North American Construction Group Ltd (NOA) 2012 Q3 法說會逐字稿

Good morning ladies and gentlemen. Welcome to the North American Energy Partners fiscal 2012 third-quarter earnings call. 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 the participant's permission.

I advise participants that this call is also being webcast concurrently on the Company's website at NACG.ca.com. I will now turn the conference over to Kevin Rowand, Director of Strategic Planning and Investor Relations of North American Energy Partners Inc. Please go ahead, sir.

Good morning ladies and gentlemen, and thank you for joining us. On this morning's call we will discuss our financial results for the three months ended December 31, 2011. All amounts are in Canadian dollars.

Participating on the call are Rod Ruston, President and CEO; David Blackley, CFO; Joe Lambert, VP Operations Support; Chris Yellowega, Vice President, Construction; [Gary Palmer], Vice President Oil Sands Operations and Bernie Robert, VP Corporate.

Before I turn the call over to Rod I would like to remind everyone that statements made during our prepared remarks or in the Q&A portion of the conference call with reference to Management's expectations or our predictions of the future are forward-looking statements. All statements made today which are not statements of historical fact are considered to be forward-looking statements. Certain material factors or assumptions were implied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information.

The business prospects of North American Energy Partners are subject to a number of risks and uncertainties that may cause actual results to differ materially from a conclusion, forecast or projection in the forward-looking information. For more information about these risks, uncertainties, and assumptions, please refer to our December 31, 2011 Management's Discussion and Analysis, which is available on SEDAR and EDGAR. As previously mentioned, Management will not provide financial guidance.

At this time I will turn the call over to CEO Rod Ruston.

Thank you, Kevin. Good morning ladies and gentlemen and thank you for joining us today. It's disappointing to open today's call reporting the improved performance in the second quarter was not able to be maintained into the third quarter, in which the benefits of increased activity levels and higher revenues were negatively impacted by a combination of losses in the Pipeline division and underutilization of our large equipment fleet in the Heavy Construction and Mining division.

On a positive note, our Piling division delivered a segment profit of CAD16.5 million on CAD51 million of revenue. This is an all-time record quarter for this division, and importantly, it's not expected to be a one-off. While we don't see records being broken every quarter, we do see this performance as being indicative of the strength of the Canada-wide market base that have built in this division over the last few years.

Looking at our topline performance, increased Piling and Pipeline activity together with the positive impact of some of our newer oil sands contracts contributed to a 7.4% year-over-year improvement in consolidated revenue despite the continued shutdown of Canadian Natural during the third quarter.

As of January 2, we recommenced operations at Canadian Natural and we expect activity to return to normal levels by the end of the fourth quarter. But I will provide more detail on this contract later in the call.

As I said in the opening, our quarter results were negatively impacted by issues in our Heavy Construction and Mining and our Pipeline divisions, and offset to some extent by the excellent results from Piling.

Let's look at the segment results. In the Heavy Construction and Mining division, the main challenges were related to our utilization. We had an unexpected deferral of a significant tailings-related project in mine services work at one -- with one of our customers at such short notice that we were left with insufficient time to redeploy the equipment to take advantage of other opportunities in the region.

We had unseasonably warm temperatures that prevented us from getting started on our backlog of winter muskeg removal work. And we had delays in maintenance and repairs caused by the parts supply problems being experienced by Finning during the commissioning of its new ERP system. The impact of these issues was that part of our large equipment fleet was significantly underutilized, particularly during the latter part of the quarter.

You should note that the impact of this underutilization is reflected in equipment recovery, so in this case it was under recovery.

But we've also had some positives in Heavy Construction and Mining. We increased our volume to reclamation, overburdened and heavy civil construction work at Suncor under our new five-year master services contract. We provided higher volumes in mining services and heavy civil activity at Syncrude, and we increased our volume of light civil construction work at several lower fence sites. And we provided our specialized tailings and environmental services to Shell, Suncor and Syncrude.

Coupled with the equipment utilization issues in the Heavy Construction and Mining, we incurred a loss in our Pipeline division. We had claims addressing some of those issues that we'll be working through with our clients over the next few months. So while Pipeline revenue climbed up by 57% to CAD66 million on the two pipeline contracts in BC and Alberta, the margin on that business has been compromised by client-driven startup delays, project scope changes and cost escalation.

The change order the process should eventually help recoup some of the lost margin. But even with that, the Pipeline division's profitability continues to fall short of our expectations. While industry pricing and risk sharing has started to improve, the contract structures continue to impact the business, creating cost uncertainty that is difficult to mitigate and leading us to undertake a further review of our options for this business.

