Executive Summary / Key Takeaways

• Strategic Diversification Fuels Growth: North American Construction Group ($NOA) is strategically transforming from a Canada-centric oil sands player into a diversified heavy construction and mining services provider with significant growth in Australia and a burgeoning civil infrastructure segment. This diversification, particularly through the MacKellar Group acquisition, is a core driver of its long-term investment thesis.
• Operational Resilience Amidst Headwinds: Despite recent operational challenges in Q1 and Q2 2025, including adverse weather, labor constraints in Australia, and oil sands demand volatility, the company has demonstrated resilience, implementing corrective measures and maintaining a positive outlook for H2 2025 and beyond.
• Robust Backlog and Future Visibility: A record $4.0 billion contractual backlog, including a $2.0 billion, five-year extension in Queensland, Australia, provides exceptional revenue visibility and a solid foundation for anticipated organic revenue growth of 5% to 10% annually.
• Disciplined Capital Allocation and Improving Financials: While Q2 2025 saw a dip in profitability and free cash flow, management is committed to disciplined capital allocation, including share repurchases and debt reduction, with expectations for free cash flow to return to historical levels in 2026, supporting shareholder returns.
• Competitive Edge Through Safety and Expertise: NOA differentiates itself through an industry-leading safety record and specialized operational expertise in complex mining and heavy civil projects, which translates into contract wins, lower downtime, and a strong competitive position against rivals.

A Foundation Forged in Heavy Industry: NOA's Strategic Evolution

North American Construction Group Ltd. ($NOA) has a rich history spanning over seven decades, continuously providing essential mining and heavy construction services across Canada, the United States, and Australia. This deep operational heritage, dating back to 1953, has established NOA as a critical partner in resource development and industrial construction. The company's strategic evolution, particularly over the last five years, has been marked by a concerted drive towards diversification and operational excellence, yielding a 20% annual growth rate. This period saw the successful execution of its largest infrastructure project, the Fargo flood diversion, and significant joint ventures, alongside strategic acquisitions like DGI in Australia and ML Northern in Canada.

A pivotal moment in NOA's transformation was the October 2023 acquisition of the MacKellar Group in Australia. This move was not merely an expansion but a strategic pivot, positioning Australia as a primary growth engine and a key component of NOA's long-term diversification strategy. The Australian operations, combined with DGI, have more than doubled revenue since Q2 2022, reaching $168.1 million in Q2 2025. This segment is now expected to generate 60% of the company's earnings before interest and tax in 2025, underscoring its strategic importance.

The company's overarching strategy is built on three essential characteristics: scale, diversification, and agility. This framework allows NOA to plan and operate with a view toward long-term averages, recognizing that quarterly deviations are inevitable. When challenges arise, as they did in Q2 2025, the company responds swiftly and decisively, remaining focused on its strategic goals. This approach aims to enhance operational diversification, improve fleet utilization, and ultimately drive sustainable growth and shareholder value.

Competitive Landscape and Differentiated Technology

NOA operates in a competitive landscape populated by both direct and indirect rivals in heavy construction, mining, and infrastructure services. Key publicly traded direct competitors include MYR Group Inc. (MYRG), Quanta Services Inc. (PWR), MasTec Inc. (MTZ), and Sterling Construction Company Inc. (STRL). While these companies offer overlapping services, NOA carves out its niche through specialized expertise, an extensive heavy equipment fleet, and a relentless focus on safety.

NOA's primary competitive advantage lies in its deep operational expertise in complex mining environments and its industry-leading safety record. The company boasts 10 years of industry-leading safety results, demonstrating a total recordable rate consistently below its target frequency of 0.5, even as exposure hours have increased more than fourfold. This strong safety culture differentiates NOA from competitors, translating directly into contract wins, reduced downtime, higher revenue, and lower costs. Joseph Lambert, President and CEO, emphasizes that "Unlike others, NACG can demonstrate 10 years of industry-leading results... Importantly, for investors, these facts readily show our customers what a strong safety culture looks like and differentiate us from our competitors. This translates to contract wins, lower downtime, higher revenue and lower costs."

Technologically, NOA leverages advanced equipment telematics and real-time machine health and production monitoring across its fleet. These technologies provide critical insights into equipment performance, enabling predictive maintenance, optimizing utilization, and extending asset life. While specific quantifiable benefits like "superior energy yield" or "lower degradation rate" are not detailed, the company's commitment to these tools aims to improve cost efficiency and equipment utilization. For instance, the company has expanded partnerships with OEM and dealer networks to improve component reliability and fleet uptime, with OEM dealers increasing critical component inventory to reduce customer downtime. This strategic collaboration, including a partnership with its Caterpillar (CAT) dealer for component remanufacturing, directly addresses component reliability issues and supports the company's in-house maintenance capabilities.

Compared to its rivals, NOA's specialized mining and equipment maintenance expertise provides a unique value proposition. While companies like MYRG and Quanta Services may have broader market positioning in electrical and utility infrastructure, NOA's strengths in fleet management and on-site support lead to superior operational efficiency for mining-specific projects. Its long-term customer relationships, particularly in resource sectors, foster robust growth and capital efficiency, offering more stable cash flow compared to competitors whose project fluctuations might be more pronounced. However, NOA's concentration in mining sectors could be a vulnerability if demand weakens, contrasting with the more diversified strategies of some larger competitors.

Financial Performance: Resilience Under Pressure

NOA's recent financial performance reflects a period of strong revenue growth tempered by operational challenges. In the second quarter of 2025, combined revenue increased by 12% year-over-year to $370.6 million. This growth was primarily driven by the Heavy Equipment - Australia segment, which saw a 14% increase in revenue, and the Heavy Equipment - Canada segment, which grew by 20%. The MacKellar Group, a key part of the Australian operations, generated a record $60 million in revenue in June alone.

