Mullen Group's (MLLGF) Murray Mullen on Q3 2016 Results - Earnings Call Transcript

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Mullen Group Ltd. (OTC:MLLGF) Q3 2016 Earnings Conference Call October 20, 2016 1:00 PM ET

Executives

Murray Mullen - President and CEO

Stephen Clark - CFO

Analysts

Greg Coleman - National Bank Financial

Walter Spracklin - RBC

Ian Gillies - GMP

Jon Morrison - CIBC World Markets

Jeff Fetterly - Peters and Co.

Elias Foscolos - Industrial Alliance Securities

Operator

Good morning. My name is Lyndsey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mullen Group Limited Third Quarter 2016 Earnings Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. [Operator Instructions] Please note that this call is being recorded today, Thursday, October 20th, 2016 at 10 AM Mountain Time.

Thank you. Mr. Murray K. Mullen, Chairman, Chief Executive Officer and President, you may begin your conference.

Murray Mullen

Thank you, good morning everyone and welcome to Mullen Group's quarterly conference call. We will be discussing our financial and operating performance for the third quarter, and this will be followed by an update on the near-term outlook as we see it. But before I commence the review, I'd remind you that our presentation contains forward-looking statements that are based upon current expectations and are subject to a number of uncertainties and risks, and actual results may differ materially. So please for further information identifying these risks, uncertainties and assumptions you can find these on our disclosure documents which are filed on SEDAR and at www.Mullen-Group.com.

So with me this morning I have our senior executive team, Stephen Clark, who's our CFO; Richard Maloney, Senior Vice President; and Joanna Scott, who's our Corporate Secretary and VP of Corporate Services; and Kim Derbecker as our conference coordinator. So this morning Stephen will review the third quarter financial and operating results of Mullen Group, after which I'll provide an outlook and discuss my near-term expectations for both the oil and natural gas industry and of course the overall economy, following which we'll close with the with that now world famous Q&A session.

So before I turn over the call to Stephen Clark, I have a few opening comments as usual. I would say this to start, that this quarter is just another example of how our organization is different than most of our pure play peers. Quite simply it is all about diversification. We have 27 business units operating in two sectors of the economy, that's the trucking logistic services sector in Canada and of course the oil and natural gas industry here in Western Canada.

And while I can reiterate that neither sector is doing particularly well at this time, we just reported another profitable quarter and this despite any growth in the Canadian economy, and Alberta economy that quite simply has been pummeled by the prolonged and steep declines in both crude oil as well as natural gas prices, and of course significant reductions in drilling activity.

Yes we were down as compared to last year, but given the challenges and economic headwinds, I am actually very pleased with our performance. In particular, I'd like to highlight the efforts of our 5,600 employees and owner/operators for their support, their dedication during these most difficult operating conditions. In those business units where opportunity existed, they nailed it. For example, our six regional LTL companies had what I would call an excellent quarter, holding revenue, operating income and operating margins flat as compared to last year. Now that's not an easy task, given the competition that's out there today.

Sticking with the trucking logistics segment, a couple of business units once again stood out. Our Cleeson group, which includes our Thompson Manitoba based contractors continued to produce strong results, staying steady year over year. And it is with the major -- this is with the major transload operations associated with the Four Hills oil sands project near completion in August, and our Mullen trucking unit had another strong quarter.

In our oilfield service segment, we had a couple of business units have excellent quarters, Canadian Dewatering which is the leader in water management and Dewatering services here in Western Canada, as well as Premay Equipment. They both had excellent quarters. Both companies are industry leaders in their respective fields. The balance of our oilfield service segment business units worked just as hard as these two companies but they did not enjoy the same opportunities. But they did the best they could, they cut cost and they maximized efficiencies where possible. Without these efforts, they could have easily lost a lot of money, because truthfully the markets these business units serve, namely drilling and production services were just quite awful. So thanks to all, we could not have generated the overall results we did without you.

Now with this as a backdrop, let me summarize the state of the market Mullen services last quarter. I'll start with the trucking logistics sector of the economy, primarily because it now represents the largest component of our overall business at roughly two-thirds. The overall Canadian economy remained mired in a slow to no growth pattern, which in itself should be neither good nor bad. But because there has been an influx of cheap money into the transportation sector over the course of the last few years, today we have a situation where capacity exceeds great demand, which has led to an ultra-competitive market, with pricing pressures intensifying in the quarter.

This is a difficult situation for most carriers, including ourselves, because while freight demand has remained reasonably steady, rates are down. In the short term this will cause big trouble for those carriers that are unable to adjust their cost structure. In the medium to longer term however, I doubt this situation can prevail. More on how we will deal with this market dynamics in my outlook set later.

In the oil and gas sector of the economy, this past quarter was really more of the same, drilling activity in Western Canada as measured by average rate count was down year over year by 34%. It's down to dismal 121 average rigs versus the 183-last year. And consistent with these declines, our 10 business units leveraged the drill bit. They were all down by roughly a similar amount. Production services were down nearly 40%. Drilling related was down by 33. However, profitability in these business units was down by approximately 50% and that's primarily due to two factors. One is the intense pricing pressures, accompanied by the fact that margins get eroded somewhat as revenue falls due to the fixed nature of some costs such as SG&A.

The good news here is, and it is good news finally, is that oil and gas prices have recovered quite nicely and it is reasonable to expect drilling activity will recover -- will continue to recover from this depression like numbers. I'll expand further in the outlook section. Our quarterly results were certainly helped by the relatively strong performance from our four specialized service business units, where revenue and margins were under pressure but in, but in no way was that like the production services or drilling related businesses. Our Canadian dewatering business had a good quarter, which was augmented by Husky Energy pipeline spill. Canadian Dewatering was called by the City of Prince Albert, Saskatchewan, and within days, Canadian Dewatering had installed 30 kilometers of record deployment holds. We had 26 pumps and 20 people working day and night, ensuring that Prince Albert had access to clean water from the south Saskatchewan river. This is an example of how Canadian Dewatering, in fact many of our business units can respond when a critical situation arises.

