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 Laboratories released its Q3’13 earnings results on October 16, 2013. Highlights of the release include:
- A quarterly record in earnings per diluted share (EPS), net income and revenue. Q3’13 marks the fourth consecutive quarter CLB posted a company profit record.
- A 20% increase in EPS to $1.36, the largest increase since Q2’12.
- Net income increased 16% to $62,284,000 and operating income increased 15% to $85,114,000, excluding items referenced in non-GAAP reconciliations.
- Revenue increased 11% to $273,163,000 for the trailing twelve months (TTM), while operating margins increased a record 31%, incremental margins reached 41%, and free cash flow (FCF) rose 55% to $65,094,000 for the same period.
During Q3’13, CLB turned 24% of every revenue dollar into free cash flow, the highest of all major oilfield service company peers, according to Bloomberg Financial. The company also bought back 362,776 shares and lowered its outstanding share count to 45,661,000. A total of $70,472,000 was spent on dividends and share repurchases. The share count is 14% more than total shares outstanding in 1995, when the company’s IPO sold shares at $3. The stock closed at $189.85 on October 17, 2013.
Comparing the first nine months of 2013 with those of 2012, ex-items, Core’s EPS increased 16% to $3.89 and net income increased 13% to $179,704,000. Revenue increased 10% to $797,229,000. Operating margins for the first nine months of 2013 were 31%, up 100 basis points from the year-earlier period. FCF for the first three quarters of 2013 exceeded net income and reached a record $183,660,000, up 43% from $127,996,000 in the year-earlier nine-month period. Core’s FCF has exceeded net income in seven of the last eleven years. The company spends approximately $0.10 for every $1 of cash flow, the best capital efficiency ratio in the OilService group.
Core’s three operating segments include reservoir description, production enhancement and reservoir management. All improved compared to Q2’13 production.
Reservoir description focuses on worldwide crude oil developments and works on five different continents. CLB’s technology regarding sample selection, preparation, and nondestructive data-capturing methodologies drives this segment. No significant revenue was lost to Gulf of Mexico storms. The operations base in Bogota, Columbia, is being expanded while CLB’s presence in Venezuela continues to decrease. A base in Perth, Australia is being expanded, and a new base is opening in Brisbane. Core expects Australian unconventional projects to expand significantly in 2014, after drilling difficulties forced delays this year.
Production Enhancement, backed by CLB’s patented FlowProfiler and Fracorating System technologies, posted its best quarter in company history, with operating margins reaching 36%. The products have prompted Core to recommend closer well spacings, longer laterals with more and shorter stages, and pumping proppant to “screen-out” for all stages. While these applications can increase well costs by as much as 20%, the additional expenses are clearly offset by the potential for a 40%-60% increase in estimated ultimate recovery in certain tight-oil plays. Its latest technology is directly tied to the expected increasing usage of horizontal well developments worldwide over the next decade.
Reservoir Management focuses on maximizing well performance and recovery factors, as well as evaluating fracture stimulation designs. Its Q3’13 results are the best third quarter in company history and operating margins reached 29%. CLB works extensively in the onshore United States, particularly in the Williston Basin, Delaware Basin, Wolfcamp shale, and Upper Devonian shales. Internationally, CLB is working on, or has completed, 14 major studies in the Golden Triangle, an area bounded by the Gulf of Mexico, eastern Brazil, and West Africa.
Core Laboratories Commentary
David Demshur, President and Chief Executive Officer of Core Laboratories, during the company’s quarterly conference call on October 17, 2013, when asked about the competitive production enhancement market said CLB’s Fracorating System is unparalleled. “Looking at the applications of the new technology in production enhancement, we believe we are creating a market there because a lot of these services aren’t out there. When you look at the introduction of this (fracing) technology, it’s only in North America and certainly we are going to take that internationally. So with respect to competition on the trade – when we look at the Fracorating System, there isn’t just any competition out there, it’s a brand new technology that’s protected by trade secrets here at Core Lab. With respect to pricing, we’ll let the incremental margins speak for the pricing and the competition that we see in the marketplace.”
David Demshur, added he predicts the number of rigs to increase in 2014, on a year over year basis, by “maybe 100.” He added, “The focus on crude oil-related projects continue to build, as Core’s revenue mix now is more than 80% tied to crude oil projects and less than 20% tied to natural gas.”
