This past quarter, Core Laboratories (CLB) reported earnings that held up much better than many expected. This has been a trend we've seen over the past several quarters. Core has been able to maintain pretty strong bottom-line results that have for the most part outpaced many of its peers in the oil-services space. If we saw this happen over one or two quarters we might not think much of it, but it continues to happen. So let's look at why Core is different from its oil-service peers such as Schlumberger (SLB -0.89%) and Halliburton (HAL 0.34%), how it outperformed these other players yet again this past quarter, and what it will would take for Core to no longer outperform its peers.
Different services mean better pricing power
Oil services as an industry category covers a wide swath of products and services. Some things are what you would call commodity-type services in which low cost is critical, and others are products or processes that have patent protection insulating them from pricing pressure. For Core Labs, many of the products and services it provides to the industry are based on proprietary technology or patented. While the larger oil-services companies also have some technology-driven offerings, larger aspects of their business are on the commodity side of oil-services offerings.
By having those patent-protected services, Core is able to preserve its pricing power and profit margins much better than its peers. The following charts illustrate the point:
CLB Revenue (TTM) data by YCharts
Source: S&P Capital IQ' author's chart.
Even though Core's revenue has declined at a rate faster than those of Schlumberger, Hallibuton, and Baker Hughes (BHI), its income margins over that time period haven't been as affected because its services have greater pricing power. It also helps that many of Core's services are much less capital intense than many of the services these others provide, so as revenue does dry up it isn't saddled with as many fixed costs.
Better pricing also means better clients
Another aspect that makes Core unique is that since the company does have some pricing power, the company also has a tendency to work with a certain type of customer. Namely, those companies that have the ability to invest through the cycle than those that may be constrained by their current cash flows. As CEO Dave Demshur highlighted in its most recent conference call, there are some distinct benefits to these kinds of client spending habits:
The majors, because of their balance sheets, are probably going to be a little bit more aggressive. The independents and smaller independents that have to live off of cash flow, probably not so much. So fortunately, we receive 30% of our revenue from major oil companies, 15% from national oil companies. So those budgets won't tend to be as affected as much as some of the independents and smaller independents.
By generating a large amount of revenue from these kinds of companies, it has provided Core with a customer base that helps it keep the lights on while the industry works though this downturn. In contrast, many of those independent producers have been pinching pennies and scaling back on spending. For companies such as Halliburton and Baker Hughes that generate a majority of their revenue in North America and from some of these smaller players, it has hit their bottom line that much more during the down cycles.
Staying out front
So much of Core's competitive advantage comes from its technology-driven products and its data services. Without them, the company wouldn't be able to preserve its pricing or attract the higher-level clientele it has. The one issue with a technological competitive advantage is that others can eventually figure out how to replicate it. So for Core Labs to maintain its competitive advantage, it will need to continually develop new technologies and increase its database.
As we have seen over the past several years, the company has been able to do this very well. One recent example is the acquisition of Sanchez Technologies. Sanchez manufactures instrumentation for data collection in high-pressure, high-temperature reservoirs that are common in deepwater offshore drilling. As one of the very few companies that have the ability to use that instrumentation to collect data from those types of reservoirs, Core has further solidified its position as the go-to company for developing an effective production strategy in these hard to handle reservoirs.
What a Fool believes
Core Labs' stock has taken a beating over the past year. Declining revenue and the general downturn of the entire oil and gas market have a lot to do with it. However, the company has shown time and time again that it can outperform its peers such as Schlumberger and Halliburton, and if you need a reminder, just look at Core's return on invested capital compared with its peers.
Source: Core Laboratories investor presentation.
As long as Core Labs continues to differentiate itself with products and services that improve well economics and that its peers can't replicate, then it should be able to maintain its place as the best-performing company in the space. Evenutally, Wall Street will get wise to this fact, and investors willing to wait for a return might want to consider looking at Core Labs' stock for their portfolios.
