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Core Laboratories N.V. Earnings Trump Oil Price Plunge to Hit Record High

By Matthew DiLallo – Oct 22, 2014 at 8:01PM

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Core Laboratories' earnings beat expectations, but its outlook didn’t impress investors.

Despite the bear market in oil prices, Core Laboratories N.V. (CLB -0.43%) delivered the most profitable quarter in its history, as earnings even topped its own guidance. The company reported third-quarter net income of $67.9 million, or $1.53 per share, which exceeded the high end of the company's guidance by a penny. However, revenue of $276.1 million fell well short of its own guidance, and the company scaled back fourth-quarter guidance as well. With that as our backdrop, let's drill down a bit deeper into the results.

A look at what fueled results this quarter
Core Labs operates three business segments: Reservoir Description, Production Enhancement, and Reservoir Management. Combined, these segments produced $276.1 million in revenue this quarter, which was well below the range of $280 million to $290 million the company had expected.

One of the reasons revenue was lower was that Reservoir Description, the company's largest segment at nearly half of total revenue, delivered just $131.4 million in revenue this quarter. Revenue, along with the segment's operating income and operating margins, were all flat compared with the third quarter of last year, because of flat international activity and a slight reduction in deepwater activity.

Still, there were some definite highlights in the quarter, with Production Enhancement notably posting its best quarter in the company's history. The segment was responsible for $122.2 million in revenue, up 10% from just last quarter. Even better, the segment's operating income jumped 25% from just last quarter, bolstered by new technology offerings.

Reservoir Management also delivered solid results, with revenue increasing slightly to $22.6 million. However, the segment was able to achieve its most profitable third quarter in the company's history as operating income jumped 18% over last year's third quarter thanks to better margins.

The other big highlight this past quarter was the company's cash flow. Core Labs was able to turn $0.24 of every dollar of revenue into free cash flow, the highest of all major oilfield services companies. This strong free cash flow enabled the company to actively buy back its stock this past quarter, as it took advantage of its falling stock price to repurchase 563,000 shares. That brought the company's diluted share count down to a 16-year low.

A look ahead
Before oil prices started to fall, Core Labs had expected to see both revenue and earnings growth in the third and fourth quarters. However, the company has now watered down its fourth-quarter outlook. In the second quarter, the company's guidance for Q4 revenue was $285 million to $295 million, with earnings coming in at $1.56 to $1.61 per share. However, the company has now revised that guidance down to revenue of $275 million to $280 million and earnings of $1.53 to $1.56 per share, as it doesn't expect the higher activity levels from this past quarter to continue.

Further, in response to weaker crude oil prices, the company sees flat activity levels through the end of this year and similar activity levels as we enter into next year. That's quite a reversal from the modest growth the company had been expecting. While Core Labs does project a return to $100 oil sometime in 2015, there's never any guarantee when it comes to oil prices.

Investor takeaway
Overall, Core Labs really did deliver a solid quarter, given the plunge in crude oil prices. While its revenue was much weaker than expected, the company did beat on earnings. Further, if crude oil prices pick up in the fourth quarter, the company's guidance could prove to be very conservative.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Core Laboratories. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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