Turning to Piling, third-quarter revenues increased an impressive CAD14 million, 38% higher than last year. This reflects top-quality execution, coupled with this division reaping one of the few benefits of the warm winter. Our Piling crews were able to continue working right through the quarter.

Growth in the Piling revenue reflects the addition of our Cyntech business which we acquired in November 2010 and which contributed CAD10 million during the quarter.

To digress for a moment and provide you with some color on the success of this acquisition, we valued Syncrude at the acquisition predominately -- sorry, we didn't buy Syncrude. We valued Cyntech at the acquisition predominantly on its domestic markets, ascribing little or no value to a sub CAD1 million opportunity in Colombia. That opportunity is now contracted with a US-based company to a value of around CAD13 million at margins befitting the Piling business.

The success of our Piling division reflects the strong internal focus on execution and safety, continued improvement in the general construction industry, and our increased ability through successful acquisitions to tap a broad range of opportunities with our growing technical, geographical and sector diversification. Margins for the quarter were particularly strong, reflecting the resolution of some outstanding change orders and the productivity benefits of good weather. Importantly, we believe the ongoing margins in this business has stabilized in the mid-20s, up from the midteens experienced during the downturn; another very good quarter for Pilings.

Our continued revenue growth despite the aforementioned challenges in HCM and Pipeline reflects the momentum of our business. The opportunities available to all three of our business segments have continued to expand, as evidenced by growing backlog which went from CAD583 million at the start of this fiscal year to CAD884 million at December 31. However while revenue improved for the quarter, gross profit results were disappointing.

While combined profit for our three reporting segments was up CAD4 million in the third quarter and CAD14 million for the first nine months of this year compared to the same periods last year, lower equipment utilization has meant that we've been unable to fully recover the owning and operating costs of that equipment over the actual operated hours, hence the under recovery.

So how do you get increased revenue and segment properties profit with reduced equipment utilization? In the past North American has generated revenue through very strong demand cycle that meant there was very little idle time for equipment. If one job was delayed, there was another to take its place and the work was really weighted towards heavy trucks, the 240-ton fleet working 24-hour shifts on large earthmoving projects.

In the past year the market has changed to more detailed construction work, using our smaller truck fleet and in many cases including a significant volume of pass-through or low-margin materials. They -- concurrently we faced with an unprecedented number of unusual events in the last nine months, including several weeks offsite -- several weeks of site evacuations due to forest fires in the spring; a seven-month work suspension at Canadian Natural due to the fire at its customer's plant; and most recently, record warm temperatures in our busiest work season when we need freezing conditions.

And the customer attitudes have changed as well. As I have said on previous calls, where in the past schedule was the driver, our customers are now taking a much more cautious and conservative approach to spending, contract detail, and project management, resulting in an increased trend of project startup delays, short notice project deferrals and overall reduced predictability. This has introduced a far more variability into the demand for our equipment and thus into our oil sands revenues.

We're responding to the changed environment by approaching the issues from a number of directions. We're looking at our costs and examining the makeup of our fleet to ensure we have the right fleet for the job and we do not have the equipment regularly clocking in sufficient operating hours to provide a reasonable return. We're looking at our wording to ensure future contracts better short notification stoppages or delayed starts better than they do at the present.

With respect to increasing utilization, we're doing a few things. We're working with Finning to assist them with ERP problems to the extent that we're able to, and where possible, we are developing workarounds in places where the service can be provided from an alternative source.

We are focusing on moving quickly if there is a stoppage of work at the site and being less tolerant of the client's willingness to delay with an expectation of no penalty.

At this point I will hand over to David Blackley to review our consolidated financial results with you in more detail. David?

Thank you Rod. And good morning everyone. I'm going to review consolidated results for the third quarter ended December 31, 2011 as compared to the third quarter ended December 31, 2010.

Revenues for the period increased to [CAD285 million] from CAD265 million in the third quarter of last year. The increase in revenue primarily reflects higher Piling and Pipeline revenue, partially offset by a reduction in Heavy Construction and Mining revenue related to Canadian Natural work suspension.

Gross margin was 7% in the third quarter compared to 11.6% for the same period last year. The change in margin primarily reflects a year-over-year shift in work mix and the related impact equipment costs, as well as negative margin on our Pipeline revenue. We recorded operating income of CAD3 million in the third quarter compared to operating income of CAD11 million last year.

This reflects the lower margins during the current period, partially offset by a reduced G&A expense. G&A decreased by approximately $1 million due to the impact of lower share price on our stock-based compensation plans.

Backing out the impact of various non-cash items, net loss would have been CAD0.10 per share for the most recent quarter compared to net income of CAD0.06 per share last year.

