agreement that Rob Butler detailed.

But first class it may seen and we just got some temporary covenant release from our existing banks in the kit. However, I'd like to stress that we negotiated the amendment from a position of real strength rather than weakness.

We had three lead banks in the competitive process to obtain the best terms at a time when many other oil industry-related companies are having to go cap and hand for their lenders to retain part of their previous facilities on much worst terms. I know that one of our competitors at Site C is effectively being managed month-to-month by the lenders.

In contrast, we will soon as of August 14, of a much lower overall cost of debt, and a tremendous financial flexibility as the borrowing base now takes reasonable account of the value of our PP&E.

Next week, once we have passed, we redeemed 908 debentures and paid interest, we will have around $30 million of cash left on undrawn $70 million revolver, and scope under the credit agreement to take on another $20 million of capital leases.

This should be clear then that we have a financial flexibility level that is far in excess of our current market capitalization of less than $80 million.

Therefore while we will always manage our business carefully within the constraints of our revised debt covenants, we have decided to extend our present normal course issue a bit to the TSX in order to buyback another 500 shares plus.

This will bring our total share purchases for cancellation of treasury to over $5.3 million that is 15% of shares outstanding in less than two years. The treasury shares will be used to hedge our long-term incentive program so as to benefit investors once this cyclical downturn runs its course.

Another highlight for Q2 for me was the successful negotiation of a new five-year agreement based on 6% permanent wage rollback with our main labor union. This provides important labor stability as we navigate these uncertain times.

Now having spent much of my earlier career in the offshore oil and gas segment, I'm not unused to seeing stock prices trading at a speed discount to book value per share and severe cyclical downturns. I know that presently some offshore drilling stocks are trading at about 30% of book value per share.

This is understandable to be as they own and operate very specialized assets that can only drill for oil in an offshore area. The second resale value is therefore very limited for those assets.

We, on the other hand, are presently training at around 40% of book value per share, which I find much harder to understand given that our equipment can be used to the extraction of many resources and construction projects worldwide.

In relation to negotiating our amended credit facility, we have an exhaustive appraisal down at the fair market value and orderly liquidation value of our fleet.

With the former coming in comfortably in excess of book value and the latter coming in October 90% of book value supported by in part the weakness of the Canadian Dollar and the strength of activity levels in some construction segment in the USA.

For listeners who aren't familiar with valuation terminology, the orderly liquidation value is based on a forced liquidation of the entire fleet in a period of 90 to 120 days at auction. Clearly, we're not in a position to concern ourselves about that.

We're certainly though in a deep downturn in the overall oil industry and so there is great last week to hear our customers talking about the very long-term nature of the oil sands on their earning's calls. The commentary about how well the Fort Hill's project is going and the expected 52 years production life was particular encouraging.

I'd like to end these prepared remarks by saving the time at the action of seven previous deep cyclical downturns. Each of the previous ones had two main things in common. Firstly, they were very painful for a while, but secondly they all came to an end.

This one has the potential to be as painful as any before, may be even more so, but I will just set up a stronger rebound. So with that, I'd like to hand the call back over to Linda for the questions please. Thank you, Linda..

Thank you. [Operator Instructions]. Our first question is from Greg McLeish with GMP Securities. Please go ahead..

Hi, guys, happy to see you guys, you're operating exceptionally well in a extremely difficult environment. Just had a couple of questions. You guys have generated a lot of cash in the first half of the year, how should we be thinking? And now your debt has come down.

How should we be thinking of cash generation in the second half of the year and sort of debt position at year-end?.

Hi Greg, it's Martin, good morning, and thanks to hear your comments on execution, we appreciate that. In term of cash, obviously we got the payments from C&M at the end of the contract, which helped our first half performance. But it's also not unusual at the start of a downturn to monetize working capital.

You've seen somewhat of that happing so far as well and that trend will continue for a while. So I see our cash position remaining strong. Capital allocation is always something we're looking at every day. So rather than us do make the right calls in terms of lowering debt and doing other good things with that cash..

And just on your G&A levels, I mean they were G&A has come down substantially. How should we be thinking of may be quarterly G&A moving forward to the balance of the year..

Hi Greg, it's Rob. The numbers you're seeing in Q2 probably a good run rate to go with around the $5 million, $5.5 million number. It may pick up a little bit at year-end just with our annual audit fees that goes through that..

And just one more question. You guys have been incredibly successfully cutting cost and becoming more efficient.

Is there other -- further things you can do in this environment or you sort of -- what else can be done here is this sort of it?.

