Morningstar DBRS Assigns Issuer Rating of BB (high) With a Stable Trend to North American Construction Group Ltd.

DBRS Limited (Morningstar DBRS) assigned an Issuer Rating of BB (high) with a Stable trend to North American Construction Group Ltd. (NACG or the Company). Concurrently, Morningstar DBRS assigned a provisional credit rating of (P) BB (high) to the Company's proposed $200 million Senior Unsecured Notes (the Proposed Notes), based on a Recovery Rating of RR4.

KEY CREDIT RATING CONSIDERATIONS
The credit ratings are supported by NACG's solid market position as a service provider in the Canadian oil sands as well as its entrance into the more diversified Australian mining services market. The credit ratings reflect NACG's contracted revenue streams, long-term customer relationships, strong safety record, fleet size/telematics program and maintenance capabilities that provide significant barriers to entry, and relatively conservative financial management practices. The credit ratings also reflect the considerable spending requirements related to fleet maintenance, risks associated with weakness in commodity prices, and customer concentration as well as uncertainties around the marketability of assets and future contract growth.

The Proposed Notes will be guaranteed by all material subsidiaries of the Company. The Proposed Notes will be unsecured obligations ranking equal with all existing and future unsecured indebtedness of NACG but will effectively be subordinated to any secured indebtedness of the Company. The proceeds of the Proposed Notes, which are expected to mature in 2030, will be used to repay amounts related to the Company's existing debt obligations. As such, credit metrics are not expected to materially change as a result of the Proposed Notes issuance. The Recovery Rating of RR4 on the Proposed Notes was based on the liquidation value approach, which takes into account the Company's strong asset base.

CREDIT RATING DRIVERS
Morningstar DBRS could take a positive credit rating action should NACG materially strengthen its business risk profile, primarily through increasing its size, customers, and resource diversification, without necessarily requiring an improvement in key credit metrics to do so. Conversely, should key credit metrics materially deteriorate in aggregate for a sustained period (i.e., debt-to-EBITDA increase toward 3.5 times (x)) because of weaker-than-expected operating performance and/or more aggressive financial management, the credit ratings could be pressured.

EARNINGS OUTLOOK
Morningstar DBRS anticipates NACG's earnings profile will steadily improve, benefitting from its record backlog, recent contract growth in Australia, further opportunities to transfer underutilized Canadian assets, and broader diversification into heavy civil construction contracts over the medium term.

Morningstar DBRS forecast revenues of approximately $1.2 billion for 2025, versus $1.16 billion in 2024, excluding contributions from joint ventures and affiliates. Looking past 2025, Morningstar DBRS expects the Company's revenue growth to be primarily driven by growth in Australia and key contract renewals. Morningstar DBRS expect 2025 EBITDA margins will remain similar to 2024, with the Company continuing to manage project pursuits, weather-related impacts, and costly equipment transfers with cost efficiencies gained from the enterprise resource planning system rollout in Australia. As such, Morningstar DBRS forecasts adjusted EBITDA to be approximately $360 million for 2025 versus $330 million in 2024, and approach $400 million in the near term.

FINANCIAL OUTLOOK
Morningstar DBRS expects NACG's financial profile to gradually improve over the near term as the Company focuses on debt repayment following the acquisition of the Mackeller Group in 2023. Morningstar DBRS expects the Company's considerable capital expenditure (capex) requirements for fleet maintenance and to support contract growth will largely be covered by operating cash flows. Morningstar DBRS forecasts cash flow from operations (before changes in working capital and principal lease payments to continue to grow in line with earnings. Capex is expected to remain elevated in 2025 to support new project wins, resulting in a neutral free cash flow position. Morningstar DBRS expects leverage to improve to roughly 2.6x in 2025 from 3.0x in 2024, and gradually reduce thereafter.

CREDIT RATING RATIONALE
Comprehensive Business Risk Assessment (CBRA): NACG's CBRA of BB/BBL reflects the Company's solid market position in its relatively niche markets, contracted revenues streams, strong safety record, and considerable heavy equipment holdings. The CBRA also reflects the substantial spending requirements related to fleet maintenance and contract growth, risks associated with weakness in commodity prices, and customer concentration as well as uncertainties around marketability of assets and future contract growth.

Comprehensive Financial Risk Assessment (CFRA): NACG's CFRA of BBBH reflects the Company's relatively conservative financial management practices (i.e., debt-to-EBTIDA of approximately 2.6x in 2025).

Intrinsic Assessment (IA): The IA of BBH is within the Intrinsic Assessment range and is based on the CBRA and CFRA, and taking into consideration peer comparisons, among other factors.

Additional Considerations: The credit ratings include no further negative or positive adjustments related to additional considerations.

Recovery Rating: The Recovery Rating of RR4 on the Senior Unsecured Notes reflects the secured revolver's first-lien position.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
The Environmental factor had a relevant effect on the credit analysis.

As a service provider to large oil, natural gas, and resource companies, NACG is subject to downstream and upstream customer environmental regulations and compliance requirements relating to carbon dioxide emissions. Current regulations could tighten further in the future, which may cause significant financial burden for the Company.

There were no Social or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

Further details on the Issuer's Intrinsic Assessment can be found at https://dbrs.morningstar.com/research/452525

Notes:
All figures are in Canadian dollars unless otherwise noted.

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in Services Industries (February 3, 2025), https://dbrs.morningstar.com/research/447184

Morningstar DBRS credit ratings may use of one or more sections of the Morningstar DBRS Global Corporate Criteria (February 3, 2025; https://dbrs.morningstar.com/research/447186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info-DBRS@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

Morningstar DBRS notes that this Press Release was updated on May 5, 2025 to include information on solicitation status.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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