Core Laboratories (ticker: CLB) is a leading provider of proprietary and patented Reservoir Description, Production Enhancement, and Reservoir Management services used to optimize petroleum reservoir performance. CLB has over 70 offices in more than 50 countries and is located in every major oil-producing province in the world.
On October 17, 2012, the company reported Q3’12 earnings results two weeks after reporting a downward revision in its previously guided earnings per share (EPS) estimates for the quarter.
Some background: After the market closed on October 1, 2012, Core Lab publicly guided Q3’12 EPS to be $1.09 to $1.13, less than the previously guided EPS range of $1.17 to $1.25. The market’s reaction to the new Q3’12 guidance was swift – CLB lost approximately $930 million of valuation on October 2, 2102.
The primary reason for the guidance change is a negative change in the North American rig count. The company originally guided its Q3’12 results using a “flat” North American rig count. Instead, the U.S. rig count in the third quarter was down 6% and the Canadian rig count was down 30%. The company’s Production Enhancement unit derives a higher percentage of its business revenues from North America. Reporting on the Production Enhancement business unit’s performance in the company’s Q3’12 news release, Core said: “Operating margins (for Production Enhancement) were 31%. Moreover, and more importantly, these results were sequentially better than second quarter 2012 results, despite the U.S. rig count decreasing approximately 6% sequentially from second quarter 2012 levels, reflecting the positive impact of the increasing market penetration of Core’s technology, especially applied to unconventional reservoir development.
A quick example taken from the company’s conference call: “[…] as an independent evaluator of proppants, we test proppants that are sand, resonated sand, ceramics and proppants related to systems like HiWAY that Schlumberger has. So it [new technology from other companies created to enhance unconventional reservoir production] does form a source of revenue for us, as we test these systems under rock mechanics and hydraulic stress that would occur in the reservoir. So for us, the more proppants that are available, or the more systems that are out there to prop open the reservoir, the better for us.”
Operating Profits Remain Best in Class
Core’s year-to-date corporate operating profit was 30%, flat with the six months ending Q2’12, but up 370 basis points year-over-year. One of Core’s strengths is the company’s operating scalability – which generates best-in-class profit margins from existing assets, products, services and professionals. Evidence of Core’s operating profit margin is how much cash flow is generated from capital spending. Approximately $0.11 of capital expenditures generates $1.00 of cash flow. These figures reflect trailing twelve months data as of Q2’12 as we are waiting on all peer companies to report Q3’12 results.
Free Cash Flow – A Novel Approach
During Q3’12 Core generated free cash flow of $46MM. One of the company’s financial strategies is to match its annual spending with its annual DD&A expense. For the nine months ended September 30, 2012, CLB generated net free cash flow (FCF) from operations of $127MM, after capital expenditures of $24MM. Full-year 2011 FCF was $174MM. Free cash flow is not a GAAP defined term. In 2012, the company paid cash dividends of more than $40MM and repurchased (as of the October 17 news release) 1,109,496 shares.
Investor Returns on Invested Capital
When factoring in capital investment and EBITDA, Core’s Return on Invested Capital is unmatched. For the purposes of this calculation EBITDA is used. For the period ended Q2’12 (again, not all peer companies have reported) CLB’s ROIC was 75%. In CLB’s Q3’12 news release, the company reiterates the importance of this metric: “As reported the previous twelve quarters, the Board of Supervisory Directors of Core Laboratories N.V. has established an internal performance metric of achieving a return on invested capital (ROIC) in the top decile of the service companies listed as Core’s peers by Bloomberg Financial. Based on Bloomberg’s calculations for the latest comparable data available, Core’s ROIC was the highest in its oilfield services Comp Group. Moreover, the Company had the highest ROIC to Weighted Average Cost of Capital (WACC) ratio in the Comp Group.”
Oil & Gas 360® compiled a few paragraphs from research analysts who wrote on Core Lab following the announcement. OAG360 suggests that you contact the analyst and/or salesperson to receive a complete copy of the report. Please read the important disclosures at the end of this note.
Howard Weil, CLB $103.71 (MP): Reports 3Q12 Results
Quick Take: Revenues and recurring earnings were near the top end of the range the Company suggested in its earnings pre-announcement earlier this month. Of note, Production Enhancement operating margins actually increased by about 70 bps sequentially, resulting in operating income that was in-line with our expectations following the 2Q12 earnings release and conference call. The outlook for the remainder of the year is consistent with the revised guidance with revenue and earnings expected to straddle our estimates and the Street consensus. We maintain our Market Perform rating.
3Q12 Results: The Company reported earnings of $1.14/share, including $0.01/share of net gains from an insurance settlement and foreign exchange impacts. Recurring earnings of $1.13/share were in-line with our estimate, slightly above of the Street consensus of $1.11/share, and at the top end of the revised guidance range. Revenues of $245 million were also at the top end of the guidance range, with Production Enhancement revenues of $101 million slightly exceeding the updated outlook of $100 million offered earlier in the month. PE operating margins improved during the quarter to 31% and actually exceeded our prior forecasts, indicative of the Company’s cost control initiatives. Revenues and operating margins both declined sequentially in each of the Reservoir Description and Reservoir Management segments.
Guidance: 4Q12 guidance is consistent with the previously announced updates, as North America activity levels should be relatively flat sequentially while international is anticipated to show moderate growth. Revenue and earnings expectations of $245 – $250 million and $1.10 to $1.17/share, respectively bracket our current estimates. General commentary regarding moderate growth in 2013 centered around international and deepwater producing reservoirs is consistent with the assumptions in our model that drive our $5.00/share earnings estimate for FY13.
