Good morning, ladies and gentlemen. Welcome to the North American Energy Partners Earnings Call for the Third Quarter ended September 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..

Thanks, Latonia. Good morning, ladies and gentlemen. Thank you for joining us. Welcome to the North American Energy Partners’ third 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 September 30, 2015 Management 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..

Thank you, David. Good morning, everyone. Let’s now review our consolidated results for the third quarter ended September 30, 2015 compared to the quarter ended September 30, 2014. Revenue for the quarter was CAD66.8 million, down from CAD134.7 million last year.

Current quarter revenue was driven by recent awards of overburden removal activity at the Steepbank and Millennium mines, site development activity at the Kearl mine and haul road construction at the Aurora mine.

These new awards complemented ongoing mine support activity at both the Kearl and Base Plant mines along with project closeout activities on the Highway 63 road construction job.

The revenue contribution from these projects helped to mitigate the drop in revenue resulting from the completion of prior year projects, which included mine development and mechanically stabilized earth wall construction at the Fort Hills mine and mine development activities at the Joslyn mine.

Prior year revenue also included activities related to the long-term Horizon mine contract which expired on June 30 of this year. Gross profit for the current quarter was $7.4 million, or 11% of revenue, down from gross profit of $16.8 million, or 12.5% 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, which was partially mitigated by benefits from project closeout reconciliations completed in the quarter.

Contributing to the reduced gross profit margin was a change in project mix in the current year, with lower margin overburden removal and mine support activities using larger equipment replacing last year’s higher margin labor-intensive heavy civil construction projects.

Included in this quarter’s gross profit was $0.9 million increase in accelerated depreciation charges, driven by the write-down of certain capitalized equipment components that did not achieve their full estimated life. It is typical for capitalized equipment component to either fall short or exceed our estimates of their useful life.

Capitalized equipment component exceeds our stated life, we do not record depreciation charges for the assets beyond that point. Operating income for the current quarter was $1 million, compared to an operating income of $9.7 million last year.

G&A expense, excluding stock-based compensation, was $5.3 million for the quarter, down [from] $6.9 million from last year, reflecting the benefits gained from restructuring and cost-saving initiatives implemented over the past nine months.

Stock-based compensation expense increased $1.1 million in the quarter, compared to last year, primarily resulting from the benefit recorded to the prior year liability classified stock-based compensation cost, which was driven by a decrease in the share price during that period.

We recorded a net loss of $2.1 million in the current quarter, with basic and diluted loss per share of $0.07, compared to last year’s net income of $4.8 million, with basic income per share of $0.14 and diluted income per share of $0.13. Total interest expense was $3.1 million for the current quarter, down from $3.2 million last year.

Interest on our higher-cost Series 1 debentures was $0.9 million in the quarter, which is down from $1.5 million recorded last year, driven by the redemption of 16.3 million of Series 1 debentures at the end of last year.

There was a slight increase in current quarter interest on capital lease obligations, as a result of a drop in capital lease obligations from last year.

We recorded current income tax benefit in the current period of $0.9 million and a deferred income tax expense of $0.2 million, compared to deferred income tax expense of $1.7 million and no current income tax recorded at the same period last year. Of note, we ended the quarter with $33.2 million of cash on hand.

This is down $7.5 million from our Q2 balance, as we used a portion of our available cash to complement the draw in our new term loan for the redemption of repurchase of a portion of our Series 1 debentures. That summarizes our third quarter results. I will now turn the call over to Martin for his remarks..

Thanks, Rob. Good morning to everyone. After the success of producing pretty much the same EBITDA for the first half of the year as we did in the same period in 2014, this was always going to be a tough quarter on a comparative basis.

Nevertheless, we were pleased to squeeze as much EBITDA as we could out of the limited volume of revenue available to us. This performance was based on continued solid execution by our operations and maintenance teams.

Q3 is normally dominated by seasonal construction work, but our customers cut very deeply into that construction project budgets this year due to the extremely challenging cyclical downturn that our industry is facing from a collapse in oil prices.

Projects that we’re seeing well placed to address with our low-cost structure with [indiscernible] upgrader exacerbating that situation. Also, while last year was a busy one for earthworks related projects at Fort Hills, the work this year was more associated with vertical construction.

On the face of it, our year-to-date revenue decline of around 40% seems to be turning pretty much in line with similar revenues for other oil service companies. Although much of our top line decline relates to the completion of the long-term overburden handling job at the Horizon mine.

At the end of this, contract had nothing to do with the industry downturn and what have occurred if the oil prices have doubled rather than halved. Therefore normalizing our revenue for the end of the Horizon work, we are only down about 15% so far this year, with much of that due to the closure of the Joslyn mine.