Demshur also said Core plans to ramp up its offshore program. “Over the next several years, we’re going to have 98 new floaters deepwater and ultra deepwater coming out, so we can’t help but think that is a very positive metric for us and the increase in deepwater activities,” he said. “Deepwater remains probably our biggest driver, but with the introduction of the new technology and the quarter that production enhancement had, we wanted to give them their due and certainly the application of that technology in North America ties directly to a lot of the unconventional plays that we spoke of… All you’ve to do is look to the deepwater Gulf of Mexico, where we are going to add perhaps a dozen or more deepwater assets there, that probably will lead the way in revenue gains for next year. It will be closely followed by North American Unconventional Activity, spreading to the developments of some world-class plays as we mentioned in Bazhenov, Russia, the Silurian Gothlandian of North Africa, and several potential oil and natural gas plays in the Cooper and Canning basins of Australia.”
Fourth Quarter 2013 Earnings Guidance, 2014 Outlook
Core Lab anticipates that fourth quarter 2013 North American activity levels will remain similar to third quarter levels, while international activity will continue with moderate increases. Therefore, Core expects fourth quarter 2013 revenue to range between $278,000,000 and $281,000,000, with EPS in the $1.39 to $1.40 range. Free cash flow for the quarter is expected to be approximately $70,000,000 or greater, once again exceeding net income for the period. A 24.5% effective tax rate is assumed for the fourth quarter. If expectations are met, CLB will once again set a quarterly record.
CLB cites continued support from strong Brent crude pricing, the delivery of additional deepwater rigs, and the expansion to new projects with its new technology to contribute to its 2014 outlook. It expects free cash flow totals to approach $300,000,000 and will continue to repurchase shares in its Shareholder Capital Return Program. The Program has reduced CLB’s diluted share count by almost 38,000,000 shares and returned almost $1.6 billion to its shareholders since its induction 11 years ago. Dividends for 2013 will equal a total payout of $1.28 per share of common stock, which represents a 14.2% increase over the amount paid in 2012.
Douglas Becker, CFA and analyst for Bank of America Merrill Lynch, said the Q3’13 release is positive for the stock in his note on October 16, 2013. CLB outperformed many of Becker’s estimates. “CLB expects 2014 (FCF) to approach $300 million vs. $253 million implied in 2013 (19% growth). We maintain an Underperform on CLB owing to our DCF valuation, although acknowledge the market is currently valuing the company differently… CLB has returned 10% more cash to shareholders than free cash flow generated in 2013.”
He added critical issues to watch include the potential for new technologies like FlowProfiler to grow Production Enhancement margins from 35% (margins are already about 500bp higher YOY); (2) the steps and timeline to bring G&A in Reservoir Description back to normal; and (3) the adoption rate for closer well spacing, more and shorter stages, and more proppant which could also be positive for U.S. Silica (SLCA) and Emerge (EMES).
James West, lead oil services and drilling analyst for Barclays, gave CLB an “Overweight/Positive” rating in his note on October 17, 2013. “We continue to believe CLB is one of the best positioned companies in our coverage universe. The company should continue to benefit from growing decline rates across the world, has leverage to the proliferation of deepwater drilling activity and is a leader in enhanced production technology in the North American shale plays where demand is accelerating. Core’s ability to generate free cash remains one of the most impressive characteristics of the company, in our opinion. We expect another dividend increase in 1Q14 and a continuation of the company’s methodical share repurchase program.”
West also increased his 2014E and 2015E EPS estimates to $6.45 (from $6.40) and $8.00 (from $7.90) respectively to reflect the stronger growth potential for CLB’s production enhancement technology. The price target was raised to $200 from $163.
Ryan Fitzgibbon, analyst for Global Hunter Securities, said production enhancement “crushed it” in his note on October 17, 2013. He added: “Good quarter, numbers are likely going up, and we suspect the stock will march toward our target, but we struggle to find additional upside from there unless you’re willing to pay a record 30x NTM earnings ($200/share).
Jeff Tillery, Managing Director at Tudor Pickering Holt, said the good quarter is “Like clockwork for this well-positioned reservoir optimization story” in his October 17, 2013 note. “Reservoir Description margins were shy of our expectations (G&A costs) but offset by splendid Production Enhancement results (revs +8% q/q with ~50% incremental margin). Q4 EPS will tweak in right direction given $1.39-$1.40 guidance vs. TPH/Street $1.38.”
Georg Venturatos, analyst for Johnson Rice & Co., also listed CLB as “Overweight” in his October 17, 2013 note, and said their outlook is positive. “In our view, CLB remains superiorly positioned within the oil service universe with significant exposure to anticipated rising Int’l, deepwater activity. Secondly, and not be overlooked, CLB’s NAm focused Production Enhancement business continues to impress and significantly outpace domestic well activity benefiting from cutting edge technological offerings.”
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