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Core Lab Reports 2Q

Oilfield services firm Core Laboratories (ticker: CLB) announced results from the second quarter 2016 today, reporting adjusted diluted earnings of 35 cents per share on quarterly revenue of $148.1 million.

Core Lab Stands by Decline Curves, V-Shaped Recovery

Core Laboratories

Because of its worldwide customer bank, Core Laboratories is viewed as a company with a firm grasp on the pulse of the industry and among the smartest companies in the oilfield. Core Lab is a unique oilfield service sector company that directs efforts toward the sciences of production enhancement, reservoir optimization and reservoir description, placing the company in a direct line with the central tenets oil and gas E&Ps need: intelligence, technology and solutions that allow them to obtain more oil and gas from the world’s reservoirs.

The company, which has been in business serving oil and gas producers for 80 years, discussed what it is seeing from various plays in its second quarter 2016 call with investors today:

“Early in the quarter, most client interest was in the Permian Basin studies. Near the end of Q2, interest increased in plays that are predominantly gas-prone, the Marcellus and the Haynesville, indicating the industry is becoming more bullish on the potential for increasing domestic natural gas demand. Many of the U.S. customers continue to be new companies that are entering the arena with good financing and little or no debt. The key to their success is identifying the best plays with the lowest risk, a process that requires good geological and engineering data, two value data sets that Core Lab can supply. We anticipate an increase in study cells as the acquisition and the divestiture markets become more active.

“Outside of North America, Reservoir Management has been leveraging our expertise in unconventional plays to gain a foothold in some of the emerging markets. A concentrated effort in the Middle East is paying off with a recent reward of another unconventional reservoir evaluation contract. On the conventional side, Suriname, Guyana, Angola and the East Coast of Canada are the focus of our ongoing offshore work. The announcement of the overwhelming success of Exxon Mobil’s and Hess’s exploration program in Guyana bodes well for future sales of Core Lab’s regional studies.”

David Demshur, Core Lab’s CEO, has a saying that goes, “The decline curve never sleeps, and always wins.” The inevitability of the decline curve gives credence to the belief that production will slow and the market will find a balance.

In its conference call, Core’s management team reaffirmed that it “continues to anticipate a ‘V-shaped’ worldwide commodity recovery beginning in the second half of 2016,” noting as evidence that “several U.S.-based operators have recently announced rig additions.”

Reaching a Balance

The oil and gas industry has thrown around the word ‘balance’ almost as much as the word ‘glut’ in the last year and half. These two factors are believed to be leading indicators of the oil price recovery. Core Lab believes that the market is reaching a balance and eliminating the glut in the second half of 2016.

During the second quarter call, Demshur said: “Core believes that worldwide crude oil supply and demand markets are close to balancing and will balance this second half of 2016. On the crude oil supply side, U.S. unconventional production peaked at 5.5 million barrels of oil per day in March of 2015, and has since fallen by over a million barrels a day owing to high decline curve rates associated with these tight oil reservoirs.

“Offsetting these sharp production declines have been additions of approximately 160,000 barrels a day from several deep water Gulf of Mexico legacy projects that were commissioned several years ago and started to bear fruit in late 2015/2016. These additions in no way will offset what’s coming from the deductions that will occur on land throughout this year and into 2017.

“The sharp declines from U.S. land production are continuing in 2016, and Core believes these decreases could reach 1.1 million barrels of oil per day or more by year end. Lower levels of new wells and delayed production maintenance will exacerbate the fall in U.S. land production going into 2016/2017. Remember, production decline curves are linear in time but logarithmic in production declines.

“A year ago, month-over-month, the U.S. production declines were in the tens of thousands of barrels per day, per month. Now these month-over-month per day losses quite often reach 100,000 barrels of oil per day or more. So look for that to expand and continue to expand into late 2016 and into 2017. From these analyses, we would take the over on the drop of 1.1 million barrels per day by year-end,” Demshur said.

Core believes that the balance in the market will stem from reduced production in the U.S.  The drop of one million barrels a day between March 2015 and present will advanced more rapidly through the end of the year.

Despite the reduction in production throughout the U.S., Core sees the rising efficiency of drilling and the technology behind it taking off in 2016.

“The decline in the North American—especially the U.S.—land rig count, there is more of that to come,” Core said. “Again, the mantra for continued success are longer laterals, more stages, closer clusters, more profit. If you look at our 2013 annual report, on the cover we have what was then called the well of the future. It contained 256 stages. We’ve just worked on a well that had over 160 stages.”

Core Lab Stands by Decline Curves, V-Shaped Recovery - Oil & Gas 360

Decline Rates

A major component of reservoir optimization is understanding the rate at which production from wells declines. The faster the decline, the more rapidly new production must come online to offset it. The oil glut has been the result of new wells coming online faster than old wells are falling off. However, that trend is reversing according to Core Lab.

Demshur said: “Globally, Core estimates that the net crude oil production decline curve rate has expanded to 3.3% net, up some 20 basis points from earlier year estimates. Applying the 3.3% net decline curve rate to a worldwide crude oil production base of approximately 85 million barrels per day means the planet will need to produce an approximately 2.8 million new barrels by this date next year to maintain current worldwide productive capacities totals.

“With the long-term worldwide spare capacity nearing zero, Core believes worldwide producers will not be able to offset these declines, and the estimated 3.3% net production decline curve rate in 2016 will lead to falling global production in 2016. This is supported by some of the recent IEA data indicating declining production on a global basis through Q2 2016.”

“Therefore, Core believes crude markets more than rationalize in the second half of 2016 and price stability, followed by price increases, some occurring as we speak, return to the energy complex.

“Remember, the immutable laws of physics and thermodynamics means that the crude oil production curve always wins, and it never sleeps. On the demand side if we look at the crude oil market, the IEA has increased demand in 2016 to approximately 1.4 million barrels of oil per day. The U.S. is now using over 10 million barrels per day of gasoline. These are near record levels. Recent Chinese exports, coupled with strong demand out of India, are at near all-time highs. Supply and demand will balance, as they have in all past market disruptions.”

Core Laboratories (ticker: CLB) will be presenting at EnerCom’s The Oil & Gas Conference® 21 in Denver on Monday, August 15, 2016 at 10:25 am EST. Conference information and registration for this year’s EnerCom conference may be accessed here.

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