Barclays Capital, Inc., Core Laboratories (CLB) – Overweight / Positive, October 17, 2012
Price Target: USD 126
Price (17-Oct-2012): USD 103.71
Potential Upside/Downside: 21%
Ticker: CLB
We believe Core Laboratories’ 3Q12 earnings release has modestly positive implications for the stock, as the company topped lower expectations following its preannouncement on October 1. Third quarter operating results of $1.12 per share were above our estimate of $1.10 and consensus of $1.11. The company issued a positive outlook for 2013 and revealed a significant step-up in share repurchases since the preannouncement and subsequent share price decline.
Core Labs reported 3Q12 operating EPS of $1.12, above our estimate of $1.10 and consensus $1.11. From the results we excluded a one-time insurance settlement and an FX gain, which in aggregate, added roughly $0.02-$0.03 per share. A higher-than-expected tax rate reduced EPS by about $0.01. EBITDA of $80.2 million slipped 1% sequentially but surpassed our forecast of $77.5 million.
Since October 1, when Core Labs preannounced lower-than-expected 3Q results and shares of CLB fell 15% the next day (vs. flat OSX), the company has significantly increased its share buybacks. CLB has already repurchased 422,600 shares in 4Q at an average price of $101.87. This compares to the 283,513 shares the company bought back in all of 3Q at an average price of $117.07.
The company issued 4Q guidance of earnings per share between $1.10 and $1.17 on revenue between $245 million and $250 million. This compares to our current EPS estimate of $1.13 and consensus of $1.12.
Total revenue of $245 million fell 1% sequentially but was in line with our $244 million estimate as modestly better-than-expected revenue for the Revenue Description and Production Enhancement segments was partially offset by lower-than-expected Reservoir Management revenue. Total operating income of $74 million declined 3% from the previous quarter but beat our forecast of $72 million. The operating margin at 30.0% contracted from 30.8% in the prior period and was below our estimate of 30.4%.
Revenue for the Reservoir Description division of $124 million fell 2% sequentially and was higher than our $122 million forecast due to a seasonal decline in the company’s Canadian operations tied to oil sand projects (CLB has experienced a sequential decline in RD revenues in four of the past five years). Operating income of $37 million declined 5% from the previous quarter but matched our estimate of $36 million. The margin at 29.6% contracted from 30.8% in 2Q12 but exceeded our 27.7% forecast. Core continued to benefit from strong demand from some of the largest deepwater projects worldwide, including offshore Brazil, Angola, Gabon, Nigeria, and Ghana. In the Middle East, CLB continues to work on projects in Iraq, Kuwait, Saudi Arabia, Qatar, and the UAE.
Production Enhancement revenue of $101 million rose 1% sequentially and was in line with our $100 million estimate despite a 6% decline in the U.S. rig count during the quarter. Operating income of $31 million increased 4% from the previous quarter and beat our $28 million forecast. The margin at 31.0% expanded from 30.3% in 2Q12 and was below our 32.5% estimate.
Reservoir Management revenue of $20 million fell 3% sequentially and was lower than our $22 million forecast. Operating income of $6.0 million declined 3% from the previous quarter and missed our $7.7 million estimate. The margin at 29.6% contracted from 34.0% in 2Q12 and was below to our 35.0% forecast.
Core generated $46 million in free cash flow during the third quarter. The company paid cash dividends totaling $13 million and repurchased 283,513 shares for approximately $33 million. Since the start of 4Q, CLB has already repurchased 422,600 shares at an average price of $101.87.
Barclays Capital Inc., Core Laboratories: Returning Cash to Shareholders, October 18, 2012
Stock Rating/Industry View: Overweight/Positive
Price Target: USD 126.00
Price (17-Oct-2012): USD 103.71
Potential Upside/Downside: +21%
Tickers: CLB
Solid Outlook for Growth in 2013: We continue to believe Core is one of the better positioned companies in our coverage universe. We expect Core to be a primary beneficiary of the cyclical upturn in global exploration and production spending which is currently under way, led by international growth, particularly deepwater. In North America, the company has a strong position in the oil shales and liquids-rich basins (which remain largely resilient) and limited exposure to dry gas activity. As cash builds further, we expect Core to continue to redistribute cash to its shareholders through dividend increases and share repurchases. We maintain our Overweight rating.
3Q Tops Lowered Expectations: Core Labs reported 3Q12 operating EPS of $1.12, above our estimate of $1.10. From the results we excluded a one-time insurance settlement and an FX gain which in aggregate added roughly $0.02-$0.03 per share. A higher-than-expected tax rate reduced EPS by about $0.01.
International to Lead the Way Again: In early discussions with customers, CLB believes growth in international E&P spending will be in the area of ~10% again in 2013, led by growth in deepwater. With 40% of its business coming from offshore (20% from deepwater), Core is well positioned to benefit from the upturn in deepwater activity.
Buying Back Stock Opportunistically: Following Core’s preannouncement on October 1, CLB shares fell 16% (vs. a flat OSX). Core Labs subsequently bought back over 400,000 shares at an average cost of $101, ~14% below the $117 average paid in 3Q.
Adjusting 4Q12, Introducing 2014 Estimate: We are tweaking our 4Q12 estimate to $1.14 (from $1.13) while maintaining our full-year 2013 EPS target of $5.25. We are introducing our full-year 2014 EPS estimate of $6.35. Our price target remains $126.
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