Shares in oil-reservoir services company Core Laboratories (CLB) had slumped more than 10% in the week leading up to Friday morning. The move comes after a good set of earnings released on Wednesday.
Investors flocked into the energy sector as the price of oil soared above $100 a barrel in response to the war in Ukraine and the dislocations caused to the energy markets. Core Labs is one of the stocks investors bought into due to reservoir optimization services. As the price of oil rises, it makes it more cost-effective for reservoir owners to hire Core Labs to analyze and enhance production thoroughly.
It's not that there was anything wrong with the first-quarter earnings or the guidance for the second quarter. Instead, it's more the case that they didn't quite justify some of the expectations built into the stock price in 2022. Moreover, some stock-specific issues are holding back Core Labs.
It's a generally positive environment for Core Labs, and the company expects to see a multiyear demand recovery built on increased development activity. However, the war in Ukraine is also creating adverse impacts on Core Labs' activities in Ukraine
The end market is improving for Core Labs, but as management noted in the earnings release, "Wells need to be drilled and subsequently completed, stimulated, and cored, or have reservoir fluid samples collected before Core can realize a revenue event. Core expects to continue benefiting from increased U.S. onshore activity, albeit led by private operators and somewhat moderated by capital discipline for larger publicly traded operators."
While the "capital discipline" displayed by the larger players is probably supportive of the long-term price of oil (it means larger operators won't go gung-ho on production and create a potential glut in the future), it does suggest Core Labs won't see as much near-term upside as some investors might have hoped.
Long-term investors will focus on the ongoing development of the business rather than some near-term uncertainty around revenue from Ukraine or slower-than-hoped new well activity. Core Labs still has double-digit growth prospects over the next few years, and if the price of oil stays high, its end markets will experience a multiyear recovery.