So in summary, it was a tough quarter. Revenue was down by $46 million. Profitability from operations was down by $12 million. But we survived. In fact, we still generated positive operating income OIBDA of $53.6 million, net income of $17.6 or $0.17 a share and we maintained solid operating margins. In addition, we acquired three small tuck-in acquisitions at what I would consider very reasonable valuations, each of which was a competitor of a Mullen business unit.

Now for additional details on the third quarter performance, I’ll turn it over to Stephen Clark. After which I'll host some thoughts on the near-term outlook, our organization [Indiscernible].

Stephen Clark

Thank you, Murray, and good morning fellow shareholders. With respect to our financial and operating results for the third quarter, October 19, 2016 news release in our Q3 interim report, which consists of our MD&A and consolidated financial results, contains the full details to explain our performance. I'll center the bulk of my comments this morning on the elements within our results that warrant further explanation. We’ll start on the revenue front. Consolidated revenue was $258.6 million, a decrease of approximately $46 million or 15.1% in 2015. This decrease in revenue was mainly due to the long decline in drilling activity and reduced capital investments in Western Canada.

From a segment perspective, trucking logistic segment, contributed 66.6% to pre-consolidated revenue or approximately $173 million. This decrease of $9.8 million or 5.4% was primarily due to decreased demand in freight services in Western Canada and to a lesser degree, $1.7 million reduction fuel surcharge revenue. These decreases were somewhat offset by revenue generated by subcontractors and by Mullen trucking, as well as the incremental revenue related to the acquisition to Courtesy freight and to a lesser degree Mo Trucks Inc. [ph].

The oilfield services segment contributed 33.4% of pre-consolidated revenue, approximately $87 million, which was a decrease of approximately $35 million or 28.9% year-over-year. Commodity prices continued to negatively impact currency in expected industry cash flows that resulted in reduced capital investments and drilling activity in Western Canada sedimentary basin, which has negatively impacted almost all of our service lines within the oilfield service segment with the exception of Premay Equipment. Further details on the oilfield services segment performance and a breakdown the revenue declines by categories can be found on Page 22 of our Q3 MD&A.

Operating income before depreciation and amortization or what we refer to OIBDA, within the MD&A or by EBITDA by almost everyone else was $53.6 million, a decrease of 11.9% or 18.2% over the same period in 2015. Operating income prior to foreign exchange gains and losses recognized within the corporate office, or what is referred to as OIBDA adjusted however was $52.1 million, a decrease of only $7.3 million or 12.3%, as compared to $59.4 million in 2015.

Stated as a percentage of revenue, OIBDA adjusted increased to 20.1% as compared to 19.5% in 2015. This increase was to margin expansion in the oilfield services segment and reflective of our highly adaptable and diversified business model, and along with our cost control initiatives, looking at some other performance indicators, net cash from operating activities in the third quarter was approximately $44 million, an increase of about $2.2 million from last year. We exited the quarter with $261.3 million in cash. Net income for the quarter was $17.6 million or $0.17 a share, an increase of $10.3 million from the $7.3 million or $0.08 per share that we experienced in 2015. This increase was mainly attributable to the $11.8 million positive variance in fair value investments and a $5.2 million positive variance on net unrealized foreign exchange.

These increases were somewhat offset by the $7.3 million decrease in adjusted OIBDA and the $5.1 million negative variance on the U.S. cash held in corporate office. Touching briefly now on our results for the nine-month period, consolidated revenue was approximately $177 million, a decrease of approximately $149 million or 16.1% as compared to 2015. OIBDA, adjusted for the FX effects on the U.S. cash held by our corporate office was a $144.2 million, a year over year decrease of $20.1 million or 12.2% as compared to the $164.3 million generated in the same period last year. As for the balance sheet, it continues to be well capitalized during the quarter. Mullen Group was able to increase its cash position by about $25 million, which resulted in an increase in net cash from operations, but also a reduction in capital expenditures and a lower dividend. Our long-term debt stood at approximately $686 million, which includes $12 million of convertible debentures. Our $75 million credit facility continues to remain undrawn.

So with that Murray, I'll pass the conference back to you.

Murray Mullen

Thank you, Steph. So all in all, folks, we're pretty pleased with the quarter given the challenging conditions. Now as I turn my attention to what do we see for the next bit, I'll open with this comment, as I think over the last -- course of the last couple of years, I've been very cautious. Some people have even said that I've been pessimistic. Can't disagree. Because every time I thought I saw the light at the end of the tunnel, all it turned out to be was just another freight train barreling down toward us.

So today for the first time in a very, very long time, I am beginning to see signs of what I hope will be a period of sustainable recovery. So what really has changed? Well firstly, earlier this year I suggested that 2016 would be a year of positioning for the Mullen Group, which for the most part, this year has been. We strengthened the balance sheet, we cut the dividend, we cut costs, we improvised, we protected margins and we made a profit, and that's all in a very challenging market. So from this perspective we are right on plan. And now we are actively looking at opportunities that will position our organization for a brighter future.

I also indicated earlier this year that the chaos encircling the energy space would end. It was simply a question of time. Well this week, additional evidence emerged that the world oil and supply and demand imbalance may be nearing a point that will support higher prices. In fact, crude oil is now back to levels last seen in mid-2015. It sort of appears that the worst is over for the oil markets. Hope runs eternal with us, as it does for everybody in the oil business.

On the natural gas front, North American storage levels have now normalized into more of the 5-year average range, which is supporting significantly higher prices than last year. So all-in-all, commodity prices are signaling that the worst is over, and that perhaps oil and gas producers here in North America will need to start drilling once again. The recent rig count data along with customer requests are constructive, increase drilling in Western Canada will also help the struggling Alberta economy, which continues to be hammered by the slowdown in drilling, capital investment of the energy sector, job losses and the like.

However, while I believe that increased capital being allocated to the drilling will be an obvious benefit to the Alberta economy, I think the fact remains that I doubt there will be any significant new capital investments made in oil sands or major pipeline projects. This will continue to be a significant drag on the Alberta economy and will negatively impact some of our business units such as Premay Equipment and Premay Pipelines. I think there needs -- there will -- there needs to be a sustained period of higher commodity prices, before these big long-life capital intensive projects are sanctioned. So all-in-all however, I see the Alberta economy doing a little bit better in 2017, and stronger yet in the years that follow.

