Core Labs' Results Scrape the Bottom of the Barrel to End 2018

Check out the latest Core Laboratories earnings call transcript.

Oil prices rose steadily for most of last year, which incentivized drillers to complete more wells, providing a boost to oil service companies like Core Laboratories (CLB). However, crude prices plummeted 40% over the final three months of the year, which started impacting industry activity levels. That slowdown affected Core Labs' fourth-quarter results, which came in at the low end of its guidance range. The company expects this weakness to continue at least through the first quarter of 2019 before bouncing back later in the year as it starts seeing the benefit of new projects that oil producers sanctioned last year.

Core Laboratories results: The raw numbers

Data Source: Core Laboratories.

What happened with Core Labs this quarter?

Plunging crude prices impacted Core's performance:

• Revenue came in at the bottom end of Core Labs' $173 million to $176 million guidance range. While that was nearly 2% above the year-ago level, revenue declined 5% from the third quarter. The company's reservoir description business generated $106.6 million in revenue, which was up 1.9% year over year, and 2.8% sequentially to a two-year high. Meanwhile, production enhancement's revenue rose 1.7% from the fourth quarter of 2017 to $66.7 million, though it plunged 15.1% sequentially.
• Adjusted earnings came at the bottom of the company's $0.48-to-$0.54-per-share guidance range, which was down significantly year over year, as well as versus the third quarter when the company reported $0.64 per share of adjusted earnings. That's after profitability in both of the company's segments slumped due to continued muted activity in international markets -- the key driver of its reservoir description business -- and a slowdown in onshore well completions in the U.S., which impacted production enhancement.
• Core did generate $32.2 million of free cash flow during the quarter, up from $19.7 million in the third quarter, as it kept capital spending at bay. The company used this cash to pay its dividend and repurchase nearly 43,000 shares.

Image source: Getty Images.

What management had to say

Core Labs' management team noted in the earnings press release that "the continued slow recovery of international and deepwater field development activity impacted revenue opportunities for the company's reservoir description segment during the fourth quarter." However, it wrote that it's "encouraged by the continued increase in client conversations regarding new international and offshore projects for 2019 and beyond." It also pointed out that the industry made final investment decisions on 30 major projects last year, up from 25 in 2017, which is a good sign, as that should drive future revenue growth -- though it noted that the "pace at which these projects are progressing after approval has been slower than in previous recovery cycles."

Meanwhile, management pointed out that the production enhancement segment's "performance was affected by a slowdown in U.S. onshore completion activity in the fourth quarter of 2018." That's due in part to the slump in crude prices to end the year, which caused oil companies to complete fewer wells.

Looking forward

Core Labs noted that the first quarter is typically a seasonally slower one for the industry, which it expects will be the case again this year. On top of that, the company assumes that the rig count in the U.S. will be flat to down modestly due to lower oil prices and continued pipeline issues in the Permian Basin. Because of these factors, the company sees its revenue slipping sequentially to a range of $164 million to $168 million, while earnings should be between $0.42 and $0.45 per share.

However, the company noted that there are several bright spots on the horizon. For example, there is a large inventory of drilled but uncompleted wells in the Permian Basin that will provide it with future revenue opportunities once the region's pipeline issues ease later in the year. On top of that, Core should start to benefit from the 30 projects that oil companies moved forward with last year as well as the 30 additional ones that they should approve this year, once oil prices start to settle down. Those factors lead the company to believe that it should experience an uptick in its financial results later in the year.