Core Laboratories' (NYSE:CLB) financial results took a big leap forward in the third quarter thanks to higher activity levels across many U.S. shale plays. That helped offset the continued weakness in its international and offshore markets, which are just starting to improve after a deep downturn in the oil prices. However, while the company expects the oil market's recovery to continue, it does see near-term headwinds that will affect its results in the fourth quarter.

Core Labs results: The raw numbers

Metric

Q3 2018

Q3 2017

Change (YOY)

Revenue

$182.1 million

$162.9 million

11.8%

Adjusted net income

$28.4 million

$20.5 million

38.4%

Adjusted earnings per share

$0.64

$0.46

39.1%

Data source: Core Labs. YOY = year over year.

What happened with Core Labs this quarter?

The shale-focused production enhancement segment led the way:

  • Revenue came in well above Core Labs' $177 million to $179 million guidance range, jumping nearly 12% year over year and about 4% sequentially. While revenue from the company's offshore-focused reservoir description business rose only 2.1% versus last year's third quarter to $103.6 million, sales out of the production enhancement segment surged 27.8% to $78.5 million, driven by demand for the company's technological solutions to enhance the output of newly drilled shale wells.
  • Adjusted earnings, on the other hand, came in toward the low end of the company's $0.64 to $0.66 per share guidance range. However, earnings surged year over year -- and improved from $0.59 per share in the second quarter -- due to a 58.2% year-over-year jump in operating income from the production enhancement segment.
  • Core generated $19.7 million in free cash flow during the quarter, slightly higher than the $19.5 million it produced in the second quarter. 
A drilling rig near some oil pumps with a nice sunset in the background.

Image source: Getty Images.

What management had to say

"International industry activity has been effectively flat year over year and year to date," wrote Core's management team in the company's earnings press release, also noting that "in addition to the muted activity in international markets, the Gulf of Mexico and other deepwater provinces have also been slow to recover." That's why revenue and earnings in the company's international and offshore-focused reservoir description segment only improved by a low-single-digit rate both sequentially and year over year.

Production enhancement, on the other hand, is mainly focused on shale drilling in the U.S., which has been a much stronger market. On top of those stronger market conditions, management noted that "the year-over-year improvement of both operating and incremental margins indicates that Core continues to create and increase market share in the high technology space for unconventional completions." That helped boost the company's margins 48% year over year, contributing to the strong profit growth in this segment.

Looking forward

"As the industry moves through the fourth quarter of 2018, Core's outlook for international activity remains flat and sees a decline in completion activity due to Permian take-away constraints when compared to third quarter 2018," according to Core's management team. Because of that, they see revenue slipping sequentially to a range of $173 million to $176 million. Profitability, likewise, will head in reverse, with Core anticipating a range of $0.48 to $0.54 per share.

However, the company noted that oil companies sanctioned several new projects this year, which should lead to increased activity levels in 2019. That should have a positive impact on the financial performance of its reservoir description business next year. Meanwhile, the results of its production enhancement segment could reaccelerate if drillers shift activity levels away from the Permian until new pipelines enter service toward the end of next year. 

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