My last sign, I see as a potential area of optimism is in the trucking logistics segment of the Canadian economy. Generally speaking, the Canadian economy is doing okay. It’s not great, but not bad either. The consumer is still spending. Job growth, while not necessary perfect, is reasonably strong, and of course, governments with their massive budgets are supporting the economy. Unfortunately, today, these budgets have a large deposit component that is simply not sustainable, but today the budget spending is similar to the overall economy on the balance. The Canadian economy will not, will most likely continue on a slow growth path. Now this growth, combined with a shrinking capacity in the trucking segment due to failures, downsizing and consolidation, sets the stage for rebalancing of the pricing for freight services later in 2017 in my opinion.

So for all-in-all, of all these reasons, I can certainly be more optimistic and more positive than I have been for quite some time. However, let me be clear the near, the term will remain a challenge. Drilling activity is just starting to recover, with pricing while it has stabilized, has not really improved that much yet. Although next year, I believe pricing will improve. The big projects, like the oil sands, like LNG in major pipelines, they remain as proposals, not as projects, and some of the last remaining big capital investment projects like Fort Hills, oil sand projects and Northwest upgrading here in Edmonton are now nearing completion. And lastly, the trucking logistics business is very competitive at this movement. It’s this good demand that's what I call ultra-competitive. So from this perspective, I’m still of the opinion that the next quarter, maybe the next few quarters will remain challenging.

My last word this morning, before turning it over to Q&A session, deals with acquisitions. So last quarter, as we’ve announced we completed three tuck ins at valuations we considered compelling. And the amount of deals we're seeing today is virtually unprecedented. We have the balance sheet, we have the opportunity but we want good meals, not just a deal.

So thank you very much, and I’ll turn it over to Q&A session.

Question-and-Answer Session

Operator

[Operator Instruction] Our first question comes from the line of [indiscernible] with Scotia Bank. Your line is now open.

Unidentified Analyst

Yes, good afternoon. I guess -- in wanted to just ask one question on the oil field services business to start with. How should we think about margins going forward here? So you've obviously done a great job in terms of reducing your cost structure? And Murray, you are talking about potentially the volume environment getting better here and pricing getting better. Should we expect a lot of nice leverage when volumes rise here or pricing gets better, or will you have to ramp up cost very quickly as you've sort of already cut it down to the barebones?

Murray Mullen

I think that’s a really good question. And truthfully, I think it's probably the latter. I think that we've cut, and that’s how we maintain margins. We've cut to the bone to match today's market. But as we look into the next one, and you have to ramp up, not all of any pricing leverage we're going to get, are going to flow through right to the bottom line. And if you look at our margins over time, they've remained relatively stable. So I wouldn’t expect huge margin improvement. I would expect better topline improvement, which will help our margins. But we stayed in a pretty tight range on margins over time and we can't have it both ways. I can't keep high margins when it's low and then have really, really, really high margins when it's high. So I would suggest we'll have to pass some of those margins on to employees, because that’s our single biggest cost in the oil field service business. And the best thing for us is we've got to get just more pucks on there. We've got to get more revenue and that’s going to come when drilling activity comes. We'll quite happy with that, and if we can maintain margins where we're at, maybe improve it a little bit, I’d be quite ecstatic, to be honest with you.

Unidentified Analyst

That’s perfect. So I guess the last peak was around 26% or so right, in terms of margins on the oil field service business. So fair to go with around that number? Is that right?

Murray Mullen

We will come out in October -- in December and we will talk more about what we see for next year. But so then we've been pretty consistent over the years, regardless of the market in terms of margin. So I honestly don’t see a significant change in our margins. We're going to have some of our business units that are going to struggle, anything to do with the big capital projects. Those are high margin businesses and that’s coming down. But then you are going to have the drilling activity come back up. So we will manage the margin as best we can. We've done it to market that we have been in. So I think -- and I and my brothers, we'll try and keep as consistent we can. I can tell you, I'm taking more business that's at the same pricing. I can tell you that right now. We're not hiring people are not moving equipment off the fence to go to work unless pricing comes up. Period.

Unidentified Analyst

Got it. Okay that’s helpful. Thank you very much. And I guess maybe one more Murray, just to clarify my head here. In terms of your improvement, I guess am I hearing you right, that you're probably expecting the oil field services business to come back a little bit quicker here? And then I guess presumably Alberta economy kind of comes back, which helps your trucking business as we get into the latter part of next year. Is that sort of reasonable?

Murray Mullen

Yes, I think that's my thesis. If it doesn't happen you know like on November 1st but you know the conditions are being set that that's a reasonable assumption to make and it’s one that that I pointed out as one of the reasons why I'm optimistic as we get later into '17. I think that we're -- the markets are starting to repair themselves, and conversely I think we're losing some competition and that that combination will be supportive for our organization, the deeper we get into '17.

Operator

Our next question comes from the line of Greg Coleman, with National Bank Financial. Your line is now open.

Greg Coleman

Just want to start with a bit of a history lesson here. In Q2 results and in the subsequent discussions, you mentioned the shift towards market share gains in oilfield services via pricing, versus protecting the margins which had been your focus up to that point. But as we saw with a strong quarter, your margins actually grew 150 basis points year over year. I'm just wondering, in your prepared remarks you talked about the strength of Premay and Dewatering and the Husky spill. Was that the reason for the margin strength or was there something else that we're missing, I'm just trying to reconcile pricing as a strategy with expanded year-over-year margins.

Murray Mullen

No, you got it right. The strategy is correct. And as I articulated in my comments here, I said anything to do with the drill bit, which was our 10 business units that are production services and drilling related, we saw margin erosion. So -- and that's because, business was still very difficult. The rig count was down and we kind of made the decision, let's not give up any more business because we saw there's going to be an opportunity for business to come back. So we kind of protected market share. Even though revenues were down, we held our own. So we had a pretty good strong quarter from those business units we talked about, more of our specialized and that's the reason why the margin was up in the oilfield service side in the third quarter.

