What happened
Shares of Core Laboratories (CLB) 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.
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.
