Mullen Group Ltd. (TSX:MTL) shares are rallying today, up more than 2% at the time of writing, as the company announced its business plan for 2018 and instituted a 67% increase in its annual dividend to $0.60 per share.
So, what does this mean for investors?
Well, this is clearly a vote of confidence by the company — confidence in the industry dynamics as well as confidence in the company.
Here are the reasons why I think Mullen Group is a very attractive buy at these levels.
First is the dividend. The dividend yield on the stock is now a very attractive 3.9%, and this is supported by cash flows and by business fundamentals.
The company’s debt-to-equity ratio is 54%, leaving it with financial flexibility, and the payout ratio is strong. In the first nine months of 2017, the company generated $83 million in cash from operating activities. Next year’s dividend payments will total just over $61 million.
Second, the company is seeing business fundamentals stabilize and improve.
In the third quarter, we saw the third consecutive quarter of revenue growth in both the company’s operating segments, and we continue to see evidence that the company is on the road to recovery.
Third-quarter revenue increased 9.8%, as the trucking segment increased 10% due mainly to acquisitions, and the oilfield services segment increased 7.8% due to increased drilling activity.
Cash generated from operating activities during the most recent quarter, the third quarter of 2017, was pretty much flat compared to last year.
It doesn’t seem like much, but it is a lot when we consider that for the first nine months of the year, cash flow declined a whopping 34%.
As a reminder, the oilfield services segment represents 33% of total revenue for the company, with the trucking and logistics segment accounting for the remainder.
The stock has a year-to-date return of -31%, mostly as a result of its oilfield services segment being hit by the relatively weak and uncertain oil and gas environment during this period. And herein lies the opportunity.
For a sense of the upside that exists with oil services stocks, here is a chart that details different stocks in the sector and the lows they were trading at in the last cycle, and the upside that materialized.
| Feb 2009 | May 2014 | Return | |
| Mullen | $8.60 | $30.72 | 257.2% |
| Pason Systems Inc. (TSX:PSI) | $10.17 | $30.00 | 195% |
| Trican Well Services Ltd. (TSX:TCW) | $6.95 | $25.01 | 259.9% |
| Precision Drilling Corp. (TSX:PD)(NYSE:PDS) | $2.76 | $14.16 | 413% |
Precision Drilling is another company that has good leverage to a North American recovery in drilling. Its shares got killed in the last two years and fell to approximately $3 from well above $14 in 2014 and are now trading at $3.30 — a fall of more than 70%.
While the company reported a loss per share in the third quarter, the loss was smaller than expected, and it was 44% better than last year (a loss of $0.07 versus $0.16 last year).
Revenue increased 47%, and the company generated $37 million in cash flow.
The company had more than double the number of rigs working than it had last year, and pricing remained firm, as the sector continued to ramp up.