Greg Coleman

And so is that more of a transient impact in Q3 that we won't see translate into Q4, or is the overall buoyancy of the market going to replace that sort of transient strength and we're still going to see a lift but for a different reason in Q4 and beyond?

Murray Mullen

Yes, and I think the specialized services are probably going to come down short term. It always does in the fourth quarter anyhow, particularly with our Canadian Dewatering Group, because you're not pumping as much water when it’s cold, but that's just a normal part of the cycle. Premay Equipment, I don't see really a lot of visibility in the short term for that business. But in saying that, it's really going to be the combination of how many of our competitors are going to stay in the business, and there's not going to be enough business for everybody. We will just hunker down for a little bit and that's what we can do in our business, whereas other companies really can't. They're all in on one -- they are pure play. So they're going to have a really, really tough time. So I think it will be a little choppier in the short term with our specialized services, but you've got to remember, there's going to be stuff happen, and when they do, we've got the business units that can do just like Canadian Dewatering did. If there's a critical issue, we have the business units that can respond, and we always have a pipeline. We always have an issue and our companies will be well situated to take advantage, but it will be more choppy, there's no doubt, over the next little bit.

Greg Coleman

Okay. I appreciate that. Shifting gears…

Murray Mullen

I would say, just we’re going to start to see -- it will be choppier on the specialized services, but we're a lot more constructive on anything to do with our other business units on the drilling activity. It’s -- we’re starting to see it already this quarter, and there's lots of indications we're getting from customers, that there's rigs ready to go to work and if they do, that’s going to be constructive for those business units, and that will be our buffer for the next step. I think drilling activity is easier to predict than big long-life capital projects that take a 30-year lifespan. I mean those ones are tough to get off the proposal shelf right at the movement.

Greg Coleman

That makes sense. I won’t accuse you of anything sort of horrible as optimism, but cautiously moving up the ladder [ph] is great.

Murray Mullen

Yes, yes optimism is a trend. It’s not a moment.

Greg Coleman

But now looking at the other side of things, and as we go probably into growth leg in the market here, you guys are sitting on -- as you mentioned, you’re sitting on probably I think the biggest war chest you ever had, $206 million cash undrawn, $75 million credit facility, but also we are seeing probably a listed activity here, and if we do see that happen, putting those two things together, taking to look at how you’re trying to figure out the acquisition strategy, does this suggest you'd be more likely to pull the trigger on good opportunities in the short term, rather than if the market tries to get away from you and the upper trend does take hold in 2017 and beyond as opposed to waiting.

Murray Mullen

We’ll always do a great strategic acquisition, that really positions for the long, long term, and then we’ll do tuck-in acquisitions to strengthen our 27 business units. I've always said this. We've got really, really good management teams, really good business units and we just need a little bit more revenue in these businesses, and for these people to do that. So we'll do tuck-ins. And I would expect that will be a trend that we’ll continue, because just so many people are in trouble. Now because the energy business is going to start improving, the challenges that are faced by many of our competitors, that six months, nine months, that’s a long for them to last in this market. So I would expect that we'll have lots of opportunity over the next bit.

Greg Coleman

Great. And this is that from me, this last one here. Just we’ve been doing some channel checks on the [Indiscernible] a little while ago. You gave us a bit of an insight on the last quarter as to how that was going. I think you said the original 10% margin business as of Q2 of this year was more like mid-teens. We're kind of interpreting that 14 to 16. Can you give us any update there? Is not still where it's sitting now or has there been any further cost improvements or operating improvements there? Just doing a bit of a report card on how that acquisition is going?

Murray Mullen

Yes, that was just, that senior team that we've got there has done an extremely good job since we acquired them, and they continue to find creative ways. I'm amazed at how doing it. They’re making me look pretty smart to be honest with you. And I really appreciate that. And they’re grinding it out in a really competitive market. So they’re doing it all on the cost side, all in efficiencies, getting better business processes, being more efficient for the customers and the like. And then I wouldn’t be surprised to see the economy not give us something later next year. So the trend is all going in the right direction for them, and that we'll continue to support that business unit with capital and with acquisition opportunities like we did this with Courtesy. That has been an absolute textbook how to do an acquisition, short term exceptionally well. Margin continues to get better in a very challenging market and that's only through cost and efficiency.

Operator

And our next question comes from the line of Walter Spracklin with RBC. Your line is now open.

Walter Spracklin

I guess my first question is Murray as the last -- I mean you singled a change in your strategy with some increased optimism you had in the last quarter. And it sounds to me like it's -- you were kind of calling it out last quarter and now you feel better about it. You mentioned that we would still have a lot of pain to go through to 2017, and then hopefully --early 2016 and hopefully into 2017 we'll start to see a period of recovery. I'm feeling like it might be a little -- your outlook might be a little bit better than how you portray that astutely, how you portrayed it last quarter. Is that fair statement?

Murray Mullen

Well, as I said, that's probably what I put in the comment. I said earlier and it really was after the first quarter. I said you know all things pass. All things come to an end. And I said this, the debacle situation we've got going on the energy space will eventually start to rectify and we'll find a new equilibrium price for the price. Now I'm not smart enough to know where that price is, but I said it was probably going to start to recover. And when that starts to recover, then one can start to see how we can start gaining back some business and market share and all those kind of good things. So there were some indicators -- some signs that were starting to emerge in the summer. I think those signs continue to be well on trenched. And so I'm more positive now than I was last quarter.

Walter Spracklin

So when you…

Murray Mullen

I don’t think we're out of the woods yet. Don’t get me -- and that’s what I want to caution everybody on. But these signs are clearly pointing towards a recovery. And it's not just oil, it's also on the natural gas side. You've got to remember, Western Canada is primary a natural gas basin, and more an oilsands basin. Oilsands, I don’t see a lot of capital going into oilsands over the next bit, but we're very, very -- we're just fortunate we've got great natural gas reserves, we've got some world class plays, we got world class companies that are taking advantage of that, and I see some pretty good activity coming along as a result of commodity prices improving. And hopefully they stay up when capital comes back into the sector and then we hire people and we get more revenue, and that’s why I'm optimistic.

