North American Energy Partners Inc. ("NAEP" or "the Company") (TSX:NOA)(NYSE:NOA) today announced results for the first quarter ended March 31, 2017.
Martin Ferron, President and Chief Executive Officer of the Company stated, "We are very pleased to have made another exceptional start to a year and to have clearly demonstrated the excellent performance we are capable of as market conditions continue to improve. Of particular note is that these results were achieved from around 10% and 20% lower prices than in Q1/2016 and from the start of the deep cyclical downturn in the oil industry, respectively."
Further Mr. Ferron commented, "Unfortunately, the recent loss of an overburden stripping contract, due to a production plant fire at the mine site, will likely result in a more normal, seasonally slow, second quarter. However, beyond that, we believe that the work opportunities exist, both within and outside the oil sands, for us to meet our growth targets for the full year."
The Company has prepared its consolidated financial statements in conformity with accounting principles generally accepted in the United States (US GAAP). Unless otherwise specified, all dollar amounts discussed are in Canadian dollars.
Highlights of the First Quarter Ended March 31, 2017
Highlights of Events Post First Quarter
Declaration of Quarterly Dividend
On May 1, 2017 the NAEP Board of Directors declared a quarterly dividend (the "Dividend") of two Canadian cents ($0.02) per common share, payable to common shareholders of record at the close of business on May 31, 2017. The Dividend will be paid on July 7, 2017 and is an eligible dividend for Canadian income tax purposes.
Results for the First Quarter Ended March 31, 2017
For the three months ended March 31, 2017, revenue was $92.8 million, up from $78.5 million in the same period last year. Revenue was up in the current period, compared to last year as a result of an expanded winter works program driven by the award of reclamation work at the Mildred Lake mine site which more than offset lower overburden removal and tailings pond support activity at the Millennium mine site. Mine support activities at the Kearl mine site contributed to the Company's revenue for both periods.
For the three months ended March 31, 2017, gross profit was $23.0 million, or 24.8% gross profit margin, up from $18.4 million, or 23.5% gross profit margin, in the same period last year. The higher gross profit in the current period was driven by higher revenue. The improved gross profit margin was achieved through continued improved operating performance despite lower pricing negotiated by the Company's customers on its long-term service agreements.
For the three months ended March 31, 2017, depreciation was $14.6 million, up slightly from $14.3 million in the same period last year.
For the three months ended March 31, 2017, the Company recorded operating income of $14.4 million, up from $10.7 million for the same period last year. General and administrative expense, excluding stock-based compensation, was $6.0 million for the quarter, down from $6.3 million for the same period last year, reflecting the benefits gained from cost-saving initiatives implemented over the past year.
Stock-based compensation expense increased $1.1 million compared to the prior year primarily as a result of the effect of the higher share price on the carrying value of the liability classified award plans.
For the three months ended March 31, 2017, the Company recorded $9.6 million net income (basic income per share of $0.34 and diluted income per share of $0.31), compared to $6.4 million net income (basic income per share of $0.20 and diluted income per share of $0.19) recorded for the same period last year. The net income improvement in the current quarter was achieved despite the recording of $2.1 million in stock-based compensation expense in the current quarter, compared to $1.0 million in stock-based compensation expense recorded in the same period last year.
Interest expense was $1.4 million for the quarter, down from $1.7 million for the same period last year, primarily due to the redemptions of the Series 1 Debentures in prior quarters partially offset by the issuance of Convertible Debentures at the end of the current quarter. The Company recorded $3.5 million of deferred income tax expense in the current period compared to the $2.6 million of deferred income tax expense recorded in the prior year driven by higher income in the current period. The variance between the basic income per share in the current period and the basic income per share in the prior period is partially affected by the reduction in the weighted average number of issued and outstanding common shares, to 28,004,778 as at March 31, 2017 compared to 31,681,357 as at March 31, 2016. The variance between the diluted income per share in the current period and the diluted income per share in the prior period is also affected by the increase in treasury shares purchased and held in the Company's trust, stock options vested and exercisable and the weighted average effect of the Company's newly issued convertible debentures. As part of determining the dilutive effect of the Company's convertible debentures on diluted income per share, $0.1 million of interest was added back to its net income and 696,365 weighted average shares for the period from the Company's Convertible Debentures was added to its weighted average number of common shares for the period.
Although the much watched weekly oil inventory levels in the US are drawing wide ranging conclusions, it is the Company's view that a re-balancing of oil supply and demand appears to be underway. Therefore, although the deep and unusually long cyclical downturn in the oil industry is into its third year, the worst seems to be in the past. The oil price appears to have stabilized at around US$50 per barrel and may head higher as 2017 unfolds.
