Thursday, February 10, 2011

Core Labs Gives Gushing Numbers

Core Labs Earnings Review

The best way to play a rising oil price is to buy an oil service company, and Core Labs is one of the best ways to get exposure. Oil services stocks tend to be highly correlated with spot oil prices, because their end demand is guided by it. By way of comparison, exploration and production companies tend to be less correlated because their value tends to lie in their reserves, which are only released over time.

What makes Core Labs an attractive stock to buy is that they are focused on using technology to help oil producers define and maximize production from existing oil fields. Therefore, as oil prices go higher, Core Labs will see its services in greater demand. In addition, oil exploration is taking place in increasingly difficult environments (deep water, off shore etc) which encourages utilization of technology in order to be able to better define reserves.

Core Labs Results

Turning to Core Labs results and guidance
  • Q4 Adjusted EPS of 84c vs. 81c estimates
  • Q4 Revenues of $208.2m vs. $206.3m estimates
  • Q1 EPS of 82-84c vs. 82c estimates
  • Q1 Revenues of $205-210m vs. $211.1m estimates
  • Full Year EPS of $3.55-3.60 vs. $3.58 estimates
  • Full Year Revenues of $890-910m vs. $893.2m estimates

So, Core Labs beat estimates and revenues for the quarter and, the mid point of full year revenue guidance is above estimates. Full year EPS guidance is within the range of analyst forecasts but Core Labs does tend to be conservative with guidance

Core Labs Growth Drivers

The really good news in this statement is that the biggest single division, Reservoir Description with 53.5% of revenues, is likely to see a strong return to growth. With high oil prices new large scale international deepwater projects are being developed alongside the worldwide shale reservoir projects. In addition, I believe that Core Labs is very active in Iraq and with the formulation of a new Government and the Kurdistan Regional Government planning to recommence exports, there is upside potential here.

Production Enhancement contributes 39.5% of revenues. The division has reported very strong revenue growth (41%) and margin expansion (300bp) which is quite impressive considering that it is strongly focused on North America. Core Labs are assuming a flat rig count for North America, although this is not necessarily a bad thing. Many rigs look likely to shift towards oil from gas as there is a wide historical discrepancy between oil/gas prices. Furthermore, Core Labs activity is in production enhancement so the company can generate strong growth even without a major pick up in exploration activity. The price of oil is more of a driver here.

Reservoir Management is the smallest of the division with only 7% of revenues and 8.7% of operating incomes. It is small, but has the potential for strong growth due to the growth of shale oil and gas projects. Unconventional types of oil and gas projects require greater understanding of reservoir optimization because of the unusual nature of their structural formulation.

Core Labs Stock Evaluation

Core Labs is a likeable stock but its hard to argue that it is anything other than fairly priced at the moment. This is not to say that it won’t go higher. If oil prices go north of $100 than Core Labs stock price will be easily north of a $100 too. However, investing is about risk and reward. Investors should buy stock when the odds are in their favor (value investing) and/or to manifest a strong viewpoint (growth investing) about the stocks growth drivers. Taking a view and assuming that oil prices will go higher this year is fine, but it doesn’t obviate the need to manage the risk of a slowdown in emerging markets.

In the statement Core Labs thinks that it will spend around the same amount in 2011 on capital expenditures. Interpolating the estimates for net income, and historical operating cash flow conversion will get to free cash flow generation of around$175m for 2011. This puts Core Labs on a forward FCF/EV of 4.2% and a forward PE of 25.5x assuming the current share price of $91.3 and that the company hits estimates. Core Labs looks to be fairly valued, although if oil prices rise, it is a great oil services stock to buy.


  1. Lee,
    Is that forward FCF/EV approach similar to LACFY? (apart from the fact that LACFY is backward-looking and this is clearly forward-looking)

    Stephen S.

  2. Hi Stephen, forward FCF/EV is just a one year out view, but the acceptable metric varies for where the company is in its evolution. Inception/High Growth/Consolidated Growth/Cash Cow. Today's Vertex is tomorrow's Gilead.

    As a rough guide, target say forward 3% for 20%+ growth, 5% for teens, 7% for single digit. Am just trying to capture a 'snapshot' of what the stock will look like in one years time to other investors.

    Am not a big fan of LACFY because it doesn't capture the evolutionary nature of company's cashflow and-a bit like Shillers 10YrPE- it assumes that the companies long term future earnings & cash flow is guided by its past.