Business Context and Reporting Period
Company: North American Energy Partners Inc. (Note: Metadata listed "North American Construction Group Ltd." but the filing is for North American Energy Partners Inc.)
Reporting Period: Three and nine months ended September 30, 2017.
Business Overview: The Company provides heavy construction and mining services to customers in the resource development and industrial construction sectors, primarily within Western Canada. Operations are seasonal, with mining revenues typically highest in Q1 and civil construction revenues highest in Q3 and Q4.
Key Financial Metrics
All figures in thousands of Canadian Dollars (CAD) unless otherwise noted.
| Metric | 9 Months Ended Sep 30, 2017 | 9 Months Ended Sep 30, 2016 | 3 Months Ended Sep 30, 2017 | 3 Months Ended Sep 30, 2016 |
|---|---|---|---|---|
| Revenue | $210,511 | $150,979 | $70,045 | $48,222 |
| Gross Profit | $27,635 | $25,951 | $5,772 | $5,376 |
| Gross Margin | 13.1% | 17.2% | 8.2% | 11.1% |
| Operating Income | $8,869 | $5,105 | $1,010 | ($342) |
| Net Income (Loss) | $2,814 | $52 | ($585) | ($1,436) |
| EPS (Basic) | $0.10 | $0.00 | ($0.02) | ($0.05) |
| Adjusted EBITDA | $44,982 | $37,838 | $11,461 | $8,705 |
| Cash from Operations | $44,409 | $35,941 | ($395) | $7,934 |
| Total Debt | $123,954 | $100,972 | $123,954 | $100,972 |
| Net Debt | ($113,243) | ($87,306) | ($113,243) | ($87,306) |
| Cash & Equivalents | $10,711 | $13,666 | $10,711 | $23,115 |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 39.4% year-over-year for the nine months ended September 30, 2017, driven by expanded winter works programs and new mine support contracts (Fording River coal mine, Highland Valley copper mine). The prior year was negatively impacted by the Fort McMurray wildfire shutdown.
- Margin Compression: Gross profit margin decreased to 13.1% (9 months) and 8.2% (3 months) compared to 17.2% and 11.1% in the prior year. This was attributed to lower pricing on long-term service agreements, higher subcontractor usage, and normalized equipment maintenance costs following the prior year's wildfire disruption.
- Profitability: The Company returned to profitability for the nine-month period ($2.8M net income) compared to minimal income ($52k) in the prior year. However, the third quarter alone resulted in a net loss of $0.6M due to seasonal factors and working capital changes.
- Debt Structure: Total debt increased by $23.0M to $124.0M, primarily due to the issuance of $40.0M in Convertible Debentures in March 2017. The Company also entered a new Credit Facility in August 2017, replacing the previous facility with a $140M revolver and removing borrowing base limitations.
- Shareholder Returns: The Company continued its Normal Course Issuer Bid (NCIB), purchasing and cancelling approximately 2.6M shares during the nine-month period, reducing the outstanding share count.
Guidance, Outlook, and Risks
- Outlook: Management expects to achieve a minimum of 15% compound growth in revenue and EBITDA over a three-year period. They remain on track for 2017 targets despite a plant fire at a customer site in Q2.
- Key Drivers:
- Renewal of all oil sands Master Services Agreements (MSAs) through late 2020.
- New contracts at Fording River coal mine and Highland Valley copper mine.
- Anticipated start-up of the Fort Hills oil sands mine in late 2017.
- Expansion into external equipment maintenance services, potentially generating over $20M in annual revenue.
- Liquidity: Total liquidity is $127.9M (cash plus $117.2M unused credit facility availability). The Company is in compliance with all financial covenants (Senior Leverage Ratio < 3.0:1; Fixed Charge Coverage Ratio > 1.15:1).
- Risks & Contingencies:
- Customer Concentration: Customer A accounted for 45% of revenue in the nine months ended Sep 30, 2017.
- Claims: $7.9M in unresolved claims and change orders remain on the balance sheet.
- Seasonality: Results are subject to weather conditions and "spring breakup" periods which limit mining activity.
- Accounting Changes: The Company is evaluating the impact of adopting new revenue recognition (ASC 606) and lease (ASC 842) standards effective in 2018 and 2019, respectively.
Investor Verification Checklist
- Debt Covenants: Verify continued compliance with the new Credit Facility covenants (Senior Leverage Ratio and Fixed Charge Coverage Ratio) given the increased debt load from Convertible Debentures.
- Claims Resolution: Monitor the status of the $7.9M in unresolved claims and change orders to assess potential cash flow impacts.
- Customer Concentration: Assess the risk associated with Customer A representing 45% of revenue; verify the stability of this relationship.
- Capital Expenditures: Confirm that sustaining capital expenditures remain near the $40M annual target and that growth capital aligns with the $15M forecast.
- Accounting Transition: Review the impact of the upcoming adoption of ASC 606 (Revenue) and ASC 842 (Leases) on future financial reporting and balance sheet leverage.