In response to the downturn, most of the Company's oil sands mining customers elected to increase their production and all slashed their expenses in order to lower operating costs per barrel. While it is unlikely that new mines will be announced until oil prices are much higher, it is important to note that the new Fort Hills mine is due on-stream late this year and the drive for increased production on most existing mines should lead to greater volumes of recurring mine services for the Company to address.
Several of the Company's customers have achieved operating cost savings per barrel of around 30% in Canadian dollar terms, which equates to about 50% in US dollars, due to the depreciation of the Canadian dollar, in which most expenses are incurred. As the Canadian dollar is not expected to significantly appreciate in 2017, this situation provides the Company's customers with a meaningful cost advantage to exploit. This seems to be translating into more work opportunities for the Company, such as a reclamation project that bolstered first quarter results.
Another example of a high production driven work opportunity was the overburden stripping contract the Company was awarded in January and planned to commence in this second quarter. Unfortunately, due to a plant fire at the mine site, the job was recently cancelled, which will likely result in a more normal, seasonally slow, spring break-up period for the Company.
In the first quarter the Company also extended a near expiration Master Service Agreement ("MSA") on a sole sourced, negotiated basis with a key customer which means that the Company is not faced with another expiration situation until late 2020. Therefore, the Company has come through the downturn with all of its MSAs intact or expanded, which it believes underpins its revenue expectations for several years.
In other resource industries, such as coal, iron ore, base metals, and precious metals, the Company has seen much increased bidding activity and opportunities. The Company was successful in winning a summer 2016 tailings dam construction job at the Red Chris copper mine in British Columbia, which the Company anticipates will be extended into 2017. This project represents the first of what the Company believes will be a stream of future opportunities from its diversification activities in this sector, as commodity pricing and associated development activity improves. The Company hopes to be able to announce further such awards as the year progresses.
The Company's business development work in the infrastructure sector continues and it has received additional partnering requests and opportunities to participate in major infrastructure projects. The Company was very pleased to qualify to bid for the Fargo-Moorhead flood mitigation project, in the northern US, as part of a strong consortium. The bid will be completed in Q1/2018, with an award expected in Q3/2018 to the successful proponent.
The Company definitely views the infrastructure sector as a positive opportunity and is actively pursuing both major and minor projects. In major infrastructure projects, the Company seeks to find strong senior partners with mega-project experience looking for an earthworks contractor that has the assets and can put the "boots on the ground" to execute earthworks safely and efficiently. If the Company's partnership is successful in the tender, it looks to self-perform the earthworks while also contributing to the overall project management team. In situations where the Company's project team is not awarded the work, it will continue to pursue the opportunity as a potential earthworks subcontractor to the awarded team(s). The Company believes the project insight and knowledge gained by being a project partner increases its ability to accurately assess risk and price as a subcontractor.
The Company's recent debt restructuring initiatives, with a focus on lowering its cost of debt, combined with a stronger financial position and improved operating cost structure should provide a stable base to allow the Company to remain competitive in its pricing and provide it with the ability to take advantage of organic growth and acquisition opportunities.
In summary, the Company continues to pursue heavy civil construction contracts in the oil sands, along with a series of much broader and more robust major resource projects and infrastructure projects. The Company is excited about its organic growth potential and believes it can capitalize on it to grow both Consolidated EBITDA and free cash flow significantly over the next three years. Although the cancellation of the overburden stripping contract, mentioned earlier, is another adverse event for the Company to deal with, the Company believes that it has the work opportunities to still meet its financial growth targets for 2017.
Conference Call and Webcast
Management will hold a conference call and webcast to discuss the Company's financial results for the quarter ended March 31, 2017 tomorrow, Wednesday, May 3, 2017 at 9:00am Eastern time.
The call can be accessed by dialing:
Toll free: 1-866-521-4909
A replay will be available through June 3, 2017, by dialing:
Toll Free: 1-800-585-8367
Conference ID: 4643011
The live and archived webcast can be accessed at:
About the Company
North American Energy Partners Inc. (www.nacg.ca) is the premier provider of heavy construction and mining services in Canada. For more than 50 years, NAEP has provided services to large oil, natural gas and resource companies, with a principal focus on the Canadian oil sands. The Company maintains one of the largest independently owned equipment fleets in the region.
The Toronto Stock Exchange has neither approved nor disapproved the information contained herein.