Core Lab realigned its operations, now reporting results under two segments: Reservoir Description and Production Enhancement
Core Laboratories (ticker: CLB) reported its Q1 earnings Wednesday.
Highlights follow:
- REVENUE OF $158 MILLION, UP MORE THAN 5% SEQUENTIALLY FROM 4Q 2016
- U.S. PRODUCTION ENHANCEMENT LAND REVENUE UP 32% SEQUENTIALLY; U.S. WELL COMPLETIONS UP 23%
- GAAP EPS OF $0.40, EX-ITEMS EPS OF $0.42
- FCF OF $23+ MILLION WAS 132% OF NET INCOME
- FCF/REVENUE CONVERSION RATE OF 15%
- COMPANY GUIDES CONTINUED GROWTH FOR 2Q REVENUE, OPERATING EARNINGS AND EPS OF $0.48 TO $0.52
Core Laboratories N.V. reported first quarter 2017 revenue of $157,800,000, up more than 5% sequentially from its fourth quarter 2016 revenue, with operating income and net income of $23,200,000 and $17,700,000, respectively and earnings per diluted share of $0.40, all in accordance with U.S. generally accepted accounting principles.
Core’s continuing efforts to streamline its business have led to a simplification of its reporting segment structure, and the company will now present its operating results in two reporting segments: Reservoir Description and Production Enhancement. As part of the streamlining of its business, Core incurred a onetime charge, which if excluded along with the impact of foreign exchange (“ex-items”), would yield an EPS of $0.42. Operating income, ex-items, was $24,400,000, yielding operating margins of almost 16%. During the quarter, Core generated $23,300,000 of free cash flow (“FCF”), defined as cash from operations less capital expenditures.
The company continues to benefit from increasing activity in the U.S. as Core’s land revenue in its Production Enhancement segment increased 32% on a sequential quarterly basis which outpaced the sequential increases in U.S. well completions and rig count, which were up 23% and 25% respectively. This indicates increasing market penetration by Core’s newly introduced HERO®PerFRAC technology and proprietary completions diagnostic services, demonstrating Production Enhancement’s strength as a technological leader in the North American up-cycle.
As reported in previous quarters, the Board of Supervisory Directors (“Board”) of Core Laboratories N.V. has established an internal performance metric of achieving a relative performance return on invested capital (“ROIC”) among the service companies listed as Core’s peers by Bloomberg Financial (“Comp Group”). Based on Bloomberg’s calculations for the latest comparable data available, Core’s ROIC is the highest of comparably sized companies in its oilfield service Comp Group.
Segment Highlights
Core Laboratories has realigned its operations and will begin reporting results under two segments: Reservoir Description and Production Enhancement. The financial statements that follow show the company’s results for the first quarters of 2017 and 2016 and fourth quarter of 2016 for comparison of sequential quarterly and year-over-year quarterly results.
Reservoir Description
Reservoir Description operations, which focus primarily on producing fields in international and offshore markets and an increasing number of reservoir fluid phase-behavior and crude oil characterization projects, reported first quarter 2017 revenue of $104,900,000, similar to prior quarter levels. Operating income, on a GAAP basis, was $15,900,000 with 15% margins, while, ex-items, it was $17,322,000, yielding operating margins of 17%.
The company continues to increase the number of major enhanced oil recovery (“EOR”) projects for unconventional reservoirs underway in various stages. Several formations and different basins are under study with multiple clients. Core has determined that the EOR techniques most effective in unconventional reservoirs will differ greatly from EOR methods used in conventional reservoirs worldwide. The injection of miscible gases and the application of gas-adsorption techniques developed in Core’s laboratories at in-situ reservoir pressures and temperatures have proved far superior to the pressurized physical movement of hydrocarbons using flood fronts that are typically employed in conventional fields.
Cycling of in-situ light hydrocarbon gases and the adsorption and capture of longer-chained hydrocarbons in unconventional reservoirs are leading to significant improvements in oil-recovery factors in company laboratory tests. On average, unconventional reservoirs currently yield a recovery factor of approximately 9%. Light hydrocarbon gas injections, cycling, and adsorption efficiencies have yielded recoveries of up to 15% under laboratory-based, reservoir-condition testing parameters. Increased recovery factors applied to unconventional tight-oil reservoirs significantly raise client ROIC, FCF, and the net present value of their producing assets.
