Mullen Group Ltd.
TSX : MTL

Mullen Group Ltd.

October 22, 2014 18:14 ET

Mullen Group Ltd. Reports Third Quarter Financial Results and Closes Private Placement Debt Financing

OKOTOKS, ALBERTA--(Marketwired - Oct. 22, 2014) - Mullen Group Ltd. (TSX:MTL) ("Mullen Group" and/or the "Corporation"), one of Canada's largest and most diversified oilfield services and transportation companies, today reported its financial and operating results for the period ended September 30, 2014, with comparisons to the same period last year.

Key financial highlights for the third quarter of 2014 and 2013 were as follows:

HIGHLIGHTS
(unaudited)
($ millions)
Three month periods ended
September 30
Nine month periods ended
September 30
2014 2013 Change 2014 2013 Change
$ $ % $ $ %
Revenue
Oilfield Services 210.8 229.0 (7.9 ) 659.3 660.2 (0.1 )
Trucking/Logistics 146.7 145.6 0.8 424.8 412.0 3.1
Corporate and intersegment eliminations (0.2 ) (0.6 ) (66.7 ) (1.4 ) (2.4 ) (41.7 )
Total Revenue 357.3 374.0 (4.5 ) 1,082.7 1,069.8 1.2
Operating Income (1)
Oilfield Services 51.8 60.2 (14.0 ) 155.3 161.8 (4.0 )
Trucking/Logistics 26.0 26.7 (2.6 ) 68.2 70.9 (3.8 )
Corporate (1.2 ) (1.1 ) 9.1 (3.7 ) (3.1 ) 19.4
Total Operating Income 76.6 85.8 (10.7 ) 219.8 229.6 (4.3 )
Net Income 10.5 51.2 (79.5 ) 72.4 123.0 (41.1 )
Net Income - adjusted (1) 36.4 43.1 (15.5 ) 98.7 109.5 (9.9 )
(1) Refer to notes section of Summary

For the three month period ended September 30, 2014, Mullen Group generated revenue of $357.3 million, operating income of $76.6 million and net cash from operations of $51.0 million. During the quarter Mullen Group paid dividends of $27.5 million, incurred net capital expenditures of $24.7 million, paid interest obligations of $3.6 million and purchased investments of $3.5 million.

Consolidated revenue in the third quarter decreased by $16.7 million, or 4.5 percent, to $357.3 million as compared to $374.0 million in 2013. The decrease in revenue was directly attributable to the Oilfield Services segment, which decreased by $18.2 million, or 7.9 percent, to $210.8 million as compared to $229.0 million in the same period one year earlier. The decrease in segment revenue was primarily due to the decrease in revenue by those Operating Entities involved in the transportation of fluids and servicing of wells as well as the anticipated decline in revenue related to large diameter pipeline construction projects. Revenue in the Trucking/Logistics segment increased by $1.1 million, or 0.8 percent, to $146.7 million from $145.6 million primarily due to the greater demand for general freight services being offset by lower demand for pneumatic bulk transportation services resulting from the completion of a large construction project that occurred in 2013 and a decline in demand for heavy haul freight services in western Canada.

Mullen Group generated operating income for the three month period ended September 30, 2014, of $76.6 million, a decrease of $9.2 million or 10.7 percent compared to the $85.8 million generated in 2013. The decrease of $9.2 million was due to the combination of an $8.4 million decrease in the Oilfield Services segment, a $0.7 million decrease in the Trucking/Logistics segment as well as an increase in Corporate costs that rose by $0.1 million on a year over year basis. As a percentage of consolidated revenue, operating income decreased to 21.4 percent as compared to 22.9 percent in 2013 primarily due to a reduction in margin experienced by the Oilfield Services segment. Overall, margins came under pressure during the quarter, however, remained consistent when compared to the average third quarter margin experienced over the most recent five year period.

In the third quarter of 2014, Mullen Group generated net income of $10.5 million, or $0.11 per share, a decrease of $40.7 million, or 79.5 percent compared to $51.2 million, or $0.56 per share in 2013. The $40.7 million decrease in net income was mainly attributable to a $19.0 million one-time expense related to the prepayment of the Series A and Series B Notes, a $15.2 million negative variance in net unrealized foreign exchange, a $9.2 million decrease in operating income and a $7.1 million negative variance in the fair value of investments. These decreases were partially offset by a $9.0 million reduction in income tax expense. Adjusting Mullen Group's net income and earnings per share to eliminate the impact of the one-time expense related to the prepayment of the Series A and Series B Notes, the net unrealized foreign exchange gains and losses and the change in fair value of investments during the third quarter of 2014 resulted in adjusted net income of $36.4 million and adjusted earnings per share of $0.40, as compared to $43.1 million and $0.47 per share in 2013, respectively. These adjustments more clearly reflect earnings from an operating perspective.

