Core Laboratories N.V. Earnings Flatten Out

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Core Laboratories (CLB) thought the third quarter would mark the start of a rebound in its financial results. Driving this view was the expectation that industry activity levels would improve due to seasonality and that a "V-Shaped" oil market recovery was about to take hold.

That improvement, however, did not materialize as quickly as Core Labs expected, causing it to miss its guidance. Furthermore, it anticipates its results to remain flat next quarter. The company, though, remains optimistic that a "V-Shaped" recovery in both the oil market and its results is just over the horizon.

Core Labs results: The raw numbers

Data source: Core Labs. QOQ = quarter over quarter.

What happened with Core Labs this quarter?

Core Lab's quarter was a bit flat.

• Core Lab's revenue not only declined 3.1% sequentially and is down 27.3% year over year, but it missed guidance of between $148 million to $151 million. Meanwhile, it also missed the mark on earnings, with its $0.38 per share falling below the guidance range of $0.39 to $0.41 per share.
• One of the factors driving that miss was the company's reservoir description business, where revenue declined by 3% to $100.3 million. That said, operating income did rise 6%, and the segment outperformed the drop in international drilling activity. Driving that outperformance was its work with Apache (APA -0.03%) to define the reservoir potential of the Alpine High play. With Core's help, Apache was able to confirm that it has thousands of low-risk drilling locations in the Woodford and Barnett formations. Meanwhile, Apache and Core continue to evaluate the potential of the Wolfcamp and Bone Springs locations.
• Revenue in Core's other two operating segments -- production enhancement and reservoir management -- also declined and were down 4% and 5%, respectively. Operating income in the reservoir management segment also fell into the red. That said, a strong rebound in production enhancement operating income as well as an improvement in reservoir description income more than offset that loss to keep profitability relatively flat.
• Despite those mixed results, Core Labs continues to generate strong free cash flow, producing $32 million in the quarter, and $101 million year to date.

What management had to say

While Core missed its guidance due to the belief that a "V-shaped" recovery would begin to lift results during the third quarter, the company's management said:

Believes the anticipated "V-shaped" worldwide commodity recovery has begun. One indication is that several U.S.-based operators continue to announce rig additions. Further, global demand for hydrocarbon-based energy continues to increase, while worldwide crude oil supply peaked in the second half of 2015 and began a decline that Core believes will continue through all of 2016 and 2017. The Company has observed that U.S. oil production peaked at approximately 9,700,000 barrels of oil per day ("BOPD") in March 2015 and has fallen since then by an estimated 1,300,000 BOPD, with decreases of 450,000 BOPD in 2015 and another 850,000 BOPD so far in 2016.

Adding more fuel to its view that industry conditions are on the verge of a vast improvement is the fact that:

Members of OPEC announced a framework to reduce their daily crude oil production. This event, in the Company's opinion, will likely serve as an important catalyst that could speed the rebalancing of the crude oil markets which may provide for a significant recovery in industry activity.

In other words, the company clearly believes that the worst is in the rearview mirror and that better days are just around the corner.

Looking forward

In spite of that view, the company offered tepid fourth-quarter guidance because it sees international activity weakness offsetting increasing North American activity. As a result, it is guiding for relatively flat fourth-quarter revenue of $143 million to $145 million and similarly flat earnings ranging between $0.38 to $0.40 per share. That guidance is similar to what oil-field service giant Halliburton (HAL 0.34%) recently offered. In Halliburton's case, it remains cautious about the fourth quarter due to holiday and seasonal weather-related downtimes. Halliburton CEO Dave Lesar did note, however, that the tepid fourth-quarter outlook "does not change our view that things are getting better for us and our customers." In other words, 2017 could be a much better year for oil-field service companies like Core.