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Mullen Group Ltd
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Thank you for standing by. This is the conference operator. Welcome to the Mullen Group Ltd. second quarter earnings conference call and webcast. [Operator Instructions] I would now like to turn the conference over to Murray K. Mullen, Chairman, CEO and President. Please go ahead.
Thank you. Good morning, everyone. Welcome to Mullen Group's quarterly conference call. We'll be discussing our financial operating performance for the second quarter, and this will be followed by an update on our near-term outlook as we see it.So before I convince -- 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 further information identifying these risks, uncertainties and assumptions can be found on the 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, Richard Maloney, Joanna Scott and Carson Urlacher. This morning, Stephen will review the financial operating results of Mullen Group for the second quarter, after which I'll provide an outlook for our organization and discuss our near-term expectations for both the oil and natural gas industry as well as the overall economy. And of course, that's always from my perspective, which will be followed by a Q&A session.So before I turn it over to Stephen, I'd like to open with a few comments. We'll start with, it's -- it was really an active quarter for our organization as we undertook a number of initiatives to position the Mullen Group for what I believe will be an exciting and successful future. We invested a portion of the excess cash we held on the balance sheet to complete 3 acquisitions, which, collectively, should add nearly $100 million in annual revenue to our group.And once we get the integration component completed, our profitability will also be enhanced. We used $70 million of excess cash on the balance sheet to repay the Series D notes, reducing our overall debt exposure and essentially leaving us with no future -- further debt repayments until 2024.We continue to look at ways to improve operational efficiencies as well as strengthen business processes and functionality, efforts that will help us achieve higher operating margins. We've positioned Mullen for what we believe will be a recovery in Canada's oil and natural gas industry, driven by changing fundamentals, which includes higher crude oil prices, recent government action in regards to crude oil pipelines to the West Coast, along with movement that we're seeing on Enbridge Line 3 replacement and Keystone XL projects. Collectively, this new pipeline takeaway capacity should help relieve some pipeline bottlenecks and support higher net backs and cash flows for producers.And there was also some positive news as it relates to LNG, one of the most important new opportunities for the oil and natural gas industry. In fact, perhaps for Canada that I personally believe, we as Canadians cannot miss out on. In other words, the outlook for the oil and natural gas industry appears to be proving -- improving here in Western Canada. We also know that there's a full-blown recovery happening in the U.S., which is now a world power house in terms of crude oil and natural gas production and LNG. And listening to the big national -- multinational oilfield service providers, there is a reinvesting trend spreading across many of the producing regions throughout the world. We hold the view that a recovery in Canada is inevitable. For our shareholders and employees, I can only hope for sooner rather than later.We entered into an agreement with a leading-edge technology provider to provide the mobility functionality of moving online. And once completed, which we will believe will be later this year, we will be -- have a new set of tools for our users, connecting the driver using mobile technology has the potentially to radically change the way drivers interact with companies and shippers.So these initiatives that I just spoke about helped us achieve a revenue increase of $22.1 million or 8.1%. But all of this was on the back of our Trucking/Logistics segment, which grew by $36.2 million to $219.4 million. That's a 20% increase. It's a record for any quarter in our history. Unfortunately, our Oilfield Services segment hurt our otherwise great quarter, and that declined by $14.1 million or 15.5% to $76.7 million. Now this is primarily because of drilling activity in Western Canada falling by about 8% year-over-year, competitive pricing that goes along when activity slows and some delays in terms of project and pipelines.We also saw an improvement in our operating income and margins and net income in the second quarter. We lowered our debt and we are now nicely positioned to continue expanding our business when the right opportunities are presented. We had another strong quarter in terms of net cash from operations at around $36 million. And of course, our investment in technology paves the way for a bright future in terms of the current business as well as providing us with potential to create a marketplace for what we think is a very large trucking ecosystem.So all in all, I'll summarize by saying it was a satisfying quarter for us, especially when we consider the headwinds we encountered in our oil and gas service sector. But these headwinds will subside. And now I'll expand upon that later. But right now, I'll have -- I'll turn it over to Stephen Clark who will provide some more details on the quarter. He'll get into more of the details and some granular thoughts. So Stephen, I'll turn it over to you.