Walter Spracklin

And I just want to clarify on your answer to one of the last questions where you were indicating there would be margin contraction, but there was improvement. You said you are pointing to a few kinds of specific items that happened in the quarter. Outside of those specific items, did you engage in that new strategy of going after -- getting back into the market? And excluding those items, would you have seen margin pressure, or have you delayed the execution of that strategy to -- into the perhaps -- with a later timeframe?

Murray Mullen

Yes, that’s a good observation. So anything to do with the drilling with the drill bits. So we get about 10 businesses in our time to production services or like to drilling activity per say. Shareholders will recall that over the last -- I refused to chase margin, because we have run a downhill slide and it was just never ending. However last quarter, I said enough is enough, we will protect market share, but we are not entering into long term contract. We'll take business and we protected it in the short term instead of giving it up because I think come next year, we are going to get the pricing back. So we did lose margins then in them and in those businesses in the third quarter.

Walter Spracklin

Okay.

Murray Mullen

I mean look drilling activity was virtually non-existent for the majority of the quarter. 121 rigs, that’s nothing.

Walter Spracklin

Right.

Murray Mullen

So, if you get up to 160, 200 drilling rigs, we will start to recover some of that business back for sure. And we will get pricing. Because as I said, if we don’t get pricing, we're not hiring more people. That's all there is to it.

Walter Spracklin

So switching over to acquisitions, you are starting to going into and it feels like -- it looks like even with the tuck-ins you are getting into, you moved little bit in the truck load, move to -- are you focusing on any particular segments or is it you are willing to look at anything that has a good price attached to it, even if it's not core to your business. Can you talk to us a bit about the geographic targets segment or perhaps the sector or market segment you are looking at for acquisitions going forward?

Murray Mullen

Well, Walter, I won't look at just any deal. We would look at companies that are strategic, that are good standalone business units that have great management teams and good customer base, all that, et cetera, et cetera. Well always look at that, at those acquisitions, because those would be long term and whatever. But the majority of the ones that we're talking about are tuck-ins. So the ones that we would take are ones that would be competitors to our existing business units, all of our trucking logistics business, or even in the all oil pads. If they are a competitor of ours, and we see some good synergistic fit, which just typically means you're getting rid of cost, and I think that’s how you're going to justify most acquisitions today, is on the cost side. You can't get pricing leverage right now, although I think in my view is I think pricing leverage starts to come back and once a little bit growth on the economy comes and some consolidation, we're losing a lot of competitors right now. Class A truck sales are down quite significantly. Those are all signs that eventually the market will tighten. And then you can get your pricing leverage back and we will be doing just fine. But in the short term there's good opportunity to tuck-in some good acquisitions and strengthen our existing trucking logistic businesses for sure.

Walter Spracklin

Okay. And last kind of modeling question here, seasonality in your oil field services business has always seen you have a third quarter or kind of fourth quarter dips down from third quarters. Any reason that wouldn’t be the case this year around?

Murray Mullen

Stephen, you want to…

Stephen Clark

Yes, so there is many factors at play at Canadian Dewatering, which is one of our larger businesses, always seasonally goes down. I think now it's going to be about the rig count and how quickly breakup for Christmas kind of comes around. It's later in the week this year. So maybe they keep on working for a little bit longer. So the bogey here will be does drilling activity rebound? And it seems to have good momentum in the last few weeks here, but it’s no great shakes here on a comparative basis from last year. But sequentially, as long as it holds, and price continues to be over 50, I think you’ll see that it will be affected by Canadian Dewatering, but the other pieces might go up a little bit.

Walter Spracklin

Okay.

Murray Mullen

We’re see it a little dip this year, Walter, but long so long as pricing holds for -- and finds a new norm and maybe inches up a bit from near and stays in the 50-60 range, by the time we get that the second quarter of 2017, I think our customers balance sheets will be in great shape and the cycle of getting back and doing drilling will be well entrenched again and we'll be looking into a more sustainable kind of platform, and that will be very constructive to us -- to our business units, because I think our competitors are -- they're having a lot of trouble right now. So it will be a combination of activity come back, and then who is going to be around to take advantage of it. And clearly with our balance sheet, we can ramp up quickly. Most companies are living day to day right now, very difficult for them to ramp up.

Operator

Our next question comes from the line of Dave [Indiscernible] with TD Securities. Your line is now open.

Unidentified Analyst

For the three tuck-in acquisitions, that were made in the quarter, just want to get a sense of is there any equity components or nuts involved in addition to the reported $26 million cash in?

Murray Mullen

Only one small are now with one of our companies, and that needed -- one we just did here in October, and like a small earnout provision. I guess it's not small.

Stephen Clark

No equity

Murray Mullen

No equity issue whatsoever, but this is a complicated market, and my view is that the short-term is going to be challenging as I’ve said. So is that okay, if you get it -- if you can earn it, you get it. So we got a bit of an earnout provision on that.

Stephen Clark

And that's included

Murray Mullen

And that's in the total purchase price.

Unidentified Analyst

Okay, so Canadian management is staying on then short term or long term.

Murray Mullen

Oh yes, we've got a good management team with the Canadian group. The other ones, those are just rolled right in. One was just Permian asset deal, the old Central water assets. Those will roll right into our Canadian Dewatering group and two parts of that. One is the receiver we're selling. We're a buyer. We have the balance sheet. So we got what we think is a very attractive price. It goes into our Canadian Dewatering group and they will have all those assets now and secondly, they don’t go into a competitor sand. So that’s a pretty good arbitrage from our perspective. So if you want to get into the Dewatering, you're going to have to put a lot of money to compete with us and we will talk with our Canadian Dewatering group. We’ve got a pretty good business strategy here. We’ve got some good assets and we are going to be very, very competitive because bought them at a good price. And anybody that goes in to get those assets now, most of those assets are all purchased in -- have to be purchased in U.S. dollars. Okay, it will be tough to compete with us.

Unidentified Analyst

Okay, great. And then in the oil field services space, was there any sense of oil field work that didn’t get done in Q3 due to the weather impact? Or was there any particular area that seemed to suffer more than others?