Turning to capital, the total additions for the third quarter amounted to CAD20 million, including CAD14 million of sustaining capital and CAD6 million of growth capital additions. Looking at liquidity, there were outstanding borrowings of CAD38 million, and issued and undrawn letters of credit of CAD22 million under the revolving facility, leaving us with CAD46 million of borrowing availability.

Startup on several new construction projects created a temporary strain on our working capital. We expect this to continue through the fourth quarter. To support the higher working capital level, we negotiated a temporary increase to our revolving credit facility until March 31, 2012.

That summarizes our third-quarter results. I will now turn the call back to Rod to tell you about our outlook.

Thanks, David. Looking ahead we ended the third quarter with our fleet fully booked and therefore expect to see work volumes and equipment utilization improve, provided the weather cooperates. You should be aware that the unseasonably warm weather experienced in December continued through into the first two to three weeks of January.

I'm pleased to report that third-quarter both two major new contract starts for the Heavy Construction and Mining division, which will help to support performance going forward. The first is a contract to provide initial earthworks at Total Joslyn North Mine Project. This represents our first significant piece of business with this new customer and maintains North American as being the only Heavy Construction and Mining contractor to undertake work on every oil sands mining site in Fort McMurray.

We are delighted to be building our relationship with this customer and will be putting in a huge effort to ensure we deliver our services in a manner that leads Total to extend the relationship through the construction phase and into providing services once the operation commences production.

We also secured a contract to provide aboveground industrial construction work at the Mount Milligan copper gold project in Northern BC. Work commenced on this project in January and will conclude in the late fall this year. Together these two contracts added CAD128 million to our backlog.

Over on the recurring services side of the business, we have a large backlog of muskeg removal to catch up on in February and March after the slow start due to the warm January weather. Overburden removal activity is also expected to increase as we resume activity on Canadian Natural's Horizon mine.

To provide a little more color on Canadian Natural's situation, we signed a memorandum of understanding in December which establishes the terms for proposed resolutions to outstanding issues related to our contract with this customer. The MOU also provides a proposed settlement for past underpayments, and importantly, it enabled us to return to work under a profitable arrangement that will remain in place until the final resolution is reached. This should help to improved margin performance for our Heavy Construction and Mining division.

In addition we are carrying our construction on Syncrude's Shear Key as part of this customer's mine train relocation project. And in our Tailings and Environmental Construction division we continue to execute work for Suncor TRO projects through the winter, which was an unexpected benefit.

Overall, we're going into the fourth quarter with a stronger backlog of work. The backlog was valued at CAD839 million at the end of December, up from CAD583 million at the start of the fiscal year. I should mention, however, that work volumes could continue to feel the impact of project startup delays and slower than expected ramp up.

The outlook for the Piling division remains positive, with strong industry fundamentals and large project backlog supporting our expectation of continued strong performance for this segment through the quarter. In our Pipeline business, our focus will be on completing our current projects and moving forward with some new pipeline integrity work for Enbridge that we started in December.

However, our outlook for the business is cautious. While the fundamentals of the industry are starting to improve with regard to pricing and contract risk, we're becoming increasingly selective about what work we'll take on. The margins need to improve.

Overall, some continued challenges for our business as a whole, but we anticipate growth and performance improvement through the balance of this fiscal year and into the next. With that, I will now the turn back to the operator.

(Operator instructions) Matt Duncan, Stephens Inc.

Good morning guys, first question I've got is with regard to the underutilization of the equipment fleet. Can you help us understand, of the $13.1 million charge, how much of that do you feel like was tied to defending ERP problems versus weather versus project delays? Just help us sort of better understand what all is driving that.

And then is that going to be a problem again in the March quarter? Is the Finning thing fixed, and with the late freeze that resulted in underutilization that maybe you can't make up for?

Matt, first of all, no I cannot. I just wouldn't be able to split those things out. You have a truck that's down and therefore not being utilized, and we don't actually identify the actual reason for that truck being down was the fact that we couldn't get a hose when we should've been able to get a hose, etc. We don't go to into that in detail (inaudible) million.

So I'll answer the question in a couple of points. First of all, Finning are working very hard on the pieces. We're working as hard as we can with them to help them improve the process. It has certainly improved substantially over the last couple of months, but still has some way to go.

We have developed some workarounds. They're somewhat inefficient and most of them we wouldn't keep in place after the Finning system is in operation. But they are helping the situation.

With respect to the way that the underutilization drove us this quarter is with one of our clients we were working for October/November. Everything was going fine. At the start of November they came to us and said they've run out of budget money and they're going to stop all service type work, and we were just basically shut down.

The problem there is we had a fleet that was going to be used for muskeg removal in the winter on that same site, starting first of January. And so we couldn't take it away and put it somewhere else, but we sat around for a period of time.