Thank you, Murray, and good morning, fellow shareholders. Our second quarter interim report contains the details that fully explain our performance. As such, I will only provide some high-level commentary. And what seems to be a recurring theme, the second quarter saw a growth in the Trucking/Logistics revenue and lower Oilfield Services results. In fact, the Trucking/Logistics segment achieved yet another set of record as Murray alluded to, an all-time record for quarterly revenue, and a second-quarter record for OIBDA or what is commonly known as EBITDA.Another record in a series of records that started last summer. These records came as a result -- not as a result of a particularly strong economy, but rather strong industry trucking fundamentals and acquisitions. Overall, these strong results were tempered by a significant decline in our Oilfield Services segment. As a result, consolidated revenue was $296 million, an increase of approximately $22 million or 8.1% as compared to 2017.On a sequential basis, consolidated revenue was uncharacteristically higher than the first quarter, reflecting our shift towards the general economy and the seasonal effects of the trucking industry. Typically, in the past, revenue declines in the second quarter after heightened drilling activity in the first quarter. This was not the case in 2018. This year, on a sequential basis, Trucking/Logistics was up by about $12 million and Oilfield Services was down by about $8 million.Specifically from a segment perspective, the Trucking/Logistics segment contributed approximately 74% of pre-consolidated revenue and grew year-over-year by $36.2 million or nearly 20% to $219 million as compared to $183 million in 2017. This included $13.3 million of acquisition revenue and $6.5 million rise in fuel surcharge revenue. Excluding the effects of acquisition and fuel surcharge fluctuations, the Trucking/Logistics segment rose by $16.4 million or approximately 10%, demonstrating the underlying strength of the overall industry.Rate increases were the call of the day. And as a results of these rate increases and the overall fixed nature of our S&A costs, the Trucking/Logistics segment generated OIBDA or EBITDA margin of 15.2% as compared to 14.4% in 2017. That was despite rising fuel costs and other inflation. I would note that wholesale diesel prices, for instance, rose by more than 35% in Alberta. Nationally, it's around 37%. Fuel surcharges always lag behind price increases and fuel efficiency is lower in cold weather. And yes, old man winter held on well into late April this year. These were major factors in explaining why fuel rose as 1.5% as a percentage of revenue over last year.I guess that's not my so subtle way of -- to point out that fuel inflation is a real issue for the industry. We also saw wage and R&M inflation. And recently, we acquired some asset-light companies that generated lower EBITDA margins. That being said, this segment was able to generate a record second quarter $33.4 million of EBITDA compared to $26.4 million last year in 2017. And again, this Q2 record was within spitting distance of our highest EBITDA ever achieved which was $33.6 million in Q3 of 2015, which was at the height of the Fort Hills and other projects. So this was a record that was -- a quarterly record that was achieved without any special projects.The Oilfield Services segment contributed approximately 26% of the consolidated revenue, approximately $77 million, which was a decrease of $14.1 million or 15.5% due to the decline in drilling activity. In addition, Premay Pipelines and Canadian Dewatering were down a combined $4.8 million. These 2 business units alone accounted for approximately 33% of the decline.As a result of the challenges of lower drilling activity and inflation, margin declined by 3.7% to 15.5% as compared to 19.2% in 2017. Overall, consolidated margin was 15%, an improvement of about 0.5% despite the large decline in the Oilfield Service segment margin and the fact that we are still integrating our acquisitions.Many of these acquisitions have yet to produce the margin that we expect, and we continue to work to improve them. When it comes to net income, our earnings per share were reduced by $0.06. The negative variance on foreign exchange of $11.3 million had a great impact on earnings per share. This foreign exchange charge is confusing to some given that we are fully hedged with our U.S.-denominated debt. And yes, we've locked in our contracts, I would remind everybody, at $1.11, and we entered into these in 2014. And these hedges mature in conjunction with our notes in 2024 and 2026, so you might think that changes in U.S. debt would be offset by changes in our cross-currency swap and there should be no accounting charge related to the swap. However, we are required to fair value the swaps at the end of each quarter and we must discount the value for maturity and take into consideration the cross-currency forward curve whereas our debt simply valued at the spot at the end of every quarter. That discounting and change in forward curve causes fluctuations in their fair value. So there is an accounting hit. But in reality, there is no, what I would call, an economic hit. Unless, of course, we unwind these swaps early which is not our intent. On Page 20 of our interim report, you will find the calculation of net income that adjusts for this factor. Earnings per share adjusted, as defined within our interim report, was $0.15 per share, up $0.05 from the $0.10 we achieved last year. Our balance sheet remains strong with just over $20 million in cash. This is greatly reduced from our cash balance on June 30, 2017, when it was $250 million.So you might ask, where did all that money go? Well, I'm glad to report it wasn't because of operating losses that it went down. And here are a few numbers that I hope you all can follow. In the past 12 months, we've generated $160 million of cash from operating activities. And yes, that is after paying our taxes. We didn't suffer operating losses, but rather, we delevered the balance sheet. We repaid $210 million of debt over the course of the last 12 months, most recently, repaying our Series D notes on June 30.This has reduced our annual interest cost by an overall $12 million a year. Other uses [ are at ] $250 million, we further -- we invested $60 million in acquisitions, $40 million in CapEx, and returned $50 million in profits to shareholders in the form of dividends. So really, that $225 million decline in cash was largely as a result of debt repayments. This and corresponding reduction in interest expense will allow us to continue to manage our cash position going forward.We generate enough after-tax cash to invest in CapEx and tuck-in type acquisitions. In the past 12 months, we've acquired 7 businesses, 8 when you include Canadian Hydrovac that closed July 1, all largely played through operating cash flows. These acquisitions are estimated to have added over $140 million to $150 million in annualized revenue. Currently, our debt covenant leverage is at 2.51x. We have no scheduled note repayments until 2024 and 2026 and a $75 million credit facility that remains undrawn. Simple math would suggest that with a 3.5x leverage covenant and current leverage of 2.5x, we have about 1 turn of EBITDA in which to borrow approximately $200 million. That's still not a small number, and this does not take into account the effects that purchased -- the purchasing of EBITDA would have on our borrowing capacity. So in conclusion, yes, perhaps less cash on the balance sheet, but still ample dry power to accelerate -- powder to accelerate growth for the right opportunities. And I would add, as a reminder, that during the most recent quarter, we generated about $36 million of cash from operating activity. So still very healthy from a cash positioning and cash generation basis. So with that, Murray, I'll pass the conference back to you.
