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Why Mullen Group Ltd. Shares Got Hit Yesterday and Why Patient Investors Should Buy

While Mullen Group Ltd. (TSX:MTL) reported fourth-quarter 2016 results that were disappointing and below most analysts’ estimates, management pointed out some very encouraging trends in their discussion that investors need to know.

In the first quarter of 2017, activity in the oil and gas industry has begun to improve. In fact, signs of the beginning of a recovery were already creeping into December stats; the December rig count was above prior-year levels. Drilling in January increased 50%, and in February, the Petroleum Services Association of Canada (PSAC) increased its estimate for wells drilled in 2017 by 23% to 975 wells.

So, it looks like we are starting to see signs of a recovery in demand, and with that, we can expect upward pricing pressure, at least to some extent.

And while we are not in the game of timing a recovery, one thing is sure, and that is that once this recovery happens, the upside to Mullen’s shares is huge. As evidence of this, let’s look back at the history of share price movements of Mullen as well as other companies in the oilfield-services industry.

Although I think it’s fair to say that this downturn has been the worst one in decades, we can look back to the most recent downturn in 2009 for an indication of the volatility of the shares of oilfield-service companies. The following table shows the return of a few of the oil services stocks from worse point of the 2009 downturn to the spring of 2014, when things were looking good and oil prices were still well over $100.

Company Feb 09  May 14 Return
Mullen $8.60 $30.72 257.2%
Pason Systems Inc. (TSX:PSI) $10.17 $30.00 195.0%
Trican Well Services Ltd. (TSX:TCW) $6.95 $25.01 259.9%
Precision Drilling Corp. (TSX:PD) $2.76 $14.16 413.0%

Back to Mullen Group, I believe investors can be patient with this name and wait for the upside in the shares that will come with a recovery because of three main reasons.

Firstly, the company’s balance sheet is strong with $273 million in cash and $75 million in an unused credit facility. Secondly, the company will continue to make acquisitions to strengthen its foothold in the industry. Thirdly, the company’s diversified business means that it is somewhat buffered from the cyclicality of the oilfield-services industry, and that it has a greater ability to generate free cash flow even in hard times.

Investors can expect a very interesting year for this company. And while a stock like this should be a part of a well-diversified portfolio, it sure is a good way to add some torque and upside!

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Fool contributor Karen Thomas owns shares of MULLEN GROUP LTD. and PRECISION DRILLING CORPORATION.

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