Now that sort of thing is available to them in the current contract arrangement, but we'll be looking at the wording of our contracts to try and mitigate that sort of action in the future. And then the other thing is the winter, while it is helped our Piling division, it is actually still very warm and now. It's early in the morning here in Edmonton and it's only about minus 5 degrees, which is actually very warm for this time of the year.

It's been very warm up in Fort McMurray, but after the first two weeks or so of January it has been freezing down, not quite as hard as we wanted it to. But we have been having continuous work.

When we look into the next quarter, so long as the weather cooperates from now on, we should have a reasonable run. We're obviously concerned if it's a bit warm now, is there going to be another breakup, because that will hurt us. But there's not a lot we can do about it.

So we're pushing as hard as we can with the equipment that we've got. We've got -- everything that we can get going, we've got utilized in working. And that's about the best we can do.

So Rod, the obvious follow-up here, then, is can you get the revenue side on Heavy Construction and Mining up enough in the March quarter that your equipment fleet can be -- you fully enough utilized that you don't have this charge? And at this point, and I know it is early, do you think you can be profitable in the March quarter?

I won't say that we can get the equipment utilization up to the point where we have zero charge, but I think we can significantly reduce that charge. And I believe that we can, so long as I say the weather cooperates particularly now with the end of the quarter, then we can probably push through and be profitable.

Okay, and then one more question for me and I will hop back in queue. On the CNRL situation, is there any detail you can share with us on sort of the revenue run rate for the March quarter and (inaudible) what profit margin do you earn under the memorandum of understanding? And then looking forward, when do you think you're going to be able to get back to the full run rate? And then what should the margin profile of that work look like once the final resolution is in place?

Okay. I need to be fairly general here. We're in the process of negotiation and I don't want to release actual numbers. But what I can say is at the present time we're operating on a cost reimbursable type contract structure, as compared to the unit rate contract structure of prior. But our margins are better than the margins we were achieving and the unit rate contracts.

The ongoing negotiations are looking toward changing the contract structure in a way that we have more certainty and that CNRL remains with strong commitment from the contractors, being us.

I will hop back in queue.

Patrick Uotila, Sterne, Agee.

Good morning guys. Hey I was just wondering if we could get a little more detailed on the options that you are currently looking at for the Pipeline business. Would a divestment be on the table? And if so, could parts of that be sold separately or would you be more inclined to try to sell it as one piece?

First of all, our Pipeline business at the moment has two unit rate contracts that we need to complete. But importantly, we have also picked up and just recently started work on a time and materials contract, which is integrity testing for one of the large pipeline operators in Canada. And that is very positive type work.

Our focus at this stage will be more on de-risking the contracts, so looking more towards the time and materials type work rather than unit rate. But I won't say that selling the Pipeline division would be off the table. If we could get the right price for it and if the opportunity arose then, yes, we would sell it. And no, we would not sell it in parts. It would be a single entity.

Thanks. Just a quick second question. Was the cancellation in the tailings program, was that caused by sort of a change in strategy by the customer? And to your knowledge are they going to be bringing those services in-house? And what specific services were you providing there?

No, they're not going to take it in-house. We believe they still have as much work to do as what they canceled plus more. It is a very large program.

They operate on a 12-month budget, and the indication to us was they'd significantly exceeded their budget and they had to stop for a period. We expect them to restart that work in the next month or two.

Okay, great guys. Thank you.

Steven Yearing, Brill Securities.

Good morning. I was curious why you can't make up the work in the Heavy Construction area that you were sort of delayed in the beginning of January because of the unseasonable weather. Why can't you make that up in the rest of the quarter?

We will push it as hard as we can, but as I said in the opening of that piece of the discussion, we had all of our equipment fully booked for the start of the season. And so once your equipment is fully booked, what you lose, you lose.

When you became operational we still had everything fully booked and didn't have any additional capacity. So we're operating every truck we possibly can. We're moving our equipment around where necessary to get better capacity in places where we can. So we will make up some of it, but I'm not sure we can make it all up.

Second question. You talk about the possibility of selling the Pipeline business, but we keep on hearing about Western Canada, about major pipeline work up there was the possibility. Would you be involved in that? And under those conditions or circumstance, why would you sell the business?

A question was asked by the prior person that said would selling Pipeline division be on the agenda, and I said everything is on the agenda. We will examine our options.

I agree with you there is some potential quite significant work coming up here in Western Canada. However, in doing that run, taking that work, it's got to be profitable. At the present time, the time and materials type -- sorry, the unit rates to our contracts that led out by the pipeline owners are -- put too much risk on the pipeline installer and not enough for risk on the pipeline owner.