Thank you, Stephen. In terms of predicting what the future holds for our organization, we all know there are always uncertainties that exist. And the most obvious today being the looming threat of trade wars, tariffs and the like. Notwithstanding the disruptive potential that these may have on the economy, I remain firmly in the camp that the underlying trends that I have outlined in previous correspondence to shareholders remain intact. So let's look at those.Firstly, the Canadian economy continues on a path of slow, but steady expansion. Not enough to generate real top line growth for our Trucking/Logistics segment, but just enough, I believe, for the pricing gains we've achieved over the last little bit to be retained. Consumer spending appears to be resilient. Job growth has tightened the employment market, in fact, to the point where one could argue that we are nearing full employment. The truth of the matter is that we're finding it very difficult to grow our business because the labor pool is so tight. These are the primary reasons, I believe, pricing gains will be retained.Now for comparative purposes only, I'll provide some anecdotal statistics of what is happening in the U.S. economy, where economic growth is much stronger than here in Canada. Truck tonnage in the United States is up 7.8% year-over-year. As a result, truck rates are up double digits. The average truck driver, which could be classified as a good-paying middle-class job, has seen their average annual wage go up by $8,000 to $10,000. And as Bob Costello, the Chief Economist for the American Trucking Association reiterated recently, this is the strongest trucking market in U.S. history, which he believes will continue for some time barring any unforeseen disruptions. In other words, the supply chain is very tight in the United States market, and trucking is doing very well. Not just okay like we are here in Canada.The second trend relates to the recovery in the oil and natural gas industry. As I reported earlier and what everyone that follows this sector of the economy knows, and that is that the U.S. industry is booming. There is recovery occurring in most regions -- producing regions of the world and that Canada is lagging in terms of recovery because of government policy and our unwillingness to support growth in this sector.The headwinds this industry has had to deal with and what our shareholders and employees have witnessed for 3 years now have been pretty strong. But I am optimistic that these headwinds are subsiding, which by its very nature is positive. And if we get some tailwinds at our backs, which is possible with new pipelines, LNG sanctioning and higher commodity pricing, then our results will start to reflect the reemergence of capital returning to the sector. At the very least, there's more hope on optimism today. Here at Mullen Group, we are preparing for an uptick in the activity in the Oilfield Service industry with recent acquisitions we've announced as an example. But on this point, I want to make it clear that we believe a recovery is in the making, but that also that the oil and gas sector is not, at this time at least, a growth business. In this -- in many respects, similar to what we anticipated within the trucking sector and we predicted last year in which we said there was a recovery in the economy but really very little growth. Today, we see a lot of similarities now in the oil and gas sector, a recovery, but not necessarily a growth business.The third trend I've referred to is LNG infrastructure, which is virtually interlinked with the second trend I just referred to. I am clearly of the belief that approval and sanctioning of new crude oil pipelines and LNG projects, the most important to the Mullen Group by the way, are closer than ever. Our business will benefit from these capital investments for a long period of time.So in summary, I am optimistic that the initiatives we've undertaken thus far in 2018, along with the steady economic outlook and improving outlook for the oil and natural gas industry will afford the Mullen Group the opportunity to generate top line growth and improved profitability in the second half of 2018. With that, I want to thank you very much for joining us today. And I'll now turn the call over to the operator who will open the lines for a Q&A session.
[Operator Instructions] Our first question comes from Elias Foscolos from IA Securities.
I have a couple of questions, first one related to the increased CapEx, the 50% increase. I'm just curious if we can attribute that to the OFS sector and maybe anticipation of an LNG project in addition to, I guess, the Trans Mountain pipeline? Some comments on that?
Yes. Elias, it's Murray. Part of it is we've acquired some more assets with these latest 2 acquisitions. And as a result, these companies will have some CapEx requirements. And there -- these 2 companies are primarily focused on the oil and gas sector. So I think it's primarily going to be focused on the oil and gas sector because when we started this year, we really didn't have a good positive view for the sector, so we didn't allocate a lot of capital for the oil and gas sector. Whereas, today, I think we're saying we got to go to a more of a neutral waiting than an underweight rating in terms of our capital allocation to the 2 sectors. So I think we've got just about enough for the Trucking/Logistics sector at $40 million. And really, most of the $20 million will go to the Oilfield Service sector.
Okay. In terms of pricing power, I guess on the call, you've talked about pricing power that you've been able to push through and believe you can maintain. Is there any prospect for increased pricing power above inflation?
