Mullen Group Ltd. (TSX: MTL) is one of Canada’s largest specialized oilfield services and transportation/logistics companies, made up of 26 independently operated businesses.
In the oilfield services segment, which accounts for approximately 65% of EBITDA, Mullen offers a broad range of specialized services, such as hauling crude oil, rig moving, drilling mud storage, warehousing, and handling and storage of oilfield fluids. The trucking/logistics segment, which accounts for the remainder of EBITDA, offers general freight services to customers in Canada, the United States, and Mexico.
Along with many others, this is a company that is going through hard times due to the difficult economic environment. However, this is exactly where the opportunity lies, because Mullen Group is not the only company going through difficult times, but it is relatively unique in its industry due to its financial strength and flexibility and its diversity. It is this that gives it the opportunities that, in my view, will enable it to emerge from this difficult time a bigger and stronger company.
Strong balance sheet and safe dividend
Mullen currently has $91 million in cash, with a debt-to-total capitalization ratio of 31%. The company recently raised $400 million debt and now has over $500 million in financial flexibility at its disposal to invest in growth.
While the company’s dividend and capital expenditures were not fully covered by cash flow generation in recent results, Mullen is seeking growth opportunities in order to grow cash flow. Furthermore, the company has more than doubled its dividend in the last four years and has taken steps to take a lot of the cyclicality out of its business and created a diversified business model that has achieved relatively steady margins for a company in its businesses.
In the oilfield services segment, for example, it has moved away from drill rig moving toward growing the pipeline, specialized service and fluid hauling operations, all of which are less cyclical and experiencing stronger and steadier long-term growth rates at this time.
Operating costs
Fuel is 8.5% of operating costs. With Brent oil down to less than $88 per barrel and down 25% since June, this will have a positive impact on companies such as Mullen Group as fuel costs decline. Although the magnitude of the decline in gasoline prices has not been as extreme, they have started to move lower. And with the risk of crude declining further, there may be bigger relief at the pump going forward.
Acquisitions
Mullen has the financial strength and inclination to acquire in order to grow the business, seeing that organic growth will be more difficult in this low-growth environment. As such, Mullen’s strategy in the next few years will be highly focused on profitable growth through acquisitions. It will focus on the trucking industry and continue to invest only in accretive acquisitions. The company is no stranger to this strategy and has a good track record of making highly profitable acquisitions in the past. Longer term, Mullen will benefit from the growth of the LNG and water handling industries in Canada.
With valuations in the sector and the market in general falling, it will be a good time for Mullen to pick up some assets. As management has stated, consolidation needs to happen in the trucking industry in order to find synergies and greater scale. On the oilfield services side, management will get more aggressive with acquisitions when there is more clarity that pipelines will be built.
Kriska: A new transportation and logistics company
Mullen recently reached an agreement with privately held Kriska Holdings Ltd. to invest in the creation of Kriska Transportation, which will be a new growth oriented transportation and logistics company. This agreement will position Mullen to participate more fully in the consolidation in the Ontario trucking industry.
In times of economic weakness and stock market corrections, investors can scoop up quality companies that will take advantage of the weakness and create opportunity. Mullen is one such company.