"While we are disappointed with our third quarter performance the fact remains that our core business continues to generate solid results particularly giving consideration to the overall economic conditions in Canada, which is stable but certainly not showing any real growth, accompanied by the fact that the oil and gas industry in western Canada is not investing with the same intensity as in prior years. There were certain pockets of activity such as oil and gas drilling, but the reality is that markets are very competitive. Our results reflect this fact. In addition, when comparing our results to last year, it is important to note that last year's results were a record for the third quarter. As such we had some pretty difficult comparisons to match up against. It is also worth noting that we refrained from pursuing acquisitions, principally due to valuation concerns. We remained disciplined in terms of our allocation of shareholders' capital opting to take a longer term view of the markets," commented Mr. Murray K. Mullen, Chairman, Chief Executive Officer and President.

Mullen Group's consolidated revenue in the first nine months of 2014 increased by $12.9 million, or 1.2 percent, to $1,082.7 million as compared to $1,069.8 million in 2013. The increase in revenue was directly attributable to the Trucking/Logistics segment, which increased by $12.8 million, or 3.1 percent, to $424.8 million from $412.0 million in the same period one year earlier. This increase was largely due to the $15.3 million of incremental revenue resulting from the acquisition of Jay's Moving & Storage Ltd. and a $3.9 million increase in fuel surcharge revenue. These increases were partially offset by decreased demand for construction related services in northern Manitoba, over-dimensional and heavy haul freight services in western Canada and lower demand for pneumatic bulk transportation services resulting from the completion of a large construction project in 2013. The Oilfield Services segment experienced a decrease in revenue of $0.9 million, or 0.1 percent, to $659.3 million as compared to $660.2 million in 2013. This decrease was mainly due to a reduction in demand for specialized transportation services to the oil sands being somewhat offset by a modest increase in drilling activity in western Canada and its impact on those Operating Entities most directly tied to oil and natural gas drilling activity.

Operating income for the first nine months of 2014 decreased to $219.8 million, or 4.3 percent, as compared to $229.6 million generated in the same period last year. The decrease of $9.8 million was due to the Oilfield Services segment that experienced a $6.5 million decrease in operating income and the Trucking/Logistics segment that experienced a $2.7 million decrease in operating income. In addition, Corporate costs rose by $0.6 million on a year over year basis. As a percentage of revenue, operating income decreased to 20.3 percent as compared to 21.5 percent in 2013. This 1.2 percent decrease in operating margin was due to a generally more competitive environment.

Net income in the first nine months of 2014 decreased to $72.4 million, or 41.1 percent, as compared to $123.0 million in 2013. The decrease of $50.6 million was mainly attributable to a $27.8 million negative variance in the fair value of investments, a $19.0 million one-time expense related to the prepayment of the Series A and Series B Notes, a $9.8 million decrease in operating income, and a $3.4 million increase in the loss on sale of property, plant and equipment. These decreases were offset by an $11.5 million reduction in income tax expense. Mullen Group's adjusted net income and earnings per share in the first nine months of 2014 was $98.7 million and $1.08 per share, as compared to $109.5 million and $1.22 per share in 2013, respectively.

Also today, Mullen Group closed the previous announced offering of senior unsecured notes on a private placement basis with a principal amount of $400.0 million, consisting of U.S. $229.0 million and Canadian $171.0 million (the "2014 Notes"). The 2014 Notes have an average term of 11 years and a weighted average fixed interest rate of approximately 3.95 percent per annum. Mullen Group intends to use a portion of the proceeds to repay portions of its existing private placement debt in the fourth quarter. Specifically, Mullen Group intends to repay its Series A (U.S. $100.0 million) and Series B (U.S. $50.0 million) Notes which will reduce its weighted average interest rate to 4.43 percent from 6.17 percent and to 4.80 percent from 5.65 percent on its U.S. and Canadian dollar denominated debt, respectively. In conjunction with repaying the Series A and Series B Notes, Mullen Group will be required to make a one-time $19.0 million payment to the Series A and Series B noteholders. This $19.0 million payment is a direct result of Mullen Group's decision to prepay the Series A and Series B Notes prior to maturity and consists of the net present value of the future interest payments on such notes that would have otherwise been paid to the noteholders. This $19.0 million payment was recognized as an expense in the third quarter of 2014 within finance costs in the statement of comprehensive income. Mullen Group also entered into cross-currency swap contracts to swap the principal portion of the U.S. $229.0 million into Canadian dollars at foreign exchange rates of $1.1047 and $1.1148 to mitigate its exposure to foreign exchange risk.