Murray Mullen

Yeah, I think -- I think a couple of things hurt us in that quarter. Those are all timing issues. I never worry about weather, because, eh, they get pushed off by a week, a month, a quarter, doesn’t matter. So but two of those sort of been drilling activity, that’s clearly hurt some in Saskatchewan. Those are very -- we've had some pretty good rain storms there. And then secondly it hurt our pipeline business, Premay Pipeline signed some projects that really got shut down. You just can't go and get -- lay this pipe this pipe on the ground when it's raining like it did. So I'd still think those projects will be pushed off into later this year or next year, and we've got a couple of those two. But I don’t worry so much about weather as I do about the big structural things, and macro scene. And the macro scene appears to me as I've said to be finding some more solid ground now. That’s why I'm probably more optimistic than I have been for two years.

Unidentified Analyst

Okay. And with a small uptick in rig count currently off of 2016 lows, how's trucking -- oilfield trucking responded to an increase in demand? And do you feel there is any tightness in the system currently?

Murray Mullen

It's hasn’t improved enough yet. It's nice to get people. The good news is our people are getting good -- getting full hours now, and then -- and that’s good for our people. But as I said, I think we need the next 50 rigs to come back to work to get pricing leverage. But it's a -- I'm assuming it's going to come back and when it does, I think our customers are going to find it's not that easy just to go ask somebody to come back to work, they're not going to come back to work unless you pay them. So that’s the way it's going to work.

Unidentified Analyst

Do you feel the steel labor at market right now in both trucking logistics and oil field services -- do you think it's fairly tight right now and do you see labor inflation as a risk in a short term?

Murray Mullen

Well I think the way you've got -- you've got a bit of a conundrum coming in, in the oilfield business because most of the activity is going to be concentrated in Saskatchewan, on some light oil plays, that are in around Kindersley and southern Saskatchewan. So that’s our local market, and for light oil. And then the other one is up around Grand-Prairie, and the Montney and the Duvernay and so I think you'll have full employment in Grand- Prairie. I think it’s probably there now. I think you have full employment in Grand- Prairie. If you want a job, you can get a job in the old fashioned Grand- Prairie right now. So if you're going to bring another 50 rigs into the market, you'll have to bring them in. So you'll have higher employment in Alberta but not in Grand- Prairie. So that means price has to go up, because you have to house them, you got to feed them, and that's going to move up cost. And I can tell you we're not eating it. So.

Unidentified Analyst

Okay, and then the last one from me. So we've been hearing some service lines are beginning to see price increases. Is there any ability in long lines to move pricing yet or is that something that's going to move out further into 2017?

Murray Mullen

Yes, I think '17 is probably where you get it. What I'm saying is going to happen, it's not happened yet. That's why it's called an outlook.

Operator

[Operator Instructions], our next question comes from the line of Ian Gillies with GMP. Your line is open.

Ian Gillies

Morning everyone. Are you able to provide a sense of where these businesses were transacted out from an EVD reduct [ph] standpoint or where you think those transaction multiples may be going? Just trying to get a sense of if the cash is deployed, what the potential incremental EBITDA may look like?

Murray Mullen

Well, I don’t think EBITDA is the right number right now. I think the number is asset value or less. That’s kind of what we're looking at. The [indiscernible] is a little different because it's more of a logistics based business than an asset base business. So you have some multiple on that. But that fits in our range where we've seen the multiples are down quite significantly, down in terms of four range. But it's a bit of the -- it's like people ask me about Gardewine. I mean why you pay this? I say it's not what you pay, it's what you get. So we would reverse engineer back and say okay when we get it, what's that business going to look like in our business, once we get cost out, we find synergies, all those kind of things. So for us to find compelling -- I think it's got be around -- we got to be in that four range. Stephen, I think…

Stephen Clark

Yes it's a quality might be…

Murray Mullen

Yes, for a standalone quality large organization, you pay more for a tuck-in and see their asset value or maybe reverse engineer back in around four.

Ian Gillies

Okay, that’s fair. And with the key acquisition, as we think about not moving forward, would it be margin accretive or dilutive, I guess over the next couple of quarters, based on what you note today for that P&L division?

Stephen Clark

Yes, it's going to be slightly dilutive. Their margins are less than the segment average.

Ian Gillies

Okay.

Murray Mullen

That's short term. Every acquisition we take, it's going to take us a while to implement our network, our disciplines, whatever, just like Gardewine. We've said, look at the process, it's not an event. Once you do an acquisition, then your hard work begins. But I think we've got proven formula that says this is how you do it. And you give us a little bit of time, we'll get the margins up.

Stephen Clark

And asset life will always typically be a little bit below the segment average. It's just the nature of their business. [indiscernible] less but invest in capital in, so on a return basis, superior.

Murray Mullen

As you know Ian, we don’t always just look at EBITDA. It's about cash.

Ian Gillies

Yes, I don’t…

Murray Mullen

So clearly you say a little bit more for our non-asset base that because you are taking a look at what you are getting for cash, how much cash is generated. If all we're doing is just buying more equipment, well that’s not really -- that really doesn’t do anything for us. So we're really cash generating kind of company. That’s what we look at.

Ian Gillies

Okay that’s very helpful. I appreciate that. And now, I mean last question, and I may be getting too far ahead of myself here, but I mean I look out the next year, and if you look at where the dividend is and the payout ratio, how is the Mullen management team and the Board thinking about the dividend as we look out into the next year, acknowledging that you were very conservative through the last 12 months and cut a twice. But I mean if next year is looking better, and you are cashed up today, it looks like there is potential for a bump at some point, but you may not want to do that, given the uncertainty. Just want to -- if you could comment on that?

Murray Mullen

No, I'll reserve that comment till we give you the outlook for '17 and we'll be clear with everybody then, what our expectation is for '17 later in December.

Ian Gillies

Okay.

Murray Mullen

Okay, we've got to go through it. I’ll comment about that just in my last statement, but nothing today. I got no comment on that whatsoever. We'll just stick with our dividend as it is. It's clearly pretty sustainable the way it is. We feel real comfortable. We're generating lots of cash. And we're really comfortable in that situation right at the moment.