Crude oil characterization, distillation, and fractionation studies increased during the first quarter of 2017, as oil company clients continued to investigate ways to maximize yields through the refining process. And the company continues to invest in technologies to improve yields and product blends for its clients, most recently through direct client access to real-time data from mobile devices.
During the quarter, the company received sufficient support and industry commitments to initiate the Deepwater Gulf of Mexico II (“GOM II”) joint industry project (“JIP”). The study will characterize Lower Tertiary reservoirs in the Alaminos Canyon, Keathley Canyon, and Walker Ridge areas of the deepwater GOM, among other areas. In the study, the company will utilize recently developed expert-guided machine learning technology to describe thousands of feet of core that will form the basis of the project. As has been the case for Core’s JIPs over the past decade, the company will reduce massive petrophysical, mineralogical, geochemical, and geomechanical data sets (“Big Data”) via data analytics to quantify reservoir quality throughout the study area.
Production Enhancement
Production Enhancement operations, largely focused on unconventional reservoirs, benefited from increased U.S. land activity levels and posted significantly higher first quarter 2017 revenue, operating income, operating margins, and incremental margins compared with the fourth quarter of 2016. Production Enhancement posted first quarter 2017 revenue of $52,900,000, up almost 20% sequentially, operating margins that increased 800 basis points to 14%, more than doubling the prior quarter, which created sequential quarterly incremental margins of more than 50%. With U.S. land-based revenue for this segment up 32% on a sequential quarterly basis, Core’s incremental growth outpaced the corresponding increased number of well completions and rig additions during the quarter. The increase in sequential incremental margins provides evidence of Production Enhancement’s technological advantage and leverage to the North American up-cycle while the company continues to maintain strict cost control.
Core Lab’s clients are using the company’s more technologically advanced products and services to further enhance their completion programs. Key examples are HERO®PerFRAC and FLOWPROFILER completion diagnostics. The company’s recently released HERO®PerFRAC perforating system provides consistent hole sizes throughout the perforating cluster, thereby maximizing frac efficiency and increasing Stimulated Reservoir Volume (“SRV”). This system equalizes the perforating friction and allows all perforations to contribute to the fracing operation. Also, tortuosity is reduced, enhancing proppant deployment at lower hydraulic pumping pressures. The HERO®PerFRAC system is specifically designed to provide 100% contribution of perforating clusters, require minimal hydraulic horsepower to efficiently place fracture treatments, maximize SRV, and increase ultimate recovery from the reservoir. The HERO®PerFRAC system is proving to be far superior to conventional perforating systems, decades old sand-jet perforating techniques, and sliding sleeves which have limited applications to some tight-oil reservoirs. Core’s HERO®PerFRAC is the company’s best perforating technology introduction for unconventional natural gas and tight oil reservoirs since Core’s launch of its industry leading HERO-HR perforating product line.
To further support Core’s clients who are increasingly focused on enhancing their stimulation programs, the company is expanding its industry-wide consortia to evaluate the use of multiple proppants and proppant sizes to improve the effectiveness of hydraulic fracing programs. Core’s proppant consortia is composed of more than 40 technologically sophisticated clients, including Anadarko, Apache, Aramco, BHP, BP, Conoco Phillips, Devon, EOG, Newfield Energy, Oxy, Pioneer Natural Resources, Shell and YPF, amongst others. Oilfield service companies in the consortia include Baker Hughes, Halliburton and Schlumberger, amongst others. Core will increase its evaluation of 100-mesh sand and will add 200- and 400-mesh sand micro proppants to its dynamic flow models and conductivity testing. Finer mesh sands are thought to prop secondary and tertiary fracture networks, significantly expanding SRV, and therefore increasing hydrocarbon flow rates and estimated ultimate recovery from tight-oil reservoirs. Core’s proppant consortia also have been asked to investigate the effectiveness of higher density proppant loading pumped at higher flow rates via larger wellbore tubulars.