So when you've got a 200 kilometer pipeline and you're taking weather risk and ground condition risk across the whole 200 kilometers, and then the client makes -- delays the project start. And so you've got to increase your equipment on the site and step up the program, etc. with the client, then being somewhat difficult to say with a change order process, we say to ourselves if it's worth it.

And you look at our Pipeline division over the last 12 months or so, it really hasn't reformed. Now I'm not saying we're selling it. But I am saying we're certainly going to do better than what we have in the past in one way or another.

Part of the contribution to doing better than we have in the past was securing that contract that we're doing integrity work with, which is time and materials. If we can focus on that type of work, if we can change the mainline pipeline process into time and materials, even if we take some risk on it with the customer where happy to do that. We're just not happy to take all the risk. So we'll examine our options.

Thank you.

Matt Duncan, Stephens Inc.

Hi. Sticking with the Pipeline segment for a minute, Rod I'm curious at what point you would consider maybe just shutting the Pipeline business down altogether. It has been a troubled child for you guys for while making money there. And I understand that this is obviously a very challenging contracting environment right now; in theory at some point that gets better. But is that an option that is on the table if the contracts that you are seeing continue to have unfavorable risk characteristics?

I think shutting it down altogether we could do, but unlikely. We have, as I said, some very good reasonable margin contracts on pipeline integrity. One of the things also is we don't want to do the wrong thing by our client, and we certainly want and want to just walk away from that type of work.

So, looking forward, what we will be doing is we will take a look at the contract that someone comes out with and we will say let's have a look at this. If this is -- tell North American to do it doing a unit rate contract taking all the risk, our answer will be no. We won't do it that way. We will offer you a time and materials approach with some risk into us, or a target price. And then if the client doesn't want to work under that mode, then we will probably consider not leading that particular work.

And as I said before, the good thing with our Pipeline group is it is able to be expanded and contracted at fairly low cost. So we would be able to bring it down to doing just very focused work for a period of time until the Pipeline business gets better.

And then looking forward here for that segment then, are the contracts that you guys have been working on, did they finish during the December quarter? Or is there still some work left on those? How much revenue do you think -- if there is work left, how much revenue is left under those? And can it be profitable as you wrap those contracts up, or are you probably going to lose money there again this next quarter?

Chris, can you respond to that?

Sure, Matt. Yes, we do have to complete the contract in the fourth quarter and there may be a little bit of cleanup work that stretches into the summer. Right now we are not forecasting to make a lot of money on those contracts. The way we have structured them in terms of completion is we're really tracking them and working them hard to cost.

And it's going to take a bit of change management to move the needle to the positive side on these remaining contracts. But some of the other types of work in the service works are ramping up through this quarter into the next. So in terms of total revenue it is a little hard to say because we've got a few of these big projects coming in and out. But it's nowhere near the level of revenue we had in Q3.

Okay. So maybe CAD10 million to CAD20 million just to kind of help us have some idea how much is left on those contracts?

Yes, that range is pretty good, Matt.

Okay, that is helpful. And as I look at the Piling segment, that was a very nice positive surprise this quarter. And honestly I guess I'm a little surprised it even had that revenue capacity in a December quarter.

What sort of quarterly revenue run rate do you think that business has? Is this the ceiling, the number that you just put up? Is there potential for upside to that?

And then help us think about the seasonality in that business in the March quarter. I know when the ground freezes revenue slows down there. But it sounds like, again, that business probably benefited from the late freeze in January. So just help us think through that segment for a minute.

Did you want me to catch that, Rod?

Yes.

I wouldn't say that's capacity but it's getting up there. It depends a lot on the structure of the contracts and how we can pass through and use the different types of subcontract mechanisms to generate the revenue numbers. But it was a very good quarter for us.

Weather did help. Typically in this quarter we start losing a little bit of revenue capacity just due to freezing temperatures. And sometimes is just too cold to physically drive steel. The steel just doesn't actually work very well at minus 40.

So I would suggest that is not our maximum. But it's getting very close. But that doesn't necessarily mean we do not have more markets move into and grow that business.

Okay, that's helpful. And then the last thing I've got, I know you guys don't want to give guidance, so let's be careful if you don't want to get into doing that. But I think we need to have some idea sort of the order of magnitude or the impact of the late freeze.

And it sounds like your utilization rates are going to be very good in the quarter, which in theory is good for margins sort of once you get back to work. So I'm just trying to think through what the revenue capacity is for the business, given all the moving parts. And typically this March quarter in the past has had the potential on the Heavy Construction and Mining side to move up around CAD200 million in revenue.

With the ramp of CNRL, can you get back to that level? Or does it need to ramp all the way back to the full run rate before that is a doable number?

