TD They currently have a $33.00 target. GLTA
North American Construction Group Ltd.
(NOA-T, NOA-N) C$31.26 | US$23.25
Suncor Contract Renewal: Much Ado About Nothing
Event
Long-term contracts at Suncor's (SU-T, HOLD, $46.00 target price) Base Mine,
Fort Hills, and Syncrude mines expired in December 2023 (see Exhibit 1), and
management had guided to a renewal by year-end 2023. Separately, Suncor has
stated its ambition to reduce contractor exposure by 20%. In this context, we
have received several inbounds from investors concerned that North American
Construction Group (NACG) has not yet announced a contract renewal.
Impact: POTENTIALLY POSITIVE
TD View on the Suncor Contract Renewal: We can appreciate investor concerns
on this issue, but we believe that a renewal with fair terms to NACG is a highly likely
event and that this renewal will not change management's previously disclosed 2024
EBITDAS guidance of $430 million-$470 million. Consider the following:
Delays are the Norm: Recall that NACG's previous oil sands contract award in
March 2022 (full report) was also delayed six months beyond when management
expected it to be completed. Similarly, NACG's last contract renewal with Suncor
occurred on April 1, 2019, following an expiry at the end of 2018.
NACG and Suncor Fleets Perform Different Functions: NACG is largely focused
on overburden removal, mine infrastructure development, reclamation, and tailing
ponds remediation with its specialized heavy-duty equipment fleet, whereas
Suncor is primarily engaged in ore hauling. These functions require different types
of equipment that are not interchangeable.
There is No Viable Alternative: NACG has one oil sands competitor (KMC Mining,
private). Our understanding is that this competitor is much smaller than NACG
and is already serving Suncor. In this context, we do not believe that it has the
capacity to displace NACG as Suncor's primary contractor.
Contract Terms Likely to Provide Suncor with Greater Optionality: On its Q3/23
conference call, management indicated that the client is "pivoting to a three-year
term with committed overburden volumes for one year".
Trading Opportunity: We remain HOLD-rated based on relative value, but we view
this contract renewal as a positive catalyst.
Q4/23 Results: NACG will report Q4/23 results on March 13, 2024 after market
close, and we expect an update on this issue if a contract is not announced before
the quarter.