So that pricing power that we received was all in the Trucking/Logistics side, and that was -- I think most of the pricing levers that we got in Canada really is on the backs of what happened in the United States where it's so busy that the carriers down there were moving pricing aggressively and with the tonnage rates being up nearly 8% year-over-year, that used up most of their capacity. So that really freed us up in Canada to get some pricing leverage. Nowhere near like they've got in the United States, none. But at least we had enough to beat inflation and to show some little improvement in our T/L sector, and that's in spite of having some asset-light business that we acquired. So not -- just enough to move our margin a little bit, which is the best we can hope for in this market of really a no-growth Canadian economy. It's just kind of -- it does okay, but nothing anywhere close to what's happening in the U.S. But I -- it's -- we're busy enough now and there's very low unemployment, so it's difficult for anybody to add capacity because there's no drivers. So in the absence of that, if the economy stays roughly in line where it's at right now, I would say that most of those pricing points that we've achieved will remain in the next bit. Will we get more from here on? Really depends on whether we get some growth in the Canadian economy, in my view.
Late last year and earlier this year, you gave us some EBITDA guidance. And in that guidance, I believe there was nothing baked in for some major pipelines, particularly the Trans Mountain expansion. With that, I would say, moving ahead, is there a little more upside potential for guidance overall? Or has the softness that's experienced in the traditional oilfield side service work kind of offset what upside you might be receiving from that?
Well, that's -- we're still unsure on Trans Mountain, to be honest, Elias. So there's lots of announcements. We think it's going to go, but there's still a lot of bottlenecks in that system, namely some protesters and others that are disrupting how much can really get done. So I don't think the real work has commenced yet. There's lots of talk about it. We're hopeful. But until you actually get the order and get moving, it's -- you got to just kind of think it's coming. And I think that's really the camp that we're in. Now our pipeline business, Premay Pipeline and whether it is -- we got a lot of orders on the books and everything looks lining up, but it's a project business. It can be delayed by weather, by increasing -- by protest. It looks constructive, but we've got to be a little up, we got to be a little realistic. I don't know if that will translate into the second half of this year or not. It's too early to really predict that.
Our next question comes from Walter Spracklin with RBC Capital Markets.
My first question on the acquisitions that you've done thus far. I think, Murray, you alluded to $100 million revenue run rate. I'm putting most of that in OFS. Is that right? Or is there any of that goes -- that tucks-in [indiscernible].
Most of that $100 million is our Oilfield Service side. That's what most companies will end up. We need a small tuck in, but it's de minimis of the third acquisition, yes.
Correct. So with that now extra $100 million, you had a guidance out there for revenue of over $1.2 billion and EBITDA of $190 million to $200 million, I think. Now that you've got these in there, do those offset some of the weakness in the first half that you've seen? Because it looks like the back half has to be pretty good for you to hit those numbers. Are you -- what's your take on that guidance at this point?
Well, our guidance that we talked about was $1.2 billion and $190 million to $200 million. That's what we indicated in the first of the year. I think it was in December of '17, we indicated that, that's what our plan would be for '18. To achieve those objectives, we said we had to deploy some of the cash and we had to do acquisitions. We're pleased to say we got the acquisitions done, but the 2 big ones are really -- don't really happen until July 1. So we missed the first 6 months for sure. But we'll make up some ground now because we got these acquisitions done for the last half of the year. So we'll be -- I think we're still going to be awfully close by the end of the year on our original projections. And then, of course, once you get that, then it sets up very good for 2019 and beyond because we'll be a bigger company and we'll have a bigger base from which to work on. That's our view at this time. So...
And I think what a lot of investors are doing are exactly that are not kind of valuing you off the industry trough. It would make sense instead looking at more of the, let's call it, normalize but I'm not sure what normal is anymore. But if you were to look at your own business farther out, outside of acquisitions, you've kind of targeted a 15% to 16% EBITDA margin on your trucking business. Does that still apply on a long-term run rate, would you say?
Yes, I think that's a reasonable assumption. I don't see much reason to change that. I think Q2 on our Trucking/Logistics side is more in line with what you would expect in that sector. The biggest delta for us will clearly be if we get rid of the headwinds that we've been facing in the oilfield side. We think those are dissipating, which in itself is positive news, because we're not facing headwinds. Even if it goes to neutral, then we'll be -- we won't be having to talk about negative growth and negative, negative. So -- and then the really -- we've done these acquisitions because we think we've been reluctant to catch a falling knife, to be honest. We've seen a lot of headwinds and a lot of problems in the oil and gas side. But I'm not so sure that we're at bottom now. That's our thesis. Others could take a different view. But ours is we're probably at rock bottom, and that's probably a decent time to start looking at positioning yourself for the next number of years, which is why we made those acquisitions over the last little bit. There's clearly stress in the seller market due to low margins, and it's the oil and gas business. You got to make sure, because it's a very cyclical business, you got to always make sure you buy at the right price. And if you do, then you minimize the risk. So buying at the low end, if we get any type of push, any recovery, then our shareholders will be -- will benefit quite nicely from us deploying that capital out. We'll continue to look at growing in the Trucking/Logistics side. But I think we just announced now is that we have a more constructive view. We like the price. And to be honest, we like our timing. We could be wrong on timing, but we certainly like the price we acquired them at. And let's see whether our timing works out. We'll know more as the quarters unfold.
