Second Half 2015 Projections: Revenue of $408 to $415 Million, Free Cash Flow of $110 Million
Core Laboratories (ticker: CLB) reported net income of $34.6 million, or $0.81 per share, on revenues of $204 million in its Q2’15 earnings release issued on July 22, 2015. The net income is 10% greater than Q1’15 and is exceeded by its free cash flow, which totaled $41.3 million for Q2’15. Operating margins jumped by 30 basis points to 24% in the same time frame, backed by a considerable sequential jump in its production enhancement segment.
Revenues fell by 4.6% compared to Q1’15 numbers, with Core attributing the majority of the decline to foreign exchange rates. The $204 million in revenue still beat the company’s internal estimate range of $192 to $202 million. On a personal company basis, Core management believes its Q2’15 revenues represents a bottom in the new commodity environment. Its operating margins are believed to have bottomed in Q1’15.
The company forecasted its returns for the remainder of 2015 in the release; Q3’15 is expected to produce $203 to $205 million in revenue and generate earnings per share metrics of $0.82 to $0.84. Guidance for Q4’15 is higher, with revenue expected to reach $205 to $210 million and return earnings per share of $0.84 to $0.86. Cumulative free cash flow is forecasted to exceed $110 million, which would place total 2015 free cash flow at more than $224 million.
The increasing revenue returns despite the current environment is a product of the development phase, explained Dave Demshur, chairman, president and CEO of Core Laboratories, in a conference call following the release. “We’re seeing a lot of the CapEx dollars that were going for exploration… going right into our wheelhouse in the development of these discoveries that have been made over the last three years to five years,” Demshur said, reminding the audience that Core’s true specialty is extending the life of existing assets rather than contributing to the exploratory, early stage phase of the projects.
Core’s Segment Results
Core Laboratories specialties include reservoir description, production enhancement and reservoir management services, and all provided net gains in the latest quarter. CLB reported margins of 23.8% and 24.9% in its North America and international markets, respectively, even though rig counts in those areas dropped by 40% and 7% compared to Q1’15.
Reservoir Description: Aided by the acquisition of Sanchez Technologies, a hydrocarbon equipment company, Core’s main revenue-generating segment yielded operating margins of 27%. Overall revenues were $119 million, accounting for 58% of overall company revenue. The addition of Sanchez Technologies to Core’s portfolio provides equipment that specializes in pressure-volume-temperature readings and is instrumental in deepwater resource evaluations. Management believes having Sanchez as an in-house provider places Core in a favorable position for what Demshur believes is the “golden age of Reservoir Fluid Analysis.”
Production Enhancement: The sector reported $70.6 in revenue (35% overall) and its quarter-over-quarter operating income leapt by nearly 45%. The technology was used extensively in the lower tertiary tend of the Gulf of Mexico with its suite of diagnostic services, and the team altered its focus to North Sea abandonment projects in the quarter in response to the drilling slowdown. The high-end technology provided to clients allowed CLB to increase its rates and provide a greater rate of return. Management estimates 20% of its total revenue is sourced from deepwater projects.
Reservoir Management: Its smallest revenue sector is focused on well evaluations and reported operating margins of 24% on revenues of $14.4 million. Its evaluation areas in the latest quarter included the Utica Shale, Eagle Ford Shale and overseas in Mozambique.
Shareholder Return Program
The trough of the market has not affected CLB’s attention to shareholders; the company’s shares are now at a 17-year low after repurchasing 360,000 shares in the most recent quarter. More than $162.8 million, or $3.81 per share, has been returned to shareholders to date in 2015.
With the latest quarter in the books, Core’s cumulative reinvestment to its shareholders exceeds $2.1 billion, or $50 per diluted share, since the Program began more than 12 years ago. Its share count has been reduced by approximately 49% and is complemented by an annual dividend of $2.20 per share. The company closely tracks its peer performance and continues to rank as the top company in EnerCom’s Oilservice Weekly Benchmarking report in return on invested capital, return on assets and return on equity.
“A V-Shaped Recovery”
Core has reiterated its view of a V-shaped recovery in the commodity environment and is pointing to early 2016 as a turning point for hydrocarbon prices. CLB believes demand continues to improve and global crude supply will likely fall in H2’15 – the result of stagnant activity levels worldwide.
The Core team believes United States production could fall by more than 500 MBOPD from April 2015’s peak rate of 9,701 MBOPD (according to information from the Energy Information Administration). The dip is expected to continue into 2016 and flatten out the supply/demand imbalance that currently weighs on the market.
Demshur explained, “With respective decline curve rates of 70%, 40% and 20% for the first three years of production in these tight oil plays, significant year-over-year declines will manifest themselves as 2015 progresses, and then into sharp declines if activity levels remain at constant levels in the 2016.”
Looking at the other side of the coin, the affordability of oil has led to the International Energy Agency projecting a demand increase of 1,400 MBOPD. But CLB management believes United States onshore activity will be the last to recover due to generally consistent volumes from international markets and the timing of numerous offshore projects. Refracturing opportunities in the onshore U.S. have been a common topic, and Core estimates the discussions it has held with customers are divided 60/40 in favor of gas projects.
Moving forward, management expressed no interest in participating in production sharing contracts. “Our view is we’re a service company, and we’re going to price our products and services properly to get a good margin,” said Dick Bergmark, chief financial officer. We choose not to compete with our customers.”
Core Lab is scheduled to present at EnerCom’s The Oil & Gas Conference in Denver on August 17, 2015. Click here to download its full Q2’15 earnings release.