The recovery in Core Laboratories' (NYSE:CLB) financial results continued gaining momentum during the second quarter, with revenue and earnings both climbing by double digits. But the overall results were mixed, since revenue came in below the company's guidance range while earnings hit the high end of its forecast. Further, the company sees the market entering a transitional period in the upcoming quarters, which will slow down its recovery.

Core Labs results: The raw numbers

Metric

Q2 2017

Q1 2017

Quarter-Over-Quarter Change

Revenue

$163.9 million

$157.8 million

10.9%

Adjusted net income

$23.0 million

$18.7 million

22.8%

Adjusted EPS

$0.52

$0.42

23.8%

Data source: Core Labs.

An oil-field worker with a laptop stands beneath a pumpjack at sunset.

Image source: Getty Images.

What happened with Core Labs this quarter?

It was a good-news, bad-news quarter.

  • While revenue jumped by double digits, it did come in below Core's guidance range of $165 million to $170 million. The company noted fewer well completions than expected, as a result of an industry shortage of completion crews and equipment.
  • Earnings per share came in at the top end of the company's $0.48-to-$0.52 guidance range. Fueling that result was an improvement in margin, driven by higher-technology services and product requests from its customers.
  • The company generated $15.8 million of free cash flow during the quarter, which it used to pay dividends and repurchase shares.

What management had to say

Core Labs' management team commented on its results in the earnings release:

Revenue in the second quarter was slightly lower compared to previous quarterly guidance as a result of industry shortages of completion crews and equipment, which caused fewer than expected completions. However, an improvement in revenue mix generated higher operating margins.

As noted, Core said an industry shortage of completion crews and equipment, which perform the fracking of shale wells, affected results. But there's a bit more to this story, because in some cases the shortage was on purpose. That was evident in comments from fracking leader Halliburton (NYSE:HAL), which saw strong demand for completion equipment as an opportunity to improve utilization and margins. Halliburton CEO Jeff Miller noted as much on the company's second-quarter conference call earlier this week:

We believe the current customer demand has outpaced the supply of completions equipment, and this should create a runway for a strong utilization through the second half of the year. We remain committed to generating industry-leading returns and reactivating our equipment was the first step toward delivering the results you have come to expect from us. As some of you've heard me say before, customer urgency is the foundation for the path to normalize margin. Today, our customers remain urgent. And therefore, we believe our path to normalized margins is achievable. We get there through a combination of increasing leading pricing, improved legacy pricing, better utilization, and continued cost control.

In other words, Halliburton has no desire to add equipment capacity until margin normalizes. As a result, it will squeeze as much as it can out of customers now that demand is booming after getting squeezed by them during the downturn.

Looking forward

Core Labs doesn't anticipate that the tight well-completion market will abate anytime soon. The situation will have a direct impact on the company's future results, since its U.S. revenue correlates with the completion of wells. Given the way things look at the moment, the company sees third-quarter revenue in the range of $165.5 million to $170 million, while earnings should be $0.54 to $0.56 per share. However, the company did note that several offshore customers recently announced final investment decisions on new projects that should start early next year. As those projects ramp up, it could reaccelerate the recovery in the company's financial results, as long as shale drilling doesn't take a nosedive.

Matt DiLallo owns shares of Core Laboratories. The Motley Fool owns shares of and recommends Core Laboratories. The Motley Fool has a disclosure policy.