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

The pricing environment remains tough, and demand remains stagnant, but 2017 looks promising for Mullen Group Ltd. (TSX:MTL).

| More on:

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!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

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

More on Energy Stocks

Question marks in a pile
Energy Stocks

What’s Going on With Brookfield Renewable Stock?

BEP stock (TSX:BEP.UN) has been stagnating in share price, but there are still many catalysts that should drive the price…

Read more »

oil and gas pipeline
Energy Stocks

A Dividend Giant I’d Buy Over Enbridge Stock Right Now

Sure, Enbridge (TSX:ENB) stock used to be a dividend giant, but I fear that's no longer the case. Yet this…

Read more »

Nuclear power station cooling tower
Energy Stocks

Should Investors Buy the Dip in Cameco Stock?

Cameco (TSX:CCO) stock recently experienced a slight dip, and with earnings around the corner, it might be time to pick…

Read more »

oil and gas pipeline
Energy Stocks

Pipeline to Prosperity: Invest in Enbridge and Pembina Stock

Here's why pipeline companies such as Enbridge and Pembina should be on the shopping list of income investors in July…

Read more »

Oil industry worker works in oilfield
Energy Stocks

If You Invested $1,000 in Headwater Exploration Stock 5 Years Ago, This Is How Much You’d Have Now

Here's why Headwater Exploration (TSX:HWX) stock has been an active investor's dream come true over the past half decade

Read more »

consider the options
Energy Stocks

Gold Stocks vs. Oil Stocks: Where to Invest for the Rest of 2024

Investing in oil and gold stocks can be tricky for the average investor given the cyclicality of these commodities.

Read more »

Silhouette of bull in front of setting sun
Energy Stocks

Here’s the Bull Case Behind Why Suncor Could Surge From Here

Let's dive into the bull case behind Suncor (TSX:SU), and where this Canadian energy giant could be headed into 2025.

Read more »

Oil industry worker works in oilfield
Energy Stocks

3 Energy Stocks to Buy Hand Over Fist in July 2024

Are you looking for a mix of income and capital growth in your portfolio? Here are three energy stocks that…

Read more »