Core Laboratories (ticker: CLB) is a provider of proprietary and patented Reservoir Description, Production Enhancement, and Reservoir Management services. The company has a market cap of $6.93 billion and is part of the basic materials sector and energy industry. With over 70 offices in 50 countries, Core provides reservoir assistance to leading world, national and independent oil companies. CLB offers services to provide evaluations of well completion effectiveness and create solutions for oil recovery projects.
Core Lab recorded its most profitable first quarter in company history in an earnings release on April 23, 2014. Its three operating segments – reservoir description, reservoir management and production enhancement – all improved on a year-over-year basis, with reservoir management posting its best quarter in CLB’s history.
Core, like countless other companies, was affected by seasonality early in the quarter. Delays from inclement weather reduced its earnings per diluted share (EPS) by 5%, or $0.07 per share. However, adjusting earnings to exclude the effects of winter would result in EPS of $1.45 in the quarter. The adjusted total would be Core’s greatest EPS to date, increasing from Q4’13’s total of $1.43 and increasing year-over-year by 22%.
The company converted 22 cents for every dollar into free cash flow, totaling roughly $58 million for the quarter. The free cash was used for stock repurchases and dividends.
Segment Breakdown
Reservoir Description is focused primarily on offshore oil ventures, including the development of Petrobras’ (ticker: PBR) Libra Field project. CLB announced Q1’14 operating income at $35.4 million (2% higher than Q1’13) despite ongoing delays in several projects. The company expects to regain operations in the remainder of 2014 as onshore projects recover from the winter.
Source: CLB Quarterly Releases
A note from Barclays on April 25, 2014, addressed Q1’14 issues. It says: “We remain positive on the fundamentals for deepwater services, particularly those tied directly to reservoir optimization. CLB is also a leader in enhanced production technology in the North American shale plays, where demand is inflecting rapidly and should make further gains in 2014.”
In a conference call following the release, management said oil ventures now consist of 80% of the company’s operations, with LNG garnering the majority of natural gas flow. Core developed a mobile lab that is currently operating in the Gulf of Mexico and provides real-time reservoir results to operators, whereas the old method took days to analyze. The company described the lab as “a container-type setting” and can fit on most rigs or platforms. Core says “only a few” are currently in service but more will be added as the year moves along. The increased analysis speed will allow operators to make faster decisions and ultimate reduce drilling days.
Production Enhancement primarily benefits tight-oil plays in the United States and returned a record $110.3 million in revenue for the quarter (3% higher than Q1’13). Operating income also climbed 11% to reach $38.1 million. CLB said the income would have been greater if not impacted from the winter season. Its FLOWPROFILERTM service is designed to maximize oil flow, and Core says its use along with downspacing and laterals can improve EURs by as much as 40%-60%. The company continues to develop new technology as the industry evolves, and management says as much as 70% of its revenue is generated from technology introduced in the last three years. Roughly 70% of its production enhancement business comes from shale plays.
Reservoir Management involves using geographic studies and data to determine prospectivity. The segment delivered $10.6 million in quarterly operating income – up 7% from last year. Operations have expanded from the Eagle Ford into the Eaglebine and also entered the Woodford Shale. CLB’s service has 66 client companies in the Permian Basin and is involved in various projects across Africa.
Value to Shareholders
CLB utilizes a Shareholder Capital Return Program that consistently strengthens its stock through dividends and share repurchases. More than $69.3 million was returned in Q1’14, and CLB’s outstanding share count was reduced to a new 16-year low of 45,132,000. The program has returned a total of $1.73 billion ($38 per share) to its shareholders since 2003. Management said in a conference call that the company’s average annual return for the last 18 years exceeds 25%.
Q2’14 Guidance
Core believes the delays experienced in Q1’14 will be absolved in the coming quarter, with revenue expected to reach $280 – $286 million (8% rise year over year). EPS guidance would climb to $1.48 – $1.53, which would guarantee another company record. Free cash flow is forecasted to hit $70 million.
Expectations for full fiscal 2014 have not changed from its initial estimates in Q4’13. Revenue is expected to range from $1,155 – $1,175 million, good for an 8% year-over-year increase, with FCF exceeding $300 million.
David Demshur, Chief Executive Officer of Core Laboratories, said: “This outlook confirms our confidence in the trends of increasing activities internationally, as well as deepwater and projects tied to large complex crude oil developments. The locations include unconventional tight-oil reservoirs in North America, an emerging place in Russia, North Africa and Australia among others. Core also sees exceptional opportunities in the deepwater Gulf of Mexico developments including the potentially prolific but technologically challenging Lower Tertiary fields.”
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