Please ensure Javascript is enabled for purposes of website accessibility

Why Core Lab Stock Is Up Today

By Jason Hall – Jun 25, 2020 at 3:49PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The tech-focused oilfield services company announced two things this week that give it more of a safety margin during the oil-market crash.

What happened

Shares of Core Laboratories (CLB 3.90%) surged more than 7% in early trading on June 25, and though it's given up some of that early momentum, the stock is still up 3.2% at 2:45 p.m. EDT in what has been a pretty volatile week.

Today's upward move isn't directly attached to anything Core Lab has announced or reported to the Securities and Exchange Commission. But this has been a volatile week, with oil prices crashing hard on June 24 following the U.S. Energy Information Administration's weekly petroleum report. That crashed most oil stocks, including Core Lab shares.

Screen shot of oil and gas prices.

Image source: Getty Images.

So what

What may have gotten lost in the shuffle was a release from Core Lab on June 23, announcing it had reached a deal to amend its credit facility, increasing the leverage ratio the company could have and stay within the covenants. The increase to a debt-to-adjusted-EBITDA ratio of 3 over the next year will allow the company more room to maneuver as the full impact of the COVID-19 downturn on the oil and gas sector plays out.

Additionally, Core Lab also announced a series of cost cuts that would lower expenses by another $61 million per year, and said those moves would be "substantially implemented" by the end of the second quarter.

There's always give and take with these amendments. In exchange for a higher leverage ratio, Core Lab will pay a higher interest rate on the premium it pays over Libor (the London InterBank Offered Rate) on its credit facility. At the same time, the underlying Libor rate has fallen dramatically along with most other global interest rate benchmarks, soaking up the additional potential expense.

The credit limit was also lowered from $300 million to $225 million, and the "accordion" feature that gives the company some ability to exceed the limit was lowered from $100 million to $50 million.

Now what

While the next year is likely to be tough for Core Lab, the company is in far better condition to ride out a prolonged downturn than many of its peers. It still expects to generate positive operating cash flow this year, and management's priority is to use that cash flow to pay down its $302 million debt balance.

Renegotiating its credit facility was one step in making sure it didn't run into a short-term cash crunch, while further lowering of expenses is the next step.

The next year may be hard going for Core Lab, along with the rest of the oil sector. But for patient investors willing to ride out some volatility, this looks like an excellent opportunity to buy an important company, and to earn very big returns on the back side of the COVID-19 crisis.

Jason Hall owns shares of Core Laboratories. The Motley Fool recommends Core Laboratories. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Core Laboratories N.V. Stock Quote
Core Laboratories N.V.
CLB
$13.85 (3.90%) $0.52

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
327%
 
S&P 500 Returns
105%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.