And then looking at on the OFS side, given the book of business you have now and understanding why you will ramp higher as the industry recovers, you've always indicated you won't get back to prior peaks because the industry simply won't get that big again, but that you will have a better share and perhaps a better quality of share of what this eventually normalizes at. If we look at that scenario in the long run rate of margin like we've done with the -- on the trucking side, historically, you've gone up to, I guess, as high as 24%, but really in that 20% to 22% range. Is there any reason why you can't back to 20% to 22% even if it's in the lower revenue base?
20% to 22% could be difficult and I'll tell you why. Because I don't think that the industries are going to be a growth industry per se. And within -- the only reason you get to 20%, 22% is because everybody needs more capital. So you need to have a 20% to 22% to have more capital. I would say it's more in line with Trucking/Logistics now, 15%, maybe a little bit above. I think our historical span is -- what we're targeting now is maybe just a little bit about 15% because it's a capital-intensive business. But there's still not enough return in the Oilfield Service side for us to deploy a lot of new capital into that because it's not a growth business. We're just going to a neutral waiting, not a growth waiting. But if I saw that margins were getting over 20%, then I would say that would give us the data point that we need to be more aggressive on capital. At 15%, we're neutral at best. At 20%, we'd be much more aggressive.
So your CapEx spend obviously tailored to that. At 15%, you're looking at a $60 million CapEx. At 20%, we might be double that?
Could be higher for sure. I don't know if it will be double, but I think our OpEx would be double. Because we're at a neutral waiting right now in our Trucking/Logistics side at roughly $40 million a year for Trucking/Logistics. And now oil patch is getting back. If we got aggressive in oil patch, we'd be $40 million in oil patch, too.
So $80 million is probably a good...
[indiscernible] business and you're back where you were in the old days which was $100 million, right? But I don't see that -- I don't see enough growth to -- in that.
Our next question comes from David Tyerman with Cormark Securities.
First question, I just want to clarify on OFS. So are you saying that 15% or maybe a bit above that is the level we should be thinking of for an EBITDA margin for OFS sort of on an annual basis going forward?
I think it's -- in the absence of getting some really good growth in that business, I think it's reasonable to assume that that's where you'll be in and around that number. Could be a little bit higher, because it's a very cyclical business. But -- and it'll be subject to -- some quarters will be up because we may have an active quarter from some of our specialized business in which you do 20% or 25%. But then the next quarter, they're down to 10%. But so I think over a balanced 12 months, I think 15% to 17% is a reasonable number for the Oilfield Service side. And that would be enough for us to consider doing a neutral waiting on capital allocation.
Okay. So when I think about the sales numbers in the $1.2 billion range and kind of what you can do in Trucking/Logistics, I'm not sure I would get to -- I'd have to do the math. But I'm not sure I get to your target range for EBITDA for the year. So I'm just wondering if you disagree with that or if you have some suggestions on how to bring all that together.
Yes. So if you took $1.2 billion at 15%, it comes out at $180 million. So I'm targeting a little bit above that if we got the acquisitions done. We're a little bit behind. But if you get some push on some of the pipeline activity and some of these -- because those are big projects, and when they go, they go fast. So we could have a little bit above that in the short term. But I think over the course of the period of time, I think targeting 15% to 17% for the Oilfield Service side is a reasonable number. We'll go -- that will be -- it's a fluid number because it depends on big projects and those kind of things. And if they do, we'll be above it. And if they don't go, we'll be on the lower end of that 15%. That's basically how I'd look at it.
Okay, fair enough. And then could you just talk a little bit about the -- your expectations on the pipeline in terms of business for you and when you would expect the money? It sounds like TMX is kind of a bit hard to call right now, but maybe the LNG, the Line 3 and the Keystone XL?
So Line 3 is a go. We're on -- we're active on Line 3 right now on the Canadian portion for sure, which is the part we'd be involved in. So we're active on that as of right now. Right, Richard?
Yes.
Yes. There's some movement on moving of pipe around on Keystone XL. Some of the original pipe that was built with that was built Canadian-made. It will not be put in the ground in the United States, so that has to be moved out of the U.S. and there's some just repositioning of that. But it looks there's just information coming out that suggests that maybe XL is going to get some -- get going. TMX, there's still pipe moving. There's pipe on the ground. There's more pipe coming in all the time, but that's being stockpiled not actually put in the ground. So we're involved in the stockpiling, which tells me the pipe's coming in. So I don't know if it's Kinder Morgan that's ordering that, I don't know if it's our Prime Minister that's ordered that pipe. But regardless, the pipe is coming in. And that pipe will not be able to be used for natural gas. That's a total different pipe that will go in for LNG. Most -- that's a different spec and different pressured lines, et cetera, et cetera. So -- but there is a lot of movement on LNG. And I'm not making it up, I mean, it's in the press and there's this and that. It appears we're just waiting for the signing ceremonies and a maybe Is dotted and Ts crossed, but there's a lot of initiative going on in LNG. And we're only -- we're hopeful as many are that we could get going and develop that expertise and get going in terms of -- for Canadians getting that because we can't miss this opportunity. We've missed the first one, but we better not miss this one or else the U.S. will just crush us.
Sure. So could you give us an idea of the opportunity in dollars for Mullen for these 4 projects?
