What happened
Shares of energy services provider Core Laboratories (CLB) fell a huge 27% in September according to data from S&P Global Market Intelligence. Through the first nine months of the year the stock is now down roughly 60%. Although that's an improvement from the over 75% decline during the worst of the early 2020 bear market, it's pretty clear that Core Labs continues to face material headwinds.
So what
Core Labs provides well enhancement services to exploration and production companies in the energy sector. Most of what it does is digital, so its business is asset light relative to peers that own drilling rigs. But that doesn't change the nature of the highly cyclical energy businesses it serves. Essentially, when oil prices are high, demand for Core Labs services tends to be high. When oil prices are low, demand ebbs, often materially.
Image source: Getty Images.
Right now oil prices are at levels that make it hard for energy companies to turn a profit. Thus, the sector has witnessed a huge pull back in drilling activity. That's not likely to change in the near future, either, because the pandemic-related economic shutdowns have resulted in a massive drop in demand for oil and the products into which it gets turned. Worse, oil that went unused in the early stages of the outbreak has ended up in storage. All of that oil has to be worked off before there's a prolonged upturn in the energy sector.
The drop in Core Labs' stock in September was basically a recognition on the part of investors that things are still pretty rough in the energy patch and there are no clear signs of a recovery just yet. In fact, crude prices started to weaken during the month following a multi-month uptrend off the lows oil reached in the early stages of the pandemic. Ultimately, this all means Core Labs' top and bottom lines will remain under severe pressure. For reference, the company lost $2.57 per share in the first half of 2020, including material one-time charges.
Now what
Core Labs operates in a highly cyclical industry that's deeply out of favor today. It's not surprising that investors are downbeat here. That said, those looking at the energy space might be better off sticking to a large, diversified, and financially strong energy company like Chevron over a highly specialized energy services company. There's nothing wrong with Core Labs, per se, but in the current market it pays for conservative investors to stick with the strongest names.
