Shares of digitally focused energy services provider Core Laboratories (CLB) rose 7% out of the gate on Nov. 16. The stock was holding on to most of that gain at 11 a.m. EST, too, as it was still up about 6% or so. Why? The easy answer here is that oil prices were on the rise today, but that's really just a piece of what's going on right now.
Core Labs customers are exploration and production companies. When the coronavirus started to spread across the globe, countries effectively shut their economies in an attempt to slow the spread of the virus. Oil was already a bit oversupplied prior to that, but the closures led to a massive decline in demand and oil prices fell off a cliff. At one point a key U.S. oil benchmark actually fell below zero. It was a temporary drop, but it speaks to the massive supply/demand dislocation that exists today. Needless to say, facing worryingly low oil prices, energy companies around the world have been pulling back on spending. And, thus, Core Labs has seen demand for its services fall, too.
Last week, however, Pfizer and BioNTech announced that they were seeing impressive results from their vaccine testing. That led to a mood shift on Wall Street, with companies and industries crushed by investors' COVID-19 concerns rallying. Then, today, Moderna reported its own vaccine results, which were even more impressive. And, as you would expect, the same stocks and industries rallied again. That includes Core Labs, as investors appear increasingly hopeful that exploration and production companies will start to increase drilling again and, thus, boost demand for Core Labs' well enhancement services.
There are two flies in the ointment here. The first is the fact that a vaccine still has to be approved, produced in large quantities, and distributed widely. That's going to be a lengthy process, so there's no easy fix here for oil demand or demand for the offerings of oil services companies. Second, and perhaps more troublesome, excess oil produced when demand was low has been put into storage. That oil needs to be worked off before investors can expect a sustained uptick in energy prices or a material increase in spending by exploration and production companies. In other words, don't get too excited about Core Labs' price gains today; there's still a lot that needs to happen before its business turns around. And there's only so much the company can do to speed up the process.