Well, I think it's not just pipe, it's just -- it relates really to economic activity, too, because once you get going, there's a lot of other side benefits that go with it. But I don't know maybe our pipeline business will be in the $50 million, $60 million range or something like that. Just for these pipe -- just for that. My general sense is if you approve 1 LNG facility, I would be very surprised if we stop at 1. Either LNG is a go or it's not a go. And it seems to be making more and more sense that natural gas is the clearest path towards electrification that Asia and Europe is looking at. It appears to be that way.
Okay. So if I understand it correctly, these projects are kind of like a $50 million, $60 million opportunity for your pipeline business then you get all the spinoff from greater economic...
Economic activity, that's correct. That helps all our business. Now once you get the pipelines built and then you're finished with that part of the buildout phase of the pipelines and some of our dewatering business, because you have to move water and go through creeks and you have to do all this, and then you're going to move into where the drilling side. So another part of our business will pick up that slack. That's why I say we'll benefit for a long period of time. Building a pipeline is good for a short period but it's -- once the pipelines built, we got to fill the line, and it's going to be for 20 years that you got to fill it with natural gas. And so we think that -- that happens in a couple of years. But at least we're involved in the construction phase. If you're waiting for drilling, you got to wait another couple of years. It's -- we just don't have enough takeaway capacity for natural gas in Western Canada because we've been debating and thinking and protesting and everything else. But -- so we're behind the curve, and that's different than in the United States where they went let's go, and they've now -- are 5 years ahead of us. So we're playing catch up.
Okay. That's very helpful. One last question for me, just on Trucking/Logistics. On the pricing, I'll call it net pricing, pricing less driver wage increases. Is it your view that we're pretty much in Canada, there's not much more to go right now without the economy getting going stronger? Or is there more at this point you think and I know ELDs are coming in Canada the next year presumably that could be one thing that could help going forward?
Yes, I think that's a fair statement. But generally, in the absence of a reduction of supply and ELDs might -- in the U.S., they suggested that was about a 4% delta that it changed the supply chain and changed capacity by about 4%, not 40%, but about 4%. So that in itself is helpful in terms of that. Where they really got that was that 4% reduction in capacity at the same time they got an 8% increase in demand. So they had a double, double. In Canada, I don't see massive growth in Canada. I think the pricing that we recovered is good and any pricing from here on in will be somewhat neutral to cost. We've got to watch what happens with tariffs, what happens with the Canadian dollar and any more tightening in the labor force would certainly tell me that labor rates will go up -- will be a few years behind the U.S. but I think it will also happen here eventually. That $8,000 to $10,000 for the average trucker, if we got any growth in our economy, the average trucker will get that same level of increase, $8,000 to $10,000. If we had any economic growth, our employees would do exceptionally well.
Our next question comes from Michael Robertson with National Bank Financial.
We saw some margin expansion from Q1 into Q2 in OFS. This happens sometimes, but it's a bit rare. Can you give us some color on what divisions were the reasoning behind that?
Yes, I think it's really specialized -- it's really our specialized...
Dewatering didn't contribute much in the first quarter as you could imagine. It's not a good timing to dewater, but it was pretty good in second quarter. There's a primary reason. Everyone else is fairly flat actually.
Well, I think the other one was on a comparative basis is that our -- on a year-over-year basis our pipeline business -- we just didn't do hardly anything in the first quarter in our pipeline business, whereas in the Q1 of '17, we were -- they were rocking. So that can really change that delta by 1 or 2 points, which is what I was talking about earlier in this call is that that's project business. And if you get it, you make your good margin. If you don't, you just kind of hunker down and you wait, then you don't have that high revenue with good margin, you have low revenue with no margin. So it kind of changes the delta. So -- but our core business, I think, was basically flat, Michael. Some of the -- on our -- anything to do with drilling, I mean, it was down 8% and it was a really, really difficult quarter. Now the good news is that that's recovered now. We were -- we've got the rig count now above 230 rigs in the first -- in the second quarter, like, 85 or I mean that is ridiculously low. So I think you got a more balanced third quarter coming in and that will give us the data point that you'd be able to say, that's more normal. It's very difficult to pick Oilfield Service numbers out of the second quarter because there's just nothing going on. To the extent that we were able to show any positive EBITDA is a testament to the diversity of our business model.
That sort of leads into my next question. Getting into Q3 now, as we look at some of the higher-margin OFS businesses, are we -- are you already seeing more pipeline and dewatering activity in the hopper.
Very -- it's better than the first half and more in line with what we did last year, yes. So even the rig count is now -- just it's marginally above 2017, but it's not like 30% above 2017. So I would guide towards -- we'll be back more towards what '17 was in terms of our margin.
Okay. Lastly, you mentioned earlier on the call about the momentum of moving online. When do you think it can become a meaningful contributor to the overall business?
