OKOTOKS, Alta. – Murray Mullen is more optimistic about Canada’s oil and gas industries than he has been in two years.
The CEO of Mullen Group told analysts during a conference call today that “Today, for the first time in a very long time, I’m beginning to see signs of what I hope will be a period of sustained recovery.”
Mullen was discussing the company’s third quarter results. Revenue was down 15.1%, due to a $35.2 million decline in the oilfield services segment and a $9.8 million drop in the trucking/logistics segment. However, the company grew its net income by 141.1% year-over-year, to $17.6 million, exceeding Bay Street expectations for the second straight quarter.
Mullen said trucking rates continue to be under pressure due to excess capacity but he predicted that will change next year. The trucking/logistics segment now represents two-thirds of Mullen Group’s business.
“Because there has been an influx of cheap money into the transportation sector over the last two years, today we have a situation here capacity exceeds freight demand,” Mullen said. “It’s an ultra-competitive market and pricing pressures are intensifying.”
He predicted carriers unable to adjust their cost structures will have trouble staying in business.
The oilfield services division continued to be hurt by a lack of drilling activity in western Canada.
“The good news is oil and gas prices have recovered quite nicely and it’s reasonable to expect drilling activity will continue to recover from these depressed levels,” Mullen said.
When discussing Q2 results three months ago, Mullen hinted at a recovery and said the time was right to start positioning the company for growth. It quietly made three small tuck-in acquisitions over the past few months “at compelling valuations.”
These included: Motrux, a B.C.-based truckload carrier with 17 owner-operators, which was integrated into Mullen Trucking; Northern Frontier Logistics, previously known as Central Water and Equipment Services, which will be integrated into Mullen’s Canadian Dewatering business; and Calgary-based Caneda Transport, which provides LTL, TL, dedicated and intermodal services throughout Canada and the western US. It runs 55 power units and 110 trailers and will continue on as a standalone business.
Mullen Group sits on more than $261 million in cash and is well positioned to make more acquisitions, Mullen said.
“The amount of deals we’re seeing today is unprecedented,” he said. “We have the balance sheet and we have the opportunities but we want good deals, not just a deal.”
He added the company is likely to pursue more tuck-in acquisitions rather than mega-deals, but said the company is always interested in buying well-run companies. In many cases asset-based trucking companies can be picked up for the value of the assets, he noted.
In addition to higher oil prices – which of late have hovered at around, or slightly higher than $50 per barrel – Mullen said natural gas storage levels have also normalized, providing stronger pricing and potentially leading to more drilling activity.
“Increased drilling in western Canada will help the Alberta economy,” Mullen said. However, he cautioned it’s unlikely mega-projects in the oilsands or major pipeline projects will be started anytime soon.
“There needs to be a sustained period of higher commodity prices before these capital-intensive projects are sanctioned,” he said.
However, he did predict the Alberta economy will strengthen in 2017 and more so in the years to follow. Mullen also predicted the Canadian economy will continue on its current slow growth path. But he said impending fleet failures and consolidation will “set the stage for a rebalancing of the pricing of freight services later in 2017.”
The next few quarters will remain challenging for the trucking/logistics business, Mullen warned.
“We can’t get pricing leverage right now,” he said. “I think pricing leverage starts to come back once a little bit of growth in the economy comes.”
With steadier oil prices and a potential increase in drilling activity, comes wider-spread employment.
“The good news is, people are getting full hours now and that’s good for our people,” he said, adding Grande Prairie employment is pretty much at capacity.
Acknowledging he’s been labeled a pessimist in the past, and justifiably so, Mullen said “I’m more optimistic than I’ve been in two years.”
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