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This Oil Stock's Earnings Were Right on Target Despite Turbulent Market Conditions

By Matthew DiLallo - Oct 24, 2019 at 8:19AM

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Core Labs' third-quarter results came in right around the midpoint of its guidance range.

The turbulence of uncertainty continues to hammer the energy market, most recently due to concerns that oil demand growth is slowing. This issue is causing oil drillers to slow their pace, which is negatively impacting the operations of oil-field service companies. That was evident in the third quarter, as the number of wells that the industry completed declined by more than 10%.

However, despite those turbulent market conditions, Core Laboratories' (CLB 1.11%) third-quarter results were right on target thanks to the strength of its international operations.

Drilling down into Core Labs' third-quarter results

Metric

Q3 2019

Q3 2018

Q2 2019

Revenue

$173.2 million

$182.1 million

$169.0 million

Adjusted net income

$22.5 million

$28.4 million

$20.7 million

Adjusted earnings per share

$0.50

$0.64

$0.46

Data source: Core Labs.

While Core Labs' revenue declined 4.9% year over year, it was 2.5% higher than the second quarter's level. Further, it was a hair above the midpoint of the company's $171 million to $175 million guidance range and beat analysts' consensus by $1.8 million. Earnings, meanwhile, followed revenue by slumping year over year while improving sequentially. Profits, likewise, were right at the midpoint of the company's $0.48 to $0.52 per share guidance range while also beating analysts' expectations, coming in $0.01 per share ahead of the consensus estimate.

Driving that solid performance was the company's reservoir description business. Overall, this segment hauled in $109.3 million of revenue, its highest level since the fourth quarter of 2015. That was up 3.5% sequentially and 5.5% year over year, fueled by strong international activity, which rebounded 9% year over year. The company benefited from a pickup in offshore drilling activity in places like Brazil, Guyana, and the North Sea.

That helped offset some weakness in the company's production enhancement segment. That business recorded $64.8 million of revenue during the quarter, up 0.7% sequentially and down 18.7% year over year. The main issue weighing on this segment was the decline in well completion activity in the U.S., due to an excess of supply. Core Labs, however, has been able to offset some of this activity loss by selling higher-end products, which help drillers improve their returns.

Core Labs was able to covert about 90% of its earnings into free cash flow, which tallied $20.7 million during the quarter. That marked its 72nd straight quarter of producing free cash. The company used all of those funds, and a little debt, to help cover its $24.3 million quarterly dividend outlay.

An offshore drilling rig with a bright sunset in the background.

Image source: Getty Images.

Core Labs' outlook on the oil market

Core Labs noted that, despite all the turbulence, the oil market remains relatively balanced as supplies are largely in line with demand. It expects those conditions to continue, which should drive more oil companies to approve new large-scale international projects. Because of that, the company has a positive outlook for its reservoir description business.

However, oil companies in the U.S. continue to focus on spending below their means so that they can produce free cash to return to their shareholders. Thus, the company believes that well completion activity will continue declining in the fourth quarter. That will have a notable impact on the company's production enhancement segment and a lesser one on reservoir description.

Given that outlook, the company expects that its revenue will head in reverse during the fourth quarter to a range of $161 million to $163 million. Earnings, likewise, will fall, with Core Labs projecting them to be between $0.44 and $0.45 per share. However, the continued improvement in offshore and international markets could give it the fuel to bounce back next year.

Still not in full recovery mode

While Core Labs was able to maneuver through the turbulent oil market in the third quarter thanks to a big improvement internationally, it expects the sector's continued headwinds to strengthen in the fourth quarter. On a more positive note, it does expect the industry to approve more long-term projects, which should bolster its reservoir description business in the coming quarters. That will help offset what appears to be another challenging year for the U.S. onshore market in 2020. While that could keep a lid on the company's stock price in the near term, investors are getting paid well to wait for a full recovery given Core Labs' 5%-yielding dividend.

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

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