Oil and gas companies don't hire reservoir-description firms to compose sonnets in homage to the firms' glorious reserves. It's much more practical than that. The description or characterization of a reservoir -- both the source rock and the hydrocarbons trapped within -- is a daunting technical task. That's why exploration and production (E&P) companies bring in a specialist to help them better understand a well in order to maximize daily flows and total extraction over the life of the well.
Subsidiaries of pretty much all the major oilfield services firms -- Schlumberger (NYSE: SLB), Baker Hughes (NYSE: BHI), and Halliburton (NYSE: HAL), to name three -- have a hand in this market. But what's grabbed my interest today is a pure play on the theme.
The reason I'm intrigued by Core Laboratories (NYSE: CLB) is that the firm's three lines of business -- reservoir description, production enhancement, and reservoir management -- strike me as significantly less cyclical than many other parts of this notoriously volatile industry. Check out the recent carnage among the land drillers if you want an example.
Of course, one must pay a price for this cushion. While you can pick up a landlubber like Nabors (NYSE: NBR) for eight times trailing earnings, or an offshore heavyweight like Noble Corp. (NYSE: NE) for 13 and change, Core sports a P/E north of 25.
Buying a stock based purely on trailing numbers, however, is like going to see Spider-Man 3 because you liked the first two. You might end up wishing you had your money back. You have to look to the future, and Core appears to have a bright one. The company is just now moving into the Middle East in a major way, which is a huge market for production enhancement, given the increasing decline rates of giant and supergiant fields in the region. Incidentally, that's Core's most profitable line of business.
One data point that might make some uneasy is the high debt to capitalization ratio. Core took on this leverage to buy back a huge slug of shares. Unlike some other jokers out there, it appears that Core has the free cash flow firepower to support this recapitalization. The company has been buying back shares for years, well before it became ever-so-fashionable to do so. Core has consistently rewarded shareholders through its capital allocation decisions, and for that reason, I would characterize it as worthy of a spot on your watch list.
More oil service Foolishness:
Fool contributor Toby Shute doesn't own shares in any company mentioned. We would characterize the Motley Fool's disclosure policy as totally sweet.
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