No, it's definitely not it. It's a never ending journey on cost. We've been doing it for a few years already and it's still the things we can do. We have an office in Fort McMurray, which we're hoping to sublease. That will save us $1 million bucks a year and some other real estate that we're looking at some cost and other things.

So we're going to continue to cut cost as we can here..

Our next question is from Ben Cherniavsky with Raymond James. Please go ahead..

I had actually Greg's remarks, tough market out there, but you're guys are hanging in there well done. With respect to the balance sheet and the potential for ongoing free cash flow and deleveraging, I would applaud you on your share repurchase that seems to be a good use of capital at this stage.

Is there anything else you would contemplate strategically as your leverage position gets stronger and stronger, and considering what asset value looks like out there in the market right now?.

Honestly, Ben, again thanks for your comment. M&A is something that we're looking at. We'd like to diversify our revenue sure. I've done a lot of views in my time and I've done one in a couple of years.

So I'm actually looking for things and I'm being as patient as I can, but I think our balance sheet as it gets better will allow us to maybe use it to fund some decent acquisitions in this tough period. I think other companies are profiteering less well than ourselves and we'll have some opportunity.

But I think it's a question of being patient here and just being optimistic too. So we'll try and do that..

How would you put right kind of context around your capabilities right now? Like what would be the size of an acquisition that you think you could reasonably digest within your comfort zone of liquidity and financial capacity right now?.

I'm not sure I want to talk about numbers in that regard. But what we'd be looking, I think, at companies that have some asset intensive that we could use and expand in balance sheet to acquire. I mentioned on the call that our credit facility now gives us due consideration for our PP&E or as before it never really did.

So I think I'd like to use that attribute to may be generate the cash through an expanded balance sheet to do an acquisition of another asset intensive company. But to put numbers on it, I think would be premature at this stage. I'm just saying that while equity isn't clearly in the consideration propositions then caution that is..

And when you guys did your orderly liquidation value, I mean I guess it's impossible a number you've come up with. But pricing on used equipment for your kind of assets has been pretty good I take it.

Is that hardly a function of exchange rates and the kind of fleets that you have and how does that breakdown between say, your large and your smaller equipment? What would be the current valuation profiles of the different sorts of machine profiles?.

Yes. You're right it wasn't us with the assessment; again it was I assigned a third-party. The first assessed the fair market value. Unfortunately there is some good comps. There have been some re-sales of assets; some are the ones we own.

So that gave them good confidence on fair market value and therefore make the assessment of orderly liquidation value from that. Again, there has been some robust auctions lately. So there are some good pieces of information out there to make the assessment. And you're right.

I've mentioned it in my prepared remarks; the weakness of the Canadian Dollar certainly helps. It supports the situation. But the fact that we're going to nice balance of construction equipment and mining here also helps, because some construction segments, especially in U.S. are pretty robust right now. So there are kind of U.S.

buyers looking to take advantage of that situation and it supports our values..

So what about your larger fleet? Does that -- that much be more distressed right now in terms of valuations?.

No..

Does this what specialized for mining?.

No. Again, we both that stuff in U.S. dollars, the main spending we have was 2008, 2009 and we find that the assessments for the valuation that we have on our books..

Okay. I guess, I mean sort of an obvious question I suppose I'll ask it anyway though.

When we see the results from the recent oil field services company -- sorry, the oil producers, I should say, I mean, in some respects they've been doing reasonably well or they're holding up the numbers themselves considering the macro environment, the price of oil as supposedly coming in with some resilience in certain cases.

Is that -- and that must be a reflection of the kinds of the pressure they're putting on the supply chain with companies like you in terms of concessions and price cost. I mean the service sector seems to be bearing the bunch of this downturn as it appears to me..

Well, that I'm not sure, well order of things in our industry and with no change this time around. All I can say is that we participated in that and we've produced the margins that we have. So we're trying right now to help our customers lower their cost by doing things differently. And I think we're having some success in that area.

So we're trying to be part of solution and I believe that our customers really value that. One of them said to me the other day, we've none left in our competition. So I don't know if that's a good little time, but I took it as a complement. So we're just trying to be part of solution that's what I'm saying to you..

And with lower cost, it's easier to do that..

Yes. I think we have an advice. We've been lowering cost for a while, perhaps we got ahead of the game in terms of the competition and we have a cost structure which we're doing okay in this terrible environment..

Okay. Mr. Ferron, no additional questions have come in the queue. I'll turn it back over to you for closing comments..

Thanks, Linda. Well, thanks everyone for participating today. As we realize that you had choice of calls you want to join, we look forward to engaging with you again in November. Thank you..