It will take -- with the startup of CNRL, as with any startup it will ramp up over time. And so it won't be at full operational capacity until the end of the quarter. Looking at revenue somewhere between [CAD150 and CAD160].

For that segment for the quarter?

Yes.

Keep in mind, as Rod said earlier, (inaudible) dependent in that March. That's the tough month for us to really predict right now.

That's actually down from the December quarter. Why would that be down if you are ramping CNRL and the weather is better?

Keep in mind we've already taken into account the drop in the first part of January here.

Industrial's not in that number, that's why. (multiple speakers)

That is just all our Fort McMurray focused revenue. We do have other construction work going on outside of that that would give us incremental.

Okay, so how much is that incremental then? I guess that's what I'm trying to get at. For that whole segment, that reportable segment, what is the revenue potential for the quarter?

Chris, what are you going to do in your copper/gold operations, etc. over the next three months?

Matt, I would expect our Industrial group to check and contribute somewhere between CAD12 million and CAD15 million in the quarter to HC&M. It will be a little weather dependent because a lot of it is excavation and civil works, laying pipe and stuff like that inside some of the plant sites. So weather does impact us, but you know right now we see between CAD12 million and CAD15 million.

Add another CAD15 million onto those.

To [CAD175 million], Rod, and that would be flat to barely up with, in theory, much better weather conditions. You're ramping Total Joslyn, you're ramping CNRL. So I guess I'm struggling with -- what did you do in December that doesn't repeat that's coming out so that that business would be up more than that sequentially?

Matt, this is Joe. I think the big guess we always have in the fourth quarter is when does spring start. So, when spring breakup happens, it has a big impact in Q4 and Q1 of the following year. So if we froze hard through March versus a spring breakup in the second week of March, it can impact -- the same kind of two weeks we're talking about in January can impact you or not impact you in March.

So it is a difficult number to put your finger on that regard. You are predicting the weather.

Stephen Volkmann, Jefferies & Co.

Hey good morning. Just sort of a theoretical question; if you're sort of pedaling as fast as you can hear in the next quarter trying to make up for some of this missed work, does that drive potentially some margin inefficiencies into the quarter? Or is that not the right way to look at it?

You're pedaling as hard as you can and it's all dependent on pushing your capacity with everything you've got. You certainly won't reduce your margins.

Okay, great. And so theoretically, I guess, your just big picture I'm trying to understand the contracting environment up there. Because it feels to me like in a couple of your businesses, that most of the contracts seem to be kind of weighted against you and in favor of the client, which I sort of understand.

But are your competitors willing to accept these types of conditions and therefore you're not going to be able to sort of shift the risk-sharing a little bit in your favor, or is this a trend do you think, that we're going to see in the industry?

Actually, what we're seeing looking at our competitors as best you can, looking across the fence and seeing what their trucks are doing, our competitors aren't doing a lot of work. (inaudible) it's not likely to reduce load that we've got has been passed on to anyone else.

The other thing we're seeing interestingly is there's some equipment going out of the oil sands, which is good for us. It is going down in the coal areas of Southern BC and Northern USA. So our competitors aren't undermining us or bidding lower or anything like that.

It's just a general customer position of they're taking longer to decide, spending more time of engineering. I've said this before. It's just going to take a little bit of time for the industry -- the contracting industry to absorb it and change its working patterns to suit what the client is -- the direction the client is going.

Okay, thanks very much.

Greg McLeish, GMP Securities.

Hi guys. I just have a couple of questions. First of all on the Pilings, I understand Q3 was a great quarter. You did have great weather in there. When we take a look at the weather patterns in Ontario and in Alberta right now, again we've had some very strong weather, some very warm weather.

Are you going to replicate a quarter like you just did in Piling? Or should we think of -- you did say that is probably a good run rate now. But is that it run rate we're going to see in Q4?

No, I wouldn't think we could do that day in, day out, day in, day out. It has been raining, actually, I understand in Ontario, so that -- part of their business did have a bit of an impact.

As I said in the statement there, we don't expect records every year, every quarter. But we do expect continued margins in the mid-20s, which is good. And I still expect a strong quarter for the fourth quarter for Piling given the fact that it is winter, and so there would be some areas that will slow down.

Looking at what you're sort of seeing on the table next year, if you go back to a sort of typical seasonality, we should see some pretty strong quarters out of Q2 or Q1, Q2 shouldn't we?

Are you still on the Piling (multiple speakers) talking about the Company as a whole?

On the Piling.

Yes, the Piling does have good backlog and good visibility. We're bidding quite a lot of work interestingly. There's quite a lot of work coming out that it is in the very much larger contracts of CAD20 million and CAD30 million worth of piling on a single project. So we see a strong start to next year and certainly going through into the summer.