We're long ways away from that. What it has done is our investment in that and our getting into it has really enhanced how we think about doing our business. That's the first -- that was the reason why we went into this, was not to really take over the world in terms of marketplace, but to make sure that our current business that we are moving in the right direction in terms of that of using data analysis and connecting with our clients and the marketplace in new creative ways, which is what the marketplace does. To get to that point, you'd had to have massive scalability. What we're trying to do is just come up and incubate and get the right tools, whether we can become a massive marketplace or not, I think that's a big stretch. But regardless, all of our initiatives will benefit our current business. There's -- whether it's the marketplace that we developed in our low board and sharing of information or whether it's mobility for our drivers, our current businesses will benefit. And that's the primary reason why we're making these initiatives. It's all about technology. Now when do we get into the point where we're the perfect solution and it can become scalable from there? We're not predicting that at this moment. If it does, then we'll come out to our shareholders and talk about it. Right now, I'm just telling people what we're doing to make sure that our business is more -- is going to be leading-edge.
Our next question comes from Turan Quettawala of Scotiabank.
I guess I wanted to focus a little bit on the growth side on revenue. I guess, first of all, just want to clarify, I think you talked about growth -- top line growth and better profitability, Murray, in your comments. Is it fair to assume you mean top line growth in both segments? Or is it just sort of overall?
We didn't really have top line growth in the oilfield side. We might have top line growth now because we're doing acquisitions. But most of the growth, Turan, that we're seeing is all coming from acquisitions. It's not coming from the market itself. Where we think the market will improve for us is it'll tighten just enough that we can get the right pricing leverage and get the better returns on the capital we've got employed, which is exactly what we have seen happen in the Trucking/Logistics side. It's tightened enough that we can get margin. But the growth that we're seeing in our T/L side has been through acquisition. We had to change the game through acquisition and then at the market tightened and allowed us to get pricing leverage but our growth come from -- most of it came from acquisition, right?
No, no, no. Yes, I understand that. I was just trying to understand -- that's what I was trying to understand that you're talking about top line growth in the second half and that's sort of obviously partly coming from acquisitions. But -- and you've been shrinking in the Oilfield Services businesses in the first half. And I was just wondering whether you talked about sort of reaching the trough. I'm just wondering whether you think the top line growth can come in as quickly as second half or does it come maybe next year or the year after that?
We'll get the top line growth because we get the acquisitions that we just announced, and that's started on July 1. We're now seeing the drilling rig count back up way above where it was in the second half, and it's actually now above actually the first half -- first quarter. So -- and even above a little bit above where we were in 2017. So that should give a little bit of growth just because there's more drilling activity. Now if we get some more capital going like pipelines and LNG, that's more growth. So at least there's the potential for growth now and then you layer on top of that the acquisitions we've done in the Oilfield Service side and we would -- we're suggesting to you that the second half will be better than the first half for Oilfield Service side for sure.
Got it. Okay. And then I guess just overall, I know it's still early and it's been very volatile, but do you think next year you could get something in the high single digit sort of just overall for the company growth?
We're probably still going to have to do acquisitions unless you tell me that the Canadian economy is going to grow by 2.5% to 4%. If it grows by 4%, we'll give you lots of top line growth.
Okay. So including acquisitions, though, you would get to, like...
No, no. We're still going to be in the acquisition game. And as Stephen pointed out, we still got well over $200 million of liquidity in our balance sheet to pursue that. So yes, we still got -- we're still an acquisition-based company and we'll continue to look at acquisitions for sure.
Perfect. Okay. And then just last question from me here. I totally hear you about pricing in the trucking segment. Certainly, we've been hearing that as well. Where do you think a risk on this pricing story at all, Murray, that you could highlight? That you think will -- I mean, something that's sort of at the back of your mind that says, okay this happens in the pricing story kind of unravels a little bit?
Well, I think -- yes, I think there's risk on the pricing side. And I think the risk is really driven by what happens in the U.S. Are they going to be able to maintain that strong economic recovery that they got going on right now? I referenced Bob Costello from the ATA, who said he believes that the pricing and the economy still has some legs. He did highlight, however, trade and tariffs as a potential to derail that. I think we should also keep in the back of our mind that if crude oil prices were to go too much higher than where they are today, I don't see how that would be good for the consumer and the overall economy, which could take money out of the consumer and maybe slow economic growth a little bit in the U.S. at the same time that everybody's added capacity. That could be a risk.
[Operator Instructions] Our next question comes from Jon Morrison with CIBC Capital Markets.
You've obviously made a number of oilfield services acquisitions lately despite the fact that the macro backdrop isn't glowing. Am I interpreting your comments right in that the largest driver behind that has been reconciling more reasonable price from the seller than anything else and it's effectively not that you're making your call on the market getting better.
No, Jon, I think it's 50-50. I can tell you that we are very, very comfortable with the pricing that we acquired these assets at, and we minimize the risk to our shareholders by buying at the price we get. But secondly, I have a much more constructive view that things will get progressively better. Our competitors are not doing well, which is why nobody can invest in capital. And it wouldn't take much growth in the oilfield service sector side to tighten the market quite significantly. There are no additional people. Personally, I doubt if we could add 100 drilling rigs to the basin rig quickly. I don't think there's enough people to do that without having very, very high pricing, which is exactly what you've seen happen down in Texas. So I -- it's a little bit of -- clearly we think we bought at the right price. Now let's see whether or timing was good. And not unlike in 2014 we've got quite negative on the oil and gas business and we were early on getting negative. I can only hope, for our employees and for our shareholders that being early on being positive is the right step. I'd rather be a little bit early than late. To be honest with you.