Despite this top-line strength, profitability metrics in Q2 2025 fell short of expectations. Adjusted EBITDA decreased by 12% to $80.1 million, and the adjusted EBITDA margin dropped to 21.6% from 27.6% in Q2 2024. This decline was attributed to a "distinct combination of operational headwinds". These included a constrained labor market in Australia leading to higher subcontractor costs, an abrupt and unplanned demand reduction at a major Canadian oil sands site causing inefficiencies, and a $7.7 million cumulative catch-up reduction in equity earnings from the Fargo joint venture due to a claim settlement and revised project plan. Excluding these abnormal disruptions, management indicated that EBITDA would have been well above $100 million, with margins closer to the typical 27% to 28% run rate observed since the MacKellar acquisition.

For the six months ended June 30, 2025, gross profit was $73.7 million with an 11.1% margin, down from $103.9 million and an 18.1% margin in the prior year period. Depreciation also increased, reaching 17% of revenue in Q2 2025, up from 15.6% in Q2 2024, largely due to fleet expansion in Australia and early component failures in Canada during Q1 2025. Adjusted EPS for Q2 2025 was $0.02, significantly lower than $0.80 in Q2 2024, reflecting the impact of these operational inefficiencies on the bottom line.

Liquidity remains robust, with $79 million in cash and $234.1 million in unused Credit Facility availability as of June 30, 2025, totaling $313.2 million in liquidity. The company also completed a $225 million private placement of senior unsecured notes in May 2025, which was used to repay existing Credit Facility debt and for general corporate purposes. Net debt ended Q2 2025 at $897 million, with a net debt leverage of 2.2x and senior secured debt leverage of 1.5x. The company remains in compliance with its Credit Facility covenants, demonstrating sound financial management despite the quarterly challenges.

Outlook and Strategic Initiatives

NOA's outlook for the second half of 2025 remains positive, with management confident in delivering results consistent with original expectations, aside from the oil sands business. Corrective measures are actively underway to address the Q2 setbacks. In Australia, intensified skilled trades recruitment and training are expected to mitigate subcontractor reliance, with reductions ahead of schedule through July. Canadian customer demand trends are consistent with previous projections, and enhanced client engagement is driving better operational planning.

The company's updated guidance for the second half of 2025 reflects these adjustments:

• Combined Revenue: $700 - $750 million (unchanged)
• Adjusted EBITDA: $190 - $210 million (revised from $205 - $225 million)
• Adjusted EPS: $1.40 - $1.60 (revised from $1.95 - $2.15)
• Free Cash Flow: $95 - $105 million (unchanged)
• Net Debt Leverage Target: 2.1x (revised from 1.7x)

The negative impact on H2 EBITDA and EPS is primarily due to increased costs in the oil sands from demand volatility and near-term costs on largest truck fleets, although revenue in this segment is expected to be consistent with original expectations. Free cash flow, however, is expected to remain strong due to anticipated working capital improvements.

Beyond 2025, NOA's long-term growth targets remain intact, projecting organic revenue growth of 5% to 10% annually. This growth will be underpinned by continued Australian expansion and new infrastructure projects. The company aims to grow its civil infrastructure business to approximately 25% of its overall operations by 2028, driven by significant opportunities in aging infrastructure, energy transition, and climate resiliency projects, particularly in the U.S. and Australia. To support this, NOA has hired a VP of Infrastructure and Growth, and a strong bid pipeline of $15 billion, including $2 billion in top 20 infrastructure projects, supports this ambition.

Risks and Challenges

While NOA's strategic direction is compelling, several risks warrant investor attention. Operational headwinds, such as the constrained labor market in Australia and demand volatility in the Canadian oil sands, can impact profitability, as demonstrated in Q2 2025. Weather variability, a recurring challenge, can lead to lower equipment utilization and increased costs for site cleanup and maintenance, particularly in Australia's rainy season and Canada's extreme cold.

The company also faces risks related to component reliability, as evidenced by early component failures in Canada that affected Q1 2025 margins. While partnerships with OEMs are being expanded to mitigate this, it remains an ongoing operational focus. Furthermore, the potential impact of U.S. tariffs, though currently estimated to raise internal costs by less than one-half of one percent, could evolve and affect supply chains or project economics.

A material weakness in internal control over financial reporting related to inventory count controls within the MacKellar entities was identified and remains unremediated as of June 30, 2025. While this has not resulted in material misstatements, it highlights the ongoing integration efforts and the need for robust internal systems as the company expands.

Conclusion

North American Construction Group is a company in dynamic transition, leveraging its deep operational history and expertise to pursue a compelling growth and diversification strategy. Despite recent operational challenges that impacted short-term profitability, the company's underlying narrative of expanding into high-growth Australian markets and burgeoning civil infrastructure opportunities remains robust. The record $4.0 billion backlog, anchored by the $2.0 billion Queensland contract, provides significant revenue visibility and a strong foundation for future growth.

NOA's commitment to operational excellence, underpinned by its industry-leading safety record and strategic investments in technology like telematics, provides a durable competitive advantage. While the path to diversification involves inherent risks, management's proactive measures to address headwinds and its disciplined approach to capital allocation, including share repurchases, underscore a clear focus on long-term shareholder value. As NOA continues to integrate its acquisitions, optimize its fleet, and expand its footprint, its ability to translate strategic vision into consistent financial performance will be key to unearthing its full value for investors.