Core Laboratories N.V. (CLB) posted record fourth-quarter results after the closing bell today. The company set all-time quarterly highs in revenue and free cash flow. Meanwhile, earnings per share, net income, and operating margins would have set new records if not for the strong dollar. All that good news aside, the company expects its business to weaken materially in 2015 as the oil price plunge begins to really take a bite out of its margins.
Drilling down into the numbers
For the quarter, Core Labs reported revenue of $278.6 million, which was up 1% from last year's fourth quarter and would have been even higher if not for weaknesses in the euro, ruble, and Canadian dollar. Meanwhile, net income hit $67.8 million, or $1.54 per share, which were 4% and 8% higher than last year's fourth quarter, respectively. This was right in the middle of the revised guidance the company provided in its third-quarter report.
Even better, free cash flow in the quarter totaled $88.4 million, which was up 12% year over year. The company did an exceptional job of turning revenue into free cash flow as it converted $0.30 of every dollar of revenue into free cash flow, which is the greatest percentage of all the major oilfield service companies. Core Labs then returned much of that cash flow to shareholders, as it paid $22 million in dividends and bought back $54 million in shares in the quarter. Overall, the company repurchased $264.4 million in stock in 2014, which is why its earnings per share grew by 8% while net income grew just 4%, as its buyback really helped to pad the company's per-share earnings.
A look at outlook
This is where the good news comes to an end. Core Labs' guidance is pretty bleak, as it sees its first-quarter results weakening materially while the slump in oil prices takes a toll. The company expects its first-quarter revenue to fall to $230 million, or 12% lower than the first quarter of last year. Meanwhile, it sees earnings dropping to $1.05-$1.10 per share, which is 20% lower than the first quarter of 2014, while free cash flow will fall to about $50 million next quarter.
The biggest blow to the company is its margins, which it sees deteriorating by 60% over prior levels. The dramatic drop in drilling activity will be the biggest drag on margins next quarter. That said, the company is taking steps to right-size its cost structure to improve margins. However, those actions will take time to before we see any improvements in margins.
Investor takeaway
Because investors are forward looking, Core Labs' stellar quarter will probably go largely unnoticed as investors react to the company's rather bleak outlook for the first quarter. That said, given the dramatic downturn in oil prices, this outlook is to be expected, as Core Labs' customers are reacting to crude prices by cutting back on the services that Core Labs provides. However, the company does expect to see the oil market improve before the end of this year, which provides a ray of hope that the current turmoil could end soon and lead to a rebound in both oil prices and industry activity, both of which would provide a boost to Core Labs.