Can you elaborate on the Columbia statement you made?

In what way? Columbia is little (multiple speakers) -- just south of here.

Go ahead.

When we bought Cyntech, Cyntech had a contract -- Cyntech does screw piles. They had a contract to supply to a US company some design and initial test piles for a project down in Columbia. And the value that we put on that was less than CAD1 million. I think it was about CAD600,000 to CAD700,000 was what they said it was worth.

And obviously when we were buying Cyntech we didn't really put too much focus on that part of the business being important to us. We were more looking at what we could do with their Piling technology in Canada.

The reason I elaborated on it (inaudible) somewhat to our surprise but through great work by the Cyntech management that came on board with us after we acquired the company, that contract down in Columbia has turned from a CAD600,000 to CAD13 million of signed contracts. It could even go further. But at the present time we have CAD13 million of signed contracts.

And importantly we're not supplying to Columbia. We're supplying to a US base and US owned company that is then doing the supply and installation down in Columbia.

Just one other question, can you just talk about your debt covenants and what the situation is there?

(inaudible) when you just look at our current quarter we're still within our covenants. We're not breaching anything. I think as we look forward into the fourth quarter, without getting into specifics around numbers, which I don't really want to give right any right now. That would have me giving you guidance. I don't want to do that.

We certainly don't believe that will have issues with breaching those covenants as of right now. But clearly we'll monitor it and work closely with our banks, because we do know that there was some risk in our fourth quarter just depending on the activity in things like the weather that is somewhat beyond our control.

I will get back in the queue. Thanks guys.

Bert Powell, BMO Capital Markets.

Thanks. Rod I'm a little bit late on the call, I'm sorry if this is been asked. I just want to go back to the Pipeline business.

My recollection is that as a virtual business where you've said in the past, you own the equipment. It's long been paid for and you have a core team of a few people and you ramp up and down when you have activity.

Can you give us a sense as to what the market value of the equipment would underpin that business? I'm just trying to get a sense for what the book value is on a market basis for that business.

Really, zero. We have some sideburns. I think as I have said before, Noah used them when the flood came. They're that old. But they're like the Woodman's axe. You change the head. You change the handle but it's still a Woodman's axe.

We only own a very few of those. In fact the majority of our equipment when we do a pipeline job is rented, and we swing our equipment in and swing it out as required. I wouldn't put any ascribing value to it. There would be some, but very minimal.

I want to go back to your comments with respect to some of the dynamics around capacity. I know you have said in the last few calls that there is still overcapacity in the oil sands.

But given all the activity level, it's interesting to see that people are having a view that things aren't happening as quickly as you think. You've stated some of it is just delays or timing or engineering, and that that the equipment is people have got to view that what it's worth moving it out of market. So I'm just wondering is there something -- is this something that is a big structural change in the oil sands from your perspective compared to the last few cycles?

The change in the oil sands is very clearly the focus by the large owners to be a lot more introspective on the way to go ahead and release work. The schedule is everything attitude of the 2007, 2008 period has gone and there is a very, very strong cost focus.

Can we do it ourselves? Do we need a contractor? If we are going to get a contractor, have we got it engineered enough to make sure that we know what the costs are going to be and have some cost certainty? So what this has caused is jobs come out and they're delayed while there is more engineering done etc., etc. So that's the environmental change and the business environment change in the oil sands.

We're responding to it. It's just that they haven't just literally moved from the old paradigm to the new paradigm. There's is some gray in between.

So in some places the customers says look I'm going to engineer it more, but, hey, I'd better get going and away you go and you're working hard. So schedule does become important. In other places we're being delayed. So it's a little bit of a mishmash.

It has caused some of our competitors to take equipment out of the market. You have seen in the last little while the contractor shovel capacity go down by about three shovels, which is actually quite a lot. And we know that at least one of our competitors, actually two of our competitors, have moved trucks out of the area. So the oversupply is declining, but there still is some oversupply there.

I just want to key on one of the comments you just made, is -- we're also hearing, like you I guess, is that there is now -- seems to be more of a tendency for the operators to want to own more of their equipment and they're -- and probably less reliant on the contractors. I was just wondering if you could offer new thoughts as to sort of the dynamics there.

That's true. It's a regular cycle in the contracting industry worldwide. The good thing for the contractor is that every owner doesn't go through that cycle at the same time. So, as some build up their fleet and decide they want to own more equipment, then others are going away from that idea because they found it doesn't work. So it does somewhat balance out.

