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Core Laboratories: the V-shaped recovery has begun

Core Laboratories (ticker: CLB) continues to call for a V-shaped recovery, with the company’s Q3 press release saying the company “believes the anticipated ‘V-shaped’ worldwide commodity recovery has begun.” Core pointed to increased drilling activity in the U.S. as one of the indicators that a new upcycle is beginning.

Demand for hydrocarbon-based energy continues to grow as supply falls off, said Core Lab. Worldwide crude supply peaked in the second half of 2015 and began a decline that CLB believes will continue through all of this year and next.

U.S. oil production peaked at approximately 9.7 MMBOPD in March 2015 and has since fallen by an estimated 1.3 MMBOP, with decreases of 0.45 MMBOPD in 2015 and 0.85 so far this year, according to Core’s estimates. At current activity levels, CLB predicts 2016 U.S. onshore oil production will fall more than 1.1 MMBOPD which may be somewhat offset by deepwater Gulf of Mexico gains of approximately 0.1 MMBOPD, “yielding a U.S. net decline of approximately (1.0 MMBOPD) and an updated net decline curve rate of approximately 11%,” Core said.

In addition to U.S. declines, Core expects 2016 production declines in Angola, Colombia, Indonesia, Iraq, Mexico, Nigeria, and Venezuela, among others. Also helping on the international supply side of the equation, China recently reported a year-over-year production decline of 10% to less than 3.9 MMBOPD. CLB estimates that the net worldwide annual crude oil production decline rate is approximately 3.3%.

“The net worldwide decline rate is predicated on sharper decline curve rates for tight-oil reservoirs and a significant reduction of maintenance capital expenditures for the existing crude oil production base,” Core Lab said. “These factors, together with the continuing decline in global production, recent Organization of the Petroleum Exporting Countries (“OPEC”) action, the accelerated decline in U.S.-based inventories, and the continuing increase in global energy consumption are creating a tighter crude oil supply market and are expected to result in increasing crude prices and industry activity levels worldwide.”

“Globally, Core estimates that the net crude oil production decline curve is currently at approximately 3.3%. Applying the 3.3% net decline curve rate to the worldwide crude production of approximately 85 million barrels per day means that the plant will need to produce approximately 2.8 million new barrels by this date next year to maintain current worldwide production capacity,” Core Lab CEO David Demshur said during the company’s conference call Thursday.

“Core believes crude oil markets will more than rationalize in late 2016 in price stability followed by price increases, some occurring, as we speak, are returning to the energy complex,” he said. “Remember the laws of physics and thermodynamics means that the crude oil production decline curve always wins and it never sleeps.”

Demshur said the company expects U.S. operators to see more revenue next quarter as activity picks up and prices improve. “We do predict that production activities will pick up in the fourth quarter,” he said. “We’re seeing that manifested in some inquiries and activity rates for our production enhancement group.”

When asked what the recovery might look like going forward for Core in terms of projects and geography, Demshur pointed to the past. “I think a good review would be to go back to 2008 through 2012,” explained Core’s CEO. “We think that we will closely follow that model because it should step out right along the same lines. We do like that business better because we have reduced cost due to some increased automation. And also we have a wider array of products to offer and services to offer.”

Analyst Commentary

Johnson Rice & Company
V-Recovery has begun. Core expects the v-shaped recovery has begun with expectations
for continued global crude supply declines through ’17. CLB’s thesis remains predicated
on continued global demand growth coupled with worldwide crude supply having peaked
in 2H15. More specifically, Core continues to expect US production to decline >1.1mm
BOPD in '16 offset partially by gains of +100k BOPD in the Gulf of Mexico (down from last
quarter’s 160k BOPD projection). Global net decline curve expectations remain at 3.3%.

CLB expects that
consolidated 4Q16 revs will be flat q/q with NAM activity increases
being offset by int'l activity declines, despite commentary that the
market has finally entered a "V-shaped" recovery (which we are not
subscribing to) 4Q rev guidance of $143 mil. - $145 mil. and EPS
guidance of $0.38 - $0.40 implies current cons. ests. may have to
adjust slightly lower.  

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