"These are uncertain times for Canada's energy sector. Commodity prices have adjusted significantly over the past few weeks, reflecting slowing demand at a time when supply is expanding. While the duration of the current pricing environment is open for debate the reality is that the risks associated with the oil and gas industry are heightened. Canada also remains at a crossroads in terms of our energy policy. The United States, currently Canada's only foreign buyer for crude oil and natural gas, is expanding production levels at an unprecedented pace, driven by multi-stage fracturing techniques which have unlocked massive shale deposits for both commodities. The choices for Canada's oil and gas industry are few; either we as Canadians support the development of new pipelines to our tidewater ports providing access to new markets or capital investment will decline. Our view is that in the absence of any real progress on the regulatory approval process the industry is vulnerable to a slow down. At Mullen Group we have already taken proactive measures to protect our shareholders and our company from any potential slowdown. This past quarter we monetized non core assets through the sale of older equipment, when buyers were in a buying mode. We also negotiated the sale of a large piece of land in Edmonton, Alberta, which was acquired as part of the Pe Ben Oilfield Services Ltd. transaction in 2006, for total proceeds of $31.0 million. We have slowed capital expenditures in our Oilfield Services segment until we see further evidence that the markets have stabilized. In addition, we will close the long-term private debt transaction this week. The net affect of these initiatives is really twofold. Firstly, our balance sheet has been strengthened by the long-term funding arrangement at very attractive interest rates. Secondly, Mullen Group will have cash reserves in excess of $340.0 million, funds that will be used primarily for acquisitions. However, we will stay disciplined with our shareholders' money, meaning that any acquisition must meet our strategic objectives and valuation criteria," added Mr. Mullen.

A summary of Mullen Group's results for the three and nine month periods ended September 30, 2014 and 2013 are as follows:

SUMMARY
(unaudited)
($ millions, except per share amounts)
Three month periods ended
September 30
Nine month periods ended
September 30
2014 2013 Change 2014 2013 Change
$ $ % $ $ %
Revenue 357.3 374.0 (4.5 ) 1,082.7 1,069.8 1.2
Operating income(1) 76.6 85.8 (10.7 ) 219.8 229.6 (4.3 )
Net unrealized foreign exchange loss (gain) 10.1 (5.1 ) (298.0 ) 10.9 8.3 31.3
Decrease (increase) in fair value of investments 2.8 (4.3 ) (165.1 ) 2.7 (25.1 ) (110.8 )
Net income 10.5 51.2 (79.5 ) 72.4 123.0 (41.1 )
Net income - adjusted(2) 36.4 43.1 (15.5 ) 98.7 109.5 (9.9 )
Earnings per share(3) 0.11 0.56 (80.4 ) 0.79 1.37 (42.3 )
Earnings per share - adjusted(2) 0.40 0.47 (14.9 ) 1.08 1.22 (11.5 )
Net cash from operating activities 51.0 54.3 (6.1 ) 169.5 146.8 15.5
Net cash from operating activities per share(3) 0.56 0.60 (6.7 ) 1.86 1.64 13.4
Cash dividends declared per Common Share 0.30 0.30 - 0.90 0.90 -
Notes:
(1) Operating income is defined as net income before depreciation on property, plant and equipment, amortization of intangible assets, finance costs, net unrealized foreign exchange gains and losses, other (income) expense and income taxes.
(2) Net income - adjusted and earnings per share - adjusted are calculated by adjusting net income and basic earnings per share by the impact of the one-time expense related to the prepayment of the Series A and Series B Notes, the net unrealized foreign exchange gains and losses and the change in fair value of investments.
(3) Earnings per share and net cash from operating activities per share are calculated based on the weighted average number of Common Shares outstanding for the period.
Operating income, net income - adjusted and earnings per share - adjusted are not recognized terms under IFRS and do not have standardized meanings prescribed by IFRS. Management believes these measures are useful supplemental measures. Investors should be cautioned that these indicators should not replace net income and earnings per share as an indicator of performance.

This news release may contain forward-looking statements that are subject to risk factors associated with the oil and natural gas business and the overall economy. Mullen Group believes that the expectations reflected in this news release are reasonable, but results may be affected by a variety of variables. Mullen Group relies on litigation protection for "forward-looking" statements.

Mullen Group is a company that owns a network of independently operated businesses. Mullen Group provides a wide range of specialized transportation and related services to the oil and natural gas industry in western Canada and is one of the leading suppliers of trucking and logistics services in Canada - two sectors of the economy in which Mullen Group has strong business relationships and industry leadership. Mullen Group provides management and financial expertise, technology and systems support, shared services and strategic planning to its independent businesses.

Mullen Group is a publicly traded corporation listed on the Toronto Stock Exchange under the symbol "MTL". Additional information is available on our website at www.mullen-group.com or on SEDAR at www.sedar.com.

Contact Information

  • Mullen Group Ltd.
    Mr. Murray K. Mullen
    Chairman of the Board, Chief Executive Officer and President
    403-995-5200
    403-995-5296 (FAX)

    Mullen Group Ltd.
    Mr. P. Stephen Clark
    Chief Financial Officer
    403-995-5200
    403-995-5296 (FAX)