This allow us to support our belief that our core recurring services work is actually building in the downturn as we gain market share and benefit volumetrically from the drive of our customers to enhance production in order to share operating cost of more barrels and therefore improve cash flow.

This trend is really starting to show up in the financial results of the customers and the quote that Chief Executive of the owner of the Kearl mine, this year is about delivering unprecedented upstream growth that will add value for decades to come.

Turning now to EBITDA margins, comparing performance with the other oil service companies that had some asset intensity, it seems like a 40% to 50% decline in revenues results in a 70% to 90% drop in EBITDA. In positive contrast EBITDA is down just 26% from the 40% decline in revenues.

Every service company has had to deal with extreme pricing pressure this year as customers seek to achieve significant pricing concessions. Other recent investor confidence that Chief Executive of one of our customers stated that he thought that his company had achieved staggering, I repeat, staggering savings from price negotiations with suppliers.

It is against this backdrop that I contend that both our absolute and relative operating performance is very commendable in the circumstances. Looking forward, the prospects of most oil service companies appear grim for 2016 and 2017 with revenues and EBITDA set to plunging further as customers cut spending.

For ourselves, seems to be more stable if we can continue to build upon the recurring services we do at the oil sands mine and persistent our efforts to secure available construction work at the mines or on general infrastructure development projects.

On the former initiative, we are encouraged by the amount of earthmoving work that we already secured for the winter months, while opportunities remain to secure more. In this situation, we anticipate being at least as busy in our winter work this year as we were last year, although we expect a couple of [indiscernible] expanded holiday breaks.

On the construction work front, it’s difficult to think that next year could be as quiet as this one, due to necessary mining development and maintenance work. Also, we are expecting more earthworks related construction opportunities at Fort Hills again next year.

Outside the oil sands, we were pleased to recently submit our bid in conjunction with two excellent partners where the main civil work related to the Site C hydro project in British Columbia.

Whatever the outcome of this exercise, we have learned a lot and developed very valuable relationships [indiscernible] to address the opportunities that arise from recently announced much increased infrastructure spending at both the provincial and federal levels.

Most of our equipment is not resource-specific and can be ready to deploy outside the oil sands. Looking now at the balance sheet, we have reduced our net debt, as Rob said, this year to around the $66 million, while continuing to buyback considerable amount of stock for both cancelation and treasury purposes.

This quarter, we also retired over $37 million of high coupon debentures, while picking up $30 million term loan at much lower interest rates. Just the related reduction in interest cost more than covers of present dividend payment.

Now, even in the midst of this very tough industry downturn, I’m comfortable to run the business with senior debt at two times EBITDA. This leaves plenty of room for tuck-in acquisitions that could strengthen our position in our core business, while providing revenue diversification at the right EBITDA margin.

As I mentioned last time, this is my eighth deep cyclical downturn of a career span and I want to complete these remarks by saying that I am sure glad that I am in the oil sands and offshore contracting segment this time around. However, negative emotion and sentiment, rather than business fundamentals, are driving our stock valuation right now.

I take solace and believe that the situation will run its course and reverse. With that, I will pass the call back to Latonia for the question segment..

[Operator Instructions] Our first question comes from Greg McLeish with GMP Securities..

Just had a couple of questions. First one related to your run rate for G&A, historically I think you said maybe in the $5 million to $7 million range. But you’ve been able to strip out some of the stock based comp, I mean, it has been running in the $5 million.

Is that more of a good range maybe for next year with the cost cutting that you’ve done?.

As you saw, we did about $5.3 million this quarter; it will come up a little bit in Q4 and then settle back down into what you saw in Q3, Q2, that $5 million, $5.5 million range..

So that’s much better than the run rate that you’ve had historically then, so – I just had another one, when a take a look at your interest expense for the quarter, you did have the amortization of deferred financing cost in there that you had to write down.

If I were take those out and also account for some of the lower interest, because you’ve replaced the debentures, you are probably going to run interest in the probably 1.6% range for the – on a quarterly basis?.

What you are seeing right now, as you said, was impacted by the write-offs of deferred financing cost. You back that out and you see those numbers as a run rate. As we draw down on this term facility payment, that interest rates will come down slightly as well..

And I guess that you retired some of the additional ones and you may have additional write-downs of the deferred, but generally that should be a good run rate then going forward?.

Right. And those deferred financing costs are non-cash charges..

So I understand that it’s just – when I’m just looking at it from getting down to the earnings line here, because you guys are getting very close with some of the – with the depreciation charge you took this quarter, also the deferred financing charge, I mean, you are pretty close to breakeven earnings here in a challenging environment, although those non-cash charges that you had, it did result in a loss..

Yes..

