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Core Labs (NYSE: CLB) expects to report fourth-quarter and full-year results this Wednesday after markets close. That report will provide investors with several important data points that should give them a clearer picture of the company's ability to navigate the turbulent oil market. However, the most important thing to focus on this week is how the company's results compared to its guidance because that will confirm if industry conditions are improving as quickly as anticipated.
No. 1: Did revenue match expectations?
Last quarter, Core Labs provided guidance that fourth-quarter sales would between $143 million to $145 million. That range represented roughly flat to slightly higher revenue from the third quarter when the company reported $143 million in sales. That third-quarter number was 3% lower than the prior period due to a 3% decline in reservoir description segment revenue, a disappointingoutcome since the company guided for revenue of $148 million to $151 million. That was not the first time it missed revenue guidance, as it failed miserably in the first quarteras well.
Given Core Labs' prior misses on revenue guidance, it needs to meet expectations this quarter or else investors could begin losing faith in the management team's ability to forecast. That said, thus far its peers have reported stronger-than-expected results, which bodes well for Core Labs. For example, oil-field service giant Schlumberger (NYSE: SLB) beat revenue expectations for the fourth quarter thanks to an improvement in North American oil and gas activities. Meanwhile, Flotek Industries (NYSE: FTK) noted in its preliminary fourth-quarter report that the expected "holiday slowdown" that had concerned the service sector heading into the quarter did not appear to be as significant as expected. Because of the strength of those reports, it would be a major disappointment if Core Labs missed revenue guidance once again.
No. 2: Watch for continued improvement in margins
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Core Labs also had trouble meeting its earnings guidance last year, whiffing on both the first and third quarters. Given that history, investors want to see the company meet the expectation that earnings will be between $0.38 to $0.40 per share, which like revenue would be flat to slightly up from the prior quarter.
One of the driving factors of the earnings guidance for slight growth is that the company sees its margins improving. Last quarter, operating margins improved to 15% and Core hopes to get them back up to its historical levels of 35% to 45% as the oil market recovers. That is why investors should focus on margins this week and look to see if they did indeed continue improving. If Schlumberger is any indication, this could prove problematic because its margins were flat sequentially, due in part to weakness in its reservoir characterization unit.
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No. 3: Is there evidence of a "V-shaped recovery" taking hold?
Core Labs has made it known that it firmly believes that the oil market is in the early innings of a V-shaped recovery. The company detailed several factors driving this view. First, oil production in the U.S. was on pace to fall by 1 million barrels per day in 2016, driven by steep declines in U.S. shale output. Second, global production was also heading lower due to underinvestment. Finally, oil demand continues to grow. These factors were expected to cause the oil market to start tightening and drive oil prices and industry activity levels higher, which would lead to a sharp rebound in Core's revenue and earnings.
That said, many of its rivals see a more localized recovery in the oil market, instead of the global recovery that Core anticipates. For example, while Schlumberger sees energy prices and production increasing this year, it does not see a "dramatic" short-term recovery in the global oil market. Instead, it sees the strongest recovery in North America, led by a 30% increase in spending due in part to robust activity in the Permian Basin. Because of the vastly differing viewpoints, investors should look to see if Core still sees a V-shaped recovery and what evidence leads it to hold fast to that stance.
Core Labs did not have a firm grasp on the market last year, causing its actual results to miss guidance on several occasions. The hope is that the company put those missteps in the past and at least met guidance last quarter, especially considering that rivals said the quarter turned out to be better than anticipated. Furthermore, investors want to see the company's bullish oil market outlook start bearing fruit, including an improvement in margins and evidence that it has actual customer requests that should lead to higher financial results in the near future.
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