But, yes, it is an issue. We know that one of our clients up in Fort McMurray has decided to take on more equipment themselves, and execute more of the work themselves. That particular client has an immense amount of dirt work to do and particularly related to the tailings issues. And so we still see significant volumes of work available for us on that site.

But, yes, there are a few -- there is one in particular, but some of the clients buying some of the 150 to 100 ton trucks to try and do the work themselves. What tends to happen there is it works out very well for a short while.

Then the difficulty that I run into generally is that they might buy another -- buy a 100-ton truck but they don't buy additional workshop space. And so now that new equipment they've bought has got to fit into the same workshop that they're doing repairs on their 400 ton trucks. And you can imagine which truck -- the production truck versus the ancillary work truck -- gets priority in the workshop, so over a period of time it tends to work out that they find out that it really is not as efficient as they thought it would be. And so the cycle goes around.

So, it sounds like it works out for the equipment sellers.

Yes, I think it does.

Thanks Rod.

Maxim Sytchev, AltaCorp Capital.

Hi good morning. I was wondering, as you drive or as you try to drive asset utilization upward, given the size of your fleet right now, I guess my question is, is the size of the fleet appropriate right now for the amount of work that you see ahead of you, let's say for the next 12 months? Is there any potential I don't know small divestitures that you could do on that front? Or do you feel that you have to keep all that you have right now in-house?

We're looking at our equipment. It's actually not just at the present time. It's a regular thing we do. And so as equipment gets to the point that we feel it's costing (inaudible) maintain than it's returning in running, we will sell it. And that's usually through an auction process.

At the same time, we look at what's the balance of equipment. Is there piece of equipment (inaudible) is not returning -- not getting enough hours on it to return the right return for us?

So recently, for example, we sold one of our EX8000 shovels to Shell. It was on the Shell side. We actually bought (inaudible) service Shell and Shell didn't utilize it as much as we needed it to be utilized, but they still wanted one. So selling it and they bought it.

We've also got some older trucks that are still somewhat useful, but have a propensity to break down and are not good trucks, so we're looking at selling those too. And then when the time comes in the future we will buy some trucks if the market demands it.

Great. But I guess right now given the pipeline of opportunities that you say you don't feel that you have to scale up the size of the fleet, I think that is probably fair to say, right?

No, we don't have any purchases on -- or potential capital purchases on out on the order book at the present time. We don't see the need.

Okay, excellent. Can we come back for a second, too, to the covenants issue? If there was an issue following the March quarter, do you feel that the banks will be cooperative to work with you to resolve this and give you a bit more breathing room, again given that a lot of the stuff is essentially out of your control, whether it is weather-related and so forth?

Maxim, it's hard for me to speculate exactly what the bank would choose to do or not do. But given the good working relationship that we have had with the bank syndicate in the past, the fact that they have supported us through our CNRL challenges over the last year, I don't see any reason why they wouldn't continue to do that.

Absolutely. And then lastly I just wanted to get a clarification on the tailings job that was canceled last minute. So did you say in your prepared remarks that you believe this work is going to be coming back?

Yes. It is work -- we're doing a retaining -- forming retaining areas for tailings. And the volume of tailings that the particular organization produces is such that we have we're very sure that they're going to need additional tailings capacity, probably in the next 12 months.

So, yes, we believe it will be -- it will come back. The indication is sort of April/May 2012 that we'll be working on that -- that we'll have an opportunity to work on that area again.

Okay, excellent. And then lastly on the tailings, do you have a sense right now in terms of how much remediation related business represents for you in the Heavy Construction business? Is it still 5% to 7% or has it grown over the last 12 months?

It is difficult to actually define the remediation work because sometimes it's just heavy earthmoving and we don't (inaudible) actually document it as either being remediation work or overburden work, or it could be overburdened being moved into remediation, etc. So the two sort of blend into each other.

What I will say is that our TEC division, the Tailing and Environmental Construction group, first of all are working over winter, which was something we just didn't expect. And that is involved in working on the dams of one of our clients, and in fact keeping the ice off the dam so they can continue the process of setting up for that particular dam to be recovered over the next -- during the next year.

And we're seeing orders for our skimmers are coming in from two of the clients up there, and orders for our Mudmaster are coming in from two of the clients up in Fort McMurray. So we are seeing a good start. We're working through the winter, but then once the winter is over and heading into the spring and the summer, we're seeing a good kick off to that environmental division next year.

Excellent. Thanks a lot for the color.

Thank you. There are no further questions at this time. I would like to hand the floor back over to management for any closing remarks.

Thank you everybody. We'll be out on the road in New York next week, I believe, so we'll drop in and see anyone that we can. Thanks for coming on the call. That's all.

Thank you. This concludes the North American Energy Partners conference call. You may now disconnect your lines. Thank you all for your participation.