So I’m just getting to your depreciation expense, you did take some – there was again the write-down of depreciation just because of assets held for sale.

Is it sort of something that we should look at continuing going forward or can we sort of look at is depreciation in the $10 million range a good number or should we sort of think going forward that you might not need to sell that equipment might not be for sale or the accelerated depreciation is probably going to happen.

I mean, how should we think of a run rate for depreciation on a quarterly basis or maybe on an annual because I know it sums around in the quarter?.

A lot of what drives the depreciation is a mix of equipment we are using. When we are using our bigger equipment, you are going to see bigger depreciation numbers, just for run rate without any write-downs for component life or assets held for sale.

So a lot of that depreciation number is seasonal that coming up with something around the $40 million a year number is probably appropriate and then it’s not a straight line depending on what equipment we are using..

No, I understand that. That’s why I noticed the annual numbers, probably a better one to use.

And just drilling down on what Martin said just on Fort Hills, the fact that there was more vertical construction this year, what are the opportunities, I mean does that mean that on the earthworks side that this year maybe was slow because of vertical at Fort Hills and next year there could be more activity in that project?.

Yes, Greg, that’s what we believe. Last year was extremely busy for earthworks related projects, couple of mechanically stabilizing environments especially. This year, as I said, the projects swung into more vertical construction mode. But next year, we are already seeing and bidding some opportunities for earthworks related projects again.

So it’s just the natural order of the construction schedule that’s kind of driving that..

Our next question comes from [indiscernible] with Dundee Capital..

Martin, I guess a question for you in relation to the visibility, I think in the last conference call you mentioned that we should probably anticipate $46 million, $47 million in EBITDA for the year.

We didn’t see in your commentary and MD&A, just was wondering if you can please provide an update in relation to how you think the Q4 is going to play out?.

I didn’t give a specific number, because we don’t do that. But what I said was that our second half performance would be similar to the first and all the [indiscernible] $12 million in Q3 we stand by that. So that’s what I can say.

Also here, we’ve indicated that we will be at least as busy on earthworks related projects, earthmoving projects in the winter time as we were last year and we have opportunities to improve on that. So t there’s a possibility we could do better in late Q4 and Q1 than last year..

And then obviously the EBITDA margin profile is beyond impressive as you mentioned.

Let’s assume that there is a more normalized operating environment, do you think you’re going to be able to retain and maybe even grow slightly the margin profile or you’re going to have to give up those gains because you’ve been really cutting through SG&A and things like that.

So I guess the question is what is going to be the new normal from a modern perspective in a normalized environment?.

It depends on the mix of work. Again, if we get back to more normal winter of earthmoving and construction work in the summer, then you will see the margin normalize at around 15% on average, because this higher EBITDA for earthmoving and construction.

But in this downturn, where there is more recurrent services work, in other words more earthmoving and heavy truck operations then the EBITDA margin is higher as you saw in Q3. It all depends how long this downturn lasts. Obviously, our customers are still grinding on cost savings and what we achieved this quarter was in spite of that.

So that makes it better. But we are having to give back some of the savings that we are making to the customers, but still we are in a decent margin. So we will continue to try and do that..

Absolutely.

And then do you have any update on Site C in terms of when we should hear the potential official announcement in terms of who is going to get that contract?.

We believe the award could come by the end of the year. That’s our understanding. We are handling technical questions. They are running a commercial assessment in parallel with the technical one or I am sure the other bidders are doing the same. So I can’t read too much into that.

It would be as early as the end of the year, but if I was handicapped then, I would of thought maybe Q1..

And then cycling back actually to Fort Hills, did you get a sense right now that the client would be looking to outsource overburdened removal activity [indiscernible] Q4 2017, what is your sense there in terms of – or if you’ve had any preliminary discussions with the client?.

It’s a little bit early to say exactly what will happen there Mark, but I would imagine that it will be a shared response. In other words, there will be some and they will have some for contactors to do. That would be our take on it, but we are expecting to have discussions on that type of work next year..

And last question for me, you talked about tuck in M&A activity, can you maybe comment in relation to the expectations from the sellers right now, do you find that they have come down to let’s call it realistic levels, any commentary there, please?.

Yes, things are moving in the right direction and these are extremely painful times for everybody in the industry.

So fortunately we manage to prepare ourselves better than most and we are buyer rather than a seller So things are moving in the right direction and might take a long little bit longer for the pain to become – even more for us to get good deals done..

[Operator instructions] Our next question comes from Ben Cherniavsky with Raymond James..

I just want to clarify the accelerated depreciation and more particularly the write-down on assets held for sale.

That’s due to component lifetime expectations or is that some kind of a mark to market of what’s happened to equipment values?.