But if activity comes back, you’re going to have to have cash to grow your business. Everybody has been living off of cash flow and reduce working capital -- that story is done now. Who is going to have the working capital with which to ramp up and grow your business and finance it? And my suggestion is a lot of companies going to have trouble with that, not our company. We’ll be just fine. Thank you.

Operator

Our next question comes from the line of Jon Morrison with CIBC World Markets. Your line is now open.

Jon Morrison

Murray, I realize you're not going to tip your hat too much in acquisitions. Is it fair to assume that the majority of the deals that you’re seeing right now are of similar scale and size to what you completed in the quarter or you looking at much larger deals at this stage?

Murray Mullen

It’s all over the map Jon. I think larger deals take longer and I would say to larger deals, there is a bigger -- there is a bigger gap on what we have for expectations from the sellers than what smaller deals have. So they’ll just take longer, but there’s a lots in the offer that we’re looking at, from that perspective. The ones I really like the most right at the moment to be honest with you are just these tuck-ins that are just -- we’ll take the customer, we’ll take the business, we’ll take the drivers, we’ll take this or that and then we'll just layer out cost and put within our system. And those are -- honestly, those tuck-ins are relatively simple. We've got great companies. They’ve got good processes, technology systems, and really that’s a no brainer. So I think those will be more of the rule of the day for the period of time, but we’re always looking for great quality companies, always.

Jon Morrison

Were the Mo trucks [ph] in Canada acquisitions entirely underpinned by cost savings opportunities or do you see either of those platforms as solid organic growth vehicles, if you got the right capital?

Murray Mullen

Yes, the biggest thing about that is, they layer in their group, their business within our group and then we share back and forth. And you get productivity improvements and reduced miles and you share. Because a lot of companies protect the business they get and they give into their truck, even though it doesn’t make sense. But within ours we have a much larger network. So when you layer in company like Kinita [ph] into our group, you share it across all of our platform and then just you find which truck is the best one to do it. It doesn’t matter whose -- which truck -- the company it's in, who's got the truck. And then we’ve got that technology, we’ve got that network that very few companies have. That’s where we would think, we’ll find the biggest productivity improvements.

Look, it's all about asset utilization, and in this ultra-competitive market, it forces one to be very, very strategic as to how you think about this. And I think that’s going to be the biggest opportunity in the truckload side. It’s very, very similar to the regional LTL business that we’ve been -- I would say very successful of implementing that. We layer in a company like Courtesy into Gardewine. We reduce costs. We find operating efficiencies and the combined entity does exceptionally well.

Jon Morrison

Basically, completing the work with closest truck, not necessarily the closest Mullen owned truck.

Murray Mullen

Yes, just think of our network that we're developing as the same as Uber. We have all these trucks out there. And then we have all of these customers and all this freight to move. And all we do is just find the closest truck. And if we don't have it, then we farm it out to a subcontractor.

Jon Morrison

On the Northern Frontier Logistics purchase that you did, was that a business that you were fairly familiar with over the last couple of years, or did you start to scrub it down once it went into receivership.

Murray Mullen

It came to us, Steph?

Stephen Clark

2008 and 2013.

Murray Mullen

Yes, they came to us multiple times before at valuations that we considered unrealistic, but somebody else paid up for it, and that company is now broke, and we brought the assets for I would say $0.10 of what the company went for two years ago.

Jon Morrison

The decision to buy that piece of the business versus the civil service for maintenance business is just that strategically it fit right into Canadian Dewatering where the other ones not so much.

Murray Mullen

Exactly, we had no interest in the Civil.

Jon Morrison

Okay, can you give me color on what was driving the tail wind absolute [ph] this quarter? I guess I don't -- maybe I missed it but I don't see Valle's announced anything in terms of expansion on the mining side in Thompson? So I'm just wondering what was the driver to the tail wind.

Murray Mullen

Oh, you've got a big hydro dam going up in Manitoba. So that's a huge project that's going in. And then you got to build the roads, and then you got to service the roads, and now you got new activity. So that's been a good win for them, and they just happen to have a great market position up there. We're very fortunate we got a very good team up there and it's overseen by our Kleysen Group, Jeff Kleysen and his executive team out of Winnipeg. So that's the primary reason why it's so busy up in Northern Manitoba.

Jon Morrison

Just give a point of clarification, because this has been asked a couple of different ways, but you'd characterize your behavior on the oilfield services side as maintaining market share through pricing, but you didn't actively go and try to pick up market share in Q3 through pricing at this point.

Murray Mullen

No, I didn't do that, just protect it, and then what we’ve started to do selectively add people in sales and start -- but we started the -- we started the process of being ready for when that market comes to us that we we'll respond accordingly. But let me be clear. I'm not adding capacity unless price goes up. The good deals, there is no more good deals. So as activity goes up, price must go up accordingly. Otherwise we're not doing it.

Jon Morrison

You guys managed the cost structure fairly well over the last 18 months in terms of reducing your staffing levels as well as trimming regions where appropriate and possible. As we move back into an environment where CapEx is creeping higher on the conventional energy side at least, and you have to look at starting to add bodies, do you believe that you can add those bodies at existing ranges or do you think that hourly rates actually have to inflate if you needed to add 20% or 30% headcount in certain business units.

Murray Mullen

I think that you'll see -- the first thing that will happen is that you're going to, if you have this influx of people, particularly into say Grand-Prairie or whatever, you're going to have to put them in camps. You're going to have to get people from outside the community and that's when wages go up. And that’s when cost goes up. So if you have to put someone in accounts, that’s going to cost you $200 a day average, and if you break that down to a 10-hour day, that’s $20 an hour.

Jon Morrison

And is it fair to say though, at this stage you haven't been out in the market aggressively hiring people to prepare for what could be a ramp?

Murray Mullen

No, because on the labor set, you can only bring the people in as the demand comes back. And what we're talking about is the outlook now, not about what's happened in the last quarter. There was no excess demand. In fact, demand was down. So -- but it's getting much closer to be in balance. And then yes, the price of oil goes up, and yes the price of labor will go up, and yes our rates go up. And we will probably keep relatively the same margin, maybe a little bit of margin expansion, our production services and drilling side, because we need to get some back. Because unless margin goes up you won't make a capital investment. That’s a guaranty.

