Oilsands CEO stays cheerful
Backlog of projects keeps business on top
Gary Lamphier
The Edmonton Journal
Saturday, November 15, 2008
Last time I sat down with Rod Ruston, CEO of North American Energy Partners, the big oilsands construction firm was flying high.
It had just completed its IPO (initial public offering) on the Toronto and New York stock exchanges, and its shares were trading in the $20 range, giving it a market value of nearly $700 million.
That was in late 2006, 18 months after Ruston -- a career mining exec with decades of front-line experience in Australia, South Africa and Madagascar -- was recruited to run the Spruce Grove-based company.
When I dropped by for a chat this week, it was a far different story. Despite strong revenue and earnings growth over the past couple of years, NAEP's share price has been absolutely crushed. The stock closed Friday at just $3.70 on the Toronto Stock Exchange, close to its recent record low of $3.05. That's more than $20 or 85 per cent below the high of $24-plus, set in July. NAEP's market cap is now just $130 million.
That's not a haircut -- investor slang for a stock that's been clipped in price -- it's more like a beheading. So what happened?
Three things. First, a huge drop in oil prices, which are down $90 US a barrel or 61 per cent since July, closing Friday at $57.04 in New York.
Second, a stock market collapse, with Toronto's main equity index roughly 6,100 points or 40 per cent below its June peak. And third, a series of recently announced project delays in the oilsands, by companies like Suncor and Nexen.
So what's the impact of all this negative news on NAEP's fundamental business outlook? A lot less severe than you might think, says Ruston.
With a work backlog of $900 million, a healthy balance sheet, and lots of oilsands work in the pipeline -- much of it tied to operating oilsands mines, not just proposed future projects -- Ruston says investors have got it all wrong.
They've assumed that the big drop in oil prices means NAEP's business model is dead, he says, but nothing could be further from the truth.
"They think if oil prices are down, we're gone. The thing the market isn't getting is that we're in both mining and construction. So we do all that service work after the construction is completed," he says, from road building to overburden removal and even site reclamation.
"The environment is still robust. We've got Syncrude, Suncor and Albian (part of Shell's Athabasca Oil Sands joint venture project) with fully operational mines," he notes.
"Then we've got (Shell's) Jack Pine mine that's being built, and CNRL's (Horizon) mine about to come online, so it's unstoppable. We've got an enormous volume of work up there."
NAEP also has earnings and revenue growth. For the first half of fiscal 2009, ended Sept. 30, net income totaled $17.9 million or 50 cents a share, versus a net loss of $5.4 million or 15 cents for the prior-year period.
Revenues jumped almost 38 per cent, to $539.3 million, and gross margins reached 17 per cent, up from less than 13 per cent a year ago.
For the full year, ended Mar. 31, 2009, consensus estimates on Bay Street call for earnings of about $1.47 a share on revenues of more than $1.1 billion, up from earnings of $1.11 a share last year on revenues of $981.3 milion.
"I'd say earnings stability is likely, and growth is still possible," says Ruston. The ongoing global credit crunch doesn't appear to be a threat to the company's viability, either.
"Our business is very robust, we're cashed up, we've got good access to cash, and we've got very good finance facilities in place. We've got a revolving credit facility for $125 million which we draw down on sometimes, and we've got cash on our books so we're very comfortable with our cash position."
On the asset side, NAEP has a fleet of equipment that Ruston estimates is worth roughly $400 million, or more than three times the company's entire market cap. And even that's a lowball number, he reckons. The replacement value of the fleet would be about $700 million, he says.
Like many in the oilsands industry, Ruston says the current slowdown is really a blessing. It's helping to bring costs under control, alleviate chronic labour shortages, and allow for more orderly development.
"What people aren't taking into account is that an enormous part of the contributing factor to increased costs was the oil price itself. When I was out on the road two years ago (talking to investors) I said a slowdown in the oilsands would not hurt anybody," says Ruston.
"Instead of jobs being done all on top of each other, they'll be done more sequentially. And when they're done sequentially, you're able to get more effective materials utilization, your purchasing programs are more subdued, and it's done in a more common-sense fashion."
One person who isn't necessarily happy with the slowdown is Mrs. Ruston. Seems she recommended that Ruston consider exercising more of his stock options when the company's shares were trading at much higher levels. He didn't.
"My wife runs my pension fund and she said, 'You know, you've got a lot of options tied up and you should sell some.'
"Instead, I said to my wife, 'No, this is a great buy.'