It’s a little bit of both in that, Ben. So on the end of life assets, we are selling that type of equipment every quarter, right, because we’d rather monetize the asset rather than keep it. So we’re willing to take whatever the market gives us, asset we don’t need any more.

And right now in the downturn, the valuation on that type of equipment end of life is lower than it would have been maybe six months ago. That doesn’t mean to say that the valuation of good equipment has gone down, it’s just the end of life stuff. So that’s one aspect.

Then on the components, as Rob mentioned, some components last longer than expected, some fall shorter than expected. That’s normal. So we take accelerated depreciation when an asset – when a component fails early and we stop depreciation when it goes over its expected lifetime. So there is a balancing out there too.

Those are the two main aspects of the depreciation question..

What would the implication of the asset write-down because of the market values be for your intangible book, I mean in the past you’ve said that your estimated liquidation value of the fleet is roughly equivalent to your tangible book value, has that changed at all in the last three or six months?.

I don’t believe it has. What I’m saying in summary, Ben, is that you can’t use the valuations of end of life assets which are worthless to us. So not much use to anybody else either as a guide to the valuation of the whole fleet. So that’s the key point here..

But anything out of the recent auction activities, there is a big one from virtually last week and getting held of small one in the region there, anything that caused you to or any kind of update on used equipment prices and valuations?.

We are just studying the outcome of those auctions and certainly they were very competitive ones. But it doesn’t give us reason to the question our recent valuation of the fleet that we did for our credit facilities.

It’s very competitive, meaning there were lots of bidders or competitive – it was lots of equipment for sale?.

Both. There were multiple options last week. There was a new one with [indiscernible] so there is plenty of activity going on, but it’s not only our equipment, it’s driven related stuff, it’s all across the oilfield equipment is coming up for auction..

So there’s been a lot of – in light of that a lot of discussion about what was happening to valuations of fleets and inventory and such, and just I was hoping you might have some color on that, but maybe too early?.

I can’t commit more than I have at this juncture..

On the revenue line, I know you guys don’t give guidance, but it’s pretty lumpy and it can swing around a bit quarter-to-quarter and for that matter year-to-year, so just directionally, for next year, with the different moving parts, I just assume you don’t get Site C for simplicity what direction would be revenue be going, are you talking about a flat kind of year or can you still grow it?.

We think at this juncture there is an opportunity for us to be better, a little better. We are expecting to keep gaining market share for recurring services. We are expecting more recurrences as to be needed by the customers as they grow production. I’m expecting a slightly better construction year with Fort Hills helping.

But a lot of projects were deferred this year that probably have to be done next year. So all those facts make us believe that we could have slightly better year next year on the revenue front..

And on your desire to diversify and go into other markets, I mean, that’s been a question for North American for quite some time just trying to get some exposure outside of the oil sands for purpose, if nothing else is diversification.

I mean, how would you describe your success to date? My perception is that it’s been limited in terms of what you’ve actually been able to secure and penetrate outside of Fort McMurray, is there a fair description? If not, or if it is, why is that the case, and if not, whether it’s some of the opportunities you’ve been able to uncover, I’m just trying to get a better understanding of how you are going to change the profile of the company from sort of being [indiscernible] your intent?.

I’ve said pretty much since I arrived 3.5 years ago that it would be nice to get some revenue above your expectation. And we continue on that path as long as the revenue can bring in an appropriate margin and that’s the trick. I think anybody can get revenue and make no margin. Some other companies are pretty good that that.

We have margin expectations, but we are going to live up to it. So we are trying to find opportunities that provide revenue and the appropriate margin. That’s harder to do, especially in a downturn, everybody is looking for different ways of generating revenue.

Our posture has been to just [indiscernible] focus on what we do best and produce some results. And I think what our success on revenue diversification might be limited success on the strategy has been pretty good. And I would take the second one and wait for the first.

We’ve spent 18 months bidding Site C for the main server, probably spent $1.5 million doing it. And that’s going to be a great effort for us. As I said, whatever the outcome, we’ve got some super partners now that we can address some of these big infrastructure projects that are going to come down the pipe.

So we’ve done a lot, maybe in not in terms of winning stuff, but certainly in terms of preparing for the diversification..

That kind of discipline is – which we saw more of it out there, so it wasn’t – not meant to be criticism, but it has been – it would be nice to see that revenue base diversify that?.

Absolutely, it’s a focus for us. I didn’t take it as a criticism, I’m sorry if that sounded like that..

No, no..

Revenue diversification is important to us, but as we say, I’d like it to be accompanied by some piece of margin..

At this time, I would like to turn the call back over to Mr. Martin Ferron for closing remarks..

Thank you, Latonia. Thanks everybody for listening in. We look forward to speaking to you again next time. Thanks very much..