Is Core Laboratories N.V. a Buy?

Shares of oilfield services company Core Laboratories (CLB) have pinballed around in the last three years to yield a total return of 0.9% in that span. That's not exactly the type of consistency investors are after.

The company, which provides specialized data analysis tools that allow energy producers to optimize oil and gas recovery and reservoir management, has struggled to regain its footing since energy prices collapsed in late 2014. That might change as North American energy production continues to grow -- and this time it might really be different. Why?

In stark contrast to previous periods, oil and gas producers are focused on profitable production growth, not just production growth at any cost. Some of that medicine was force-fed to the industry because of the realities of high break-even costs in American shale and deepwater basins, but the lessons learned in recent years seem to be making their way into the long-term strategies of many producers.

Evolving extraction technologies, which have significantly lowered production costs, also help. The services provided by Core Laboratories certainly appear to fit into that bucket. This probably has investors asking that all importand question. Is the oil stock a buy?

Image source: Getty Images.

By the numbers

Core Laboratories stabilized operations in 2017 and ended the year on an upswing, or what management has characterized as a "V-shape recovery." That wasn't exactly the case, but shapes aside, the business improved last year compared to 2016. 

Data source: SEC filings.

There's a long way to go yet before the company matches its performance from 2014 -- when it delivered over $1 billion in annual revenue, $257 million in net income, and sported a debt to EBITDA ratio of 0.89 -- but management thinks it's well-positioned to exploit industry trends. Namely, the prioritization of return on investment and profitability over outright production volume growth. 

The fact that the company focuses on reservoir description and production enhancement is key to understanding its ability to exploit ongoing shifts in the oil and gas industry. How so? Production represents the largest portion of the capital expenditure budget of a typical customer, in addition to providing the clearest path to value creation for a customer. After all, optimizing daily production from assets in service today is more important on the whole than exploration activities for projects that may go into service tomorrow.

The value provided by the company's services in the current environment is clearly reflected in operating results. In 2017, Core Laboratories generated 63% of its revenue from reservoir description services and the remaining 37% of revenue from production enhancement, compared to 72% and 28%, respectively, in the prior year. The year-over-year shift toward production enhancement is owed to a rising rig count in the United States, from an average of 510 to 875, which represented 84% of the global increase in that span -- that, and the fact that the segment generates two-thirds of its revenue from the United States. 

Image source: Getty Images.

It's a good place to be. Production enhancement delivered an operating margin of 19% in 2017, compared to 16% for reservoir description. That's a monstrous improvement from 2016. And while that's also more in line with the historical ranking of profitability between the two segments, there's plenty of room for improvement. 

Consider that in 2014, the company posted a total operating margin of 32%, when the average U.S. rig count was 1,862 (another example of the industry's inefficiency at the time). Then again, that's an imperfect benchmark for making comparisons across periods. Why?

While rig count is still an important measure for the company's potential, the industry's focus on efficiency changes the calculus a bit. In other words, while there may be fewer rigs now than years ago, more rigs today are laser-focused on maximizing profits -- which increases the value of services offered by Core Laboratories. The prioritization of profitability also makes the industry a little more resilient to future price crashes, which is also a boon for the company's business. 

Can the oil data specialist stage a comeback?

One of the biggest differences between the American oil industry of 2014 and that of 2018 is efficiency. Various technologies have led to a precipitous drop in breakeven pricing for oil and gas production in that span, including analytical services offered by Core Laboratories. The company's ability to help customers increase production from existing assets and its expectations for a solid year ahead make this oil stock a buy, especially considering Wall Street appears to be neglecting the progress it has made in recent quarters.