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Core Laboratories N.V.'s Earnings Slide Alongside Oil Prices

By Matthew DiLallo - Jan 30, 2016 at 9:45AM

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The oil-field technology company has an unusually optimistic outlook, forecasting a V-shaped recovery in the second half of 2016.

The price of oil continued its slide down a slippery slope last quarter, slumping more than 20%, which led to a further 16% decline in the U.S. land rig count. That slowdown in drilling hurt Core Laboratories (CLB -0.84%), which saw both its revenue and earnings slide. That said, the company sees clear signs on the horizon that industry conditions are poised to improve; it's expecting a sharp recovery in oil prices and business conditions in the second half of 2016.  

Core Labs results: The raw numbers

 MetricQ4 2015 ActualsQ3 2015 ActualsGrowth
Revenue $182.7 million $197.3 million (7.4%)
Net Income $27.7 million $35.4 million (21.8%)
EPS $0.65 $0.83 (21.7%)

Data source: Core Labs.

What happened this quarter?
Core Labs felt the impact of weak oil prices.

  • Core's reservoir description business posted relatively solid quarterly revenue of $114.8 million, which was down just 3% sequentially. That said, its operating income fell 10.6% due to weak margins.
  • The company's production enhancement division, which is primarily focused on shale plays and deepwater completions, was the hardest hit by the downturn, primarily due to the steep drop-off in the rig count. Its revenue dropped 13% from last quarter to $56.6 million. Worse, however, was the 42% plunge in that segment's operating income.
  • Core's reservoir management segment was also hard hit this quarter, with its revenue plunging 21%, and a 24% drop in operating income.
  • On the bright side, free cash flow was much stronger than earnings again this quarter. The company delivered $44.8 million in free cash flow.

What management had to say
In the company's press release, management trumpeted Core's ability to generate strong free cash flow, noting, "In 2015, Core converted over 24% of every revenue dollar into free cash flow, the highest of all major oilfield companies that have reported fourth quarter 2015 results. Core's ability to generate free cash in the current oilfield environment is unmatched in the oilfield services industry and gives the Company an unrivaled ability to capitalize on a variety of significant business opportunities."

They say that cash is king, and nowhere is that more apparent than in the oil industry right now. Those companies that can produce cash are in a much stronger position to not only make it through the downturn, but to take advantage of it to strengthen their businesses for when conditions improve. This is one area where Core Labs really outshines its peers. By way of comparison, oil-field service giant Schlumberger (SLB 0.98%) only converted 14% of every dollar into free cash flow. That in itself was a pretty remarkable feat, considering that many smaller service companies aren't generating much, if any, free cash flow in the current environment.

Looking forward
Given where oil prices and oil-field activity levels are right now, Core Labs expects to see its financial results continue to fall backward. For the first quarter, the company projects that its revenue will decline by roughly 10% to around $164 million. Meanwhile, due to continued margin pressure, the company is projecting that its earnings will fall to between $0.41 and $0.43 per share.

That said, the company is growing more confident that a rebound is on the horizon. It "anticipate[s] a 'V-shaped' worldwide activity recovery in 2016 with upticks starting in the third quarter." That is one of the more bullish outlooks in the industry, and it is the polar opposite of what Schlumberger foresees. While Schlumberger does predict oil prices will rebound this year, it expects 2016 to be very challenging for oil-field service companies because oil producers will need to use any incremental cash flow to repair their balance sheets. As such, it doesn't see activity levels improving until 2017. Needless to say, it will be very interesting to see which forecast about the timing and speed of the recovery turns out to be closer to reality.

Matt DiLallo owns shares of Core Laboratories. The Motley Fool owns shares of and recommends Core Laboratories. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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Stocks Mentioned

Core Laboratories N.V. Stock Quote
Core Laboratories N.V.
CLB
$16.45 (-0.84%) $0.14
Schlumberger Limited Stock Quote
Schlumberger Limited
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