Jon Morrison

Appreciate the colors.

Murray Mullen

First thing that will come back, you got to get labor back. Once they used up in the local market, and I'm telling you, I think Grand-Prairie local market is pretty much in balance right now. So if you want to get the next person, you got to pay. Well I don’t think service companies are going to pay. I think we're going to pass those costs on.

Operator

Our next question comes from the line Jeff Fetterly with Peters and Co. Your line is now open.

Jeff Fetterly

Just two quick questions. On the organic CapEx side, your budget coming into the year was $25 million. You are just over $15 million through the first three quarters. Is 25 is still a good number, or do you think you will undershoot?

Murray Mullen

Well, I don’t think we'll hit the numbers Jeff. I think we will be substantially below that. You know we should clear on this. Our 25 million was predicated upon us doing a little bit higher EBITDA than what we've done. But like when we first came out in October of -- December of last year, we were not anticipating $25, $30 oil. And so it was only in the first quarter that things really started to just totally melt down. So we just ratcheted it down a little bit more. If oil were to stay kind of in the margin where it's at now, like high 40s or 50s, I think we would have probably been in the $25 million range.

Jeff Fetterly

I know you'll provide more formal color in December, but…

Murray Mullen

Yes…

Jeff Fetterly

But when you think about 2017, predicated on a -- call it a $50-ish oil price, do you have enough excess capacity to not have to ramp up the CapEx? Like is $25 million a decent number to think about then?

Stephen Clark

I would say it's a little early to tell Jeff, but I think certainly in the first half for the drilling season, if we have a bought now committed for the first half. So you are really looking to 2018 and see how the year progresses. So we'll probably put in the number and then have a provisional number with our Board.

Murray Mullen

Yes. Most of it is going to go -- most of it went this year Jeff for strategic staff line plans. And some of our trucking which is business like our Gardewine business, probably got the majority of that capital. And it was all designed to show them how to get this capital and it will improve your margins. And things like that. So -- but the oil patch is way too early to start talking capital for the oil patch. You will need two pricing bumps in oil patch to get to capital. First pricing bump goes to employees. Second capital bump will because we need new capital, that’s too early. That’s late '17, '18 game. We're not going to make a capital investment for the oil-patch in anticipation that the oil companies might raise prices. I ain't doing that. Don’t trust them. Then

Jeff Fetterly

You've touched on it earlier.

Murray Mullen

Let it go up. Then we'll consider capital.

Jeff Fetterly

You've touched on it earlier, Murray, about investment to bring some assets through some operations back and having cut into the bone or to the bone. Do you expect that under a more positive outlook for '17, you’re going to have to allocate a little bit more capital, either in OFS or in trucking and logistics?

Murray Mullen

I don’t know if it will be so much capital as repair and maintenance, Jeff. But it's still going -- our repair and maintenance stays in a relatively tight band because it's predicated once again upon, about your expectation what equipment is going to go to work. So I think it more has to do with repairs and maintenance than it does about capital.

Jeff Fetterly

Okay.

Murray Mullen

I think we should be clear, is that if you've under invested for two years, you are maybe a year or maybe two years away from when you have to go back into reinvest. Like, we can only -- the industry can only go for so long. I don’t think the service side is any different than the oil and gas side. If you quit drilling, production goes down. Eventually, exactly, the same thing will happen in the service side. If you don’t reinvest, eventually you're out of business. So, it’s only a matter when that cycle starts to turn, and it's still too early to talk. That’s a late '17 discussion, I think Jeff, not -- a little early for today I think.

Jeff Fetterly

On the M&A side, referenced earlier about the large cash war chest you have, but when you think about $130 million of debt maturity next year that you've marked capital for, and a subsequent debt maturity in 2018, how much dry powder do you think you have or what are you comfortable using the balance sheet to spend in aggregate?

Murray Mullen

Well, that’s a tough one to answer right now, because really it depends on what we think the opportunities are. First and foremost, we do, we wanted to be positioned, well really for two reasons, one to protect the balance sheet but is other is opportunistically to grow the business. And our first priority would be to grow the business. And so that’s where we are focused on right now. If we find good opportunities, and nothing wrong with the debt level that we got, and we’ll determine whether we payoff that debt or we roll with that next year. That will be dependent upon what the markets tell us.

So too early to talk about that when, but we have all the optionality. If we want, we’ll just payoff that U.S. debt. We’ve got U.S. dollars to pay that off. We hold that, and we continue to generate cash. We generate a lot of cash -- we generate cash because we -- it’s our business model and we cut the dividends. So we generate a lot of cash. So the U.S. debt, we’ll pay off that U.S. debt. The question is, are we going to layer on more debt? Well, that depends on the opportunities. If the markets recover like I think they are, who knows, we might just roll the debt, put it into Canadian dollars.

Operator

Your next question comes from the line of Elias Foscolos from Industrial Alliance Securities. Your line is open.

Elias Foscolos

Good morning, I'll just say my question was asked and I couldn't withdraw. So I don't have anything more to add. Thanks very much.

Unidentified Company Representative

Okay, thanks Elias, take care.

Operator

There're no further questions in queue at this time, I'll turn the call over to Mr. Mullen for closing remarks.

Murray Mullen

So thanks everybody. Some really good insightful questions there, and clearly we've articulated that while things are not necessarily going to change in the next quarter, but the signs are really aligning that within a period of time we're going to see some more normalization, and we can get out of this funk that we’ve been in for the last couple of years. So if there's one takeaway that I'd give everybody that would be it today. So over the next course of the next few weeks we're going to be monitoring the state of the economy, we're going to be watching commodity prices and we're going to of course be looking for any signs that the oil and gas companies are back to restarting their drilling programs. And once we get to mid-December we'll have completed our annual budget review process with our 28 business units and we'll present our views, expectations for '17 along with an update on our strategic initiatives at that time. So we look forward to chatting with everybody in mid-December and until then, thank you very much, appreciate everybody's call in and good questions. Take care.

Operator

Ladies and gentlemen this does conclude today's conference call. Thank you for joining us today. You may now all disconnect your lines.

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