The prices that you paid for those were incredibly reasonable and would have been below what we were expecting as well. Is it fair to say that for you guys to meet your hurdle rates, you don't need things to get better as you integrate them but that would be all incrementally above what you would call the base hurdle rate for investment capital?
That's correct. We're comfortable that it will be -- that our shareholders will win by how we've deployed this and all the potential upside goes to our shareholders if we got our timing right but for sure we bought them at the right price and we'll get a return on those assets. How good? It depends on how well the market recovers but we will get a return. That's our job here.
Stephen on your fuel inflation comments, there was obviously a large catch up this quarter as there's a lag that goes on as you're in a rising fuel price environment. If diesel costs were to flatten out from here would you still see a decent read through to better margin and fuel surcharges getting picked up in Q3 based on that lag impact or is it largely all been caught up at this point?
It's catching up. There's no doubt that fuel will still be a headwind for us. We're always behind but I appreciate your comments. The price of diesel is probably flat from here on in from -- as long as oil is relatively range bound between $65 to $70. The challenge in the oilfield services side is that we don't get fuel surcharges and so we really have to look at prices in the fall because clearly that is such a rise in fuel prices. We can't eat that forever. We'll do that in Q2 but there's not much activity so you’re not burning much fuel but once you get back to more normal activities and when fuel -- you start to burn a lot, we got to take a look at it and look at pricing for sure.
That's helpful. Murray you talked about labor availability becoming an issue. Is it at a stage now where you believe that average wages that you're going to pay to an employer at year end are going to be materially different than where they are today? And is that comment driven towards both the Trucking/Logistics and oilfield services side as far as the tightness that you're seeing?
It's -- I can tell you Jon, it's something that we are very, very aware of here. That -- and we're watching it like a hawk. I wouldn't be surprised to see, with any type of announcement on -- and any increase in economic activity in Western Canada, particularly in the oilfield side. I wouldn't be surprised to see some pretty big moves in pricing. As an example, it is virtually impossible to hire anybody in Grande Prairie right now. And we're not even -- and it's not even busy. So I wouldn't be surprised the next employees that are going to come in to the oil and gas sector are going to have to come from oil products. That in itself implies much higher prices.
If you back out the positive impact of acquisitions and fuel charges in the quarter, your Trucking/Logistics business still showed healthy year-over-year growth. Can you give any sense of an idea of how much of that was a function of tonnage increases versus price increases?
They're very little tonnage. It's just a couple percent. Most of them was pricing. And that was something that I articulated in previous calls is that I've been -- I'm not asking our business units to get pricing, I'm telling them to get pricing. And I think they -- for the most part, they listen pretty good. I'm very happy with it.
Okay. Last one just for me, is M&A the only thing that would really materially change the 2018 CapEx program at this point? And realistically speaking, any incremental bump is really probably more of a 2019 spend above and beyond what you obviously know.
Yes, it will be mostly acquisition first on the CapEx side. It would -- there's still going to be that. We'll take a look at it at the end of next quarter. The thing that I'm a little bit concerned about in terms of CapEx right now and I articulated in the press release, if you wanted to go get a new truck right now, a Class 8 truck, not a pick up, but a Class 8 truck to go to work in the oil patch, that truck will not be ready for delivery until April of 2019. The supply chain is extremely tight. I don't need to tell you, you have no negotiating power in negotiating price if you want a truck in April of 2019. That's how tight it is right now and the trailers are virtually the same thing. Any specialty equipment really, really tight right now, Jon. So we have to -- we're going to have to make earlier calls than we ever have. Usually, we wait until October to do our budgets up. But we've already alerted our business units to say, think about 2019 now, which means we're -- we got to get in the hopper and you got to make your call early. Because if you wait, you will not be able to add that equipment when you need it. So we're being aggressive. That's part of the reason why we increased CapEx now. We're taking spots and we're gobbling it up because if you miss it, you're not getting until April of 2019.
Actually one more just last one for me. If LNG Canada were to go ahead, there's obviously a number of stages where you'd be involved as you alluded to. Do you believe the bulk of those would be heavily weighted to the early stage spending on the project and that it would largely be a 2019, 2020 story for you guys if an FRD were to take place say by the end of the year?
Yes, I think that's fair to say, it's -- I don't see a lot of economic activity happening this year. There'll be a lot of planning and negotiating and all that. But we're making plans right now as if it's going to go in 2019. We're thinking about that right now.
This concludes the question-and-answer session. I would like to turn the conference back over to Murray K. Mullen for any closing remarks.
I don't have any folks. Thank you very much. It was a great session. Good questions this time. Hope we've added a lot of color to it. I do have to thank my team. When you do acquisitions like we have, I got to tell you, we have put a lot of pressure on a lot of people and our whole organization responded remarkably well. I'm just -- as you can see all, I'm very, very pleased with that, they are just true professionals. So I want to thank all of our team, and we look forward to chatting with everybody in the fall. And I hope everybody's summer goes well and think LNG, Canada, think LNG. Thank you very much.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.