Core Laboratories (NYSE: CLB ) , an oil servicing company engaged in development of intellectual capital and patented technologies, revised downward its revenue guidance and earnings on Monday. Core Labs lowered full-year earnings guidance from $6.00-$6.25 to $5.80-$6.00 per share. Revenue for the second quarter is now estimated to be between $265 and $270 million, a number less than the previous estimate but still above last year's second quarter results. Analyst consensus put estimates at $288 million.
There lies the the heart of this disappointment: Consensus expectations. While management did substantially reduce its own guidance, the biggest discrepancy was indeed between guidance given by management and the expectations of the Street.
What's going on?
One of Core Labs' most used services, especially in unconventional shale plays, is core sampling and analysis. North American clients are now sampling and analyzing less reservoir fluids than previously expected in more developed areas such as the Marcellus, Bakken, Niobrara and Eagle Ford shales. As these three shales mature, demand to understand the geology and flow rates also decreases. Also worth noting is that there was a pickup of activity in south central Oklahoma, the Spraberry/Wolfcamp, Codell, Parkman, and the Tuscaloosa Marine Shale, but that was not enough to compensate for the decrease in activity in the former shale plays.
What does this mean? I believe that the 'second wave' of the shale revolution, which includes developing a few new shale plays, namely the SCOOP (south central Oklahoma), Wolfcamp, and Tuscaloosa Marine, is yet to get into full swing. Producers aren't sure whether they want to bring that much more supply online in this existing market. Meanwhile, the Eagle Ford, Bakken, and Niobrara are each entering a more mature phase of development.
Management will probably need to adjust to the concept that these first shale plays are beginning to mature, and that exploration and appraisal will be less needed. Thankfully, Core Labs has a variety of geographies and revenue sources, including, particularly, deepwater. In the long run there should be little doubt in Core Labs' ability to adapt to the needs of its customers and maintain a competitive advantage through its patented technologies.
A place to buy
A few weeks ago, in an article I wrote highlighting Core Labs' price action, I concluded that drops of around 10% were buying opportunities, and that the 9% drop from a couple weeks ago was a good chance to get in. This week's price action proved me wrong. But in looking at things strictly from a valuation perspective, at 26 times earnings Core Labs is very close to its 15-year average price to earnings ratio of 25 times.
Don't be too worried about Core Labs' earnings growth. Over time, the service intensity of oil extraction has been growing, and Core Labs is a greater beneficiary of that trend than anyone else is. Management can develop more heavily in other areas if development of the older North American shale plays levels off. There are some very powerful, secular forces at work that are in favor of Core Labs.
Bottom line: Stick with it
As I mentioned in a previous article, Core Labs has a great record of converting its fantastic capital discipline into free cash flow. And that free cash flow is then returned to shareholders in the form of buybacks and dividends. In the long run, companies such as Core Labs, with shareholder-first policies and strong secular forces behind it, are exactly the ones you want to own.
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