The Highly Anticipated Earnings Recovery at Core Laboratories N.V. Finally Takes Hold

By Matthew DiLallo Markets Fool.com

Image source: Getty Images.

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Core Laboratories'(NYSE: CLB) financial results finally hit bottom and started bouncing back during the fourth quarter. The rebound was even sharper than the company expected, with results rising above the high end of itsguidance range. While Core doesn't expect to see quite as big a bounce during the current quarter, the company anticipates that its results will continue improving throughout 2017.

Core Labs results: The raw numbers

Metric

Q4 2016

Q3 2016

Quarter-Over-Quarter Change

Revenue

$149.5 million

$143.5 million

4.2%

Adjusted net income

$18.3 million

$16.7 million

9.4%

Adjusted EPS

$0.41

$0.38

7.9%

Source: Core Labs.

What happened with Core Labs this quarter?

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Core Labs' "V-shaped" recovery appears to be taking hold.

  • Core Labs' revenue was well above its guidance range of $143 million to $145 million. That reversed last quarter's 3.1% sequential decline, though revenue is still down 18.2% year over year. Earnings, likewise, were above the high end of the company's guidance range of $0.38 to $0.40 per share.
  • The primary driver of the sequential increase was the company's production enhancement segment, which captured a 13% increase in U.S. land-based revenue. Overall, segment revenue rose to $43 million while operating income surged 154% to $2.9 million, thanks to a 350-basis-point improvement in operating margins to 7%.
  • The reservoir management segment also enjoyed a bounce-back quarter, with revenue rising 2.5% to $7 million while profitability returned, as the company recorded $1.3 million of operating income during the quarter.
  • Those improvements helped offset weakness in the company's reservoir description segment, which continues to experience the impact from declining international and offshore drilling activities. Those sluggish markets pushed that segment's revenue down 1% to $99 million while operating income slumped 15.1% from last quarter to $17.3 million, because of a decline in operating margins, which slipped from 20.3% to 17.9%.
  • Core Labs continues to generate more cash flow than net income, producing $23.3 million in cash from operating activities during the quarter and $19.6 million of free cash flow.

What management had to say

Core Labs' management team noted several factors in its earnings press release that contributed to its stronger-than-expected performance:

In offshore projects, Core continues to perform increasing numbers of reservoir fluid phase-behavior and crude oil characterization studies from producing fields in the Gulf of Mexico and West Africa. Additionally, the company is continuing advanced rock properties studies and will begin extensive reservoir fluid phase-behavior testing on the ExxonMobil (NYSE: XOM) Liza-2 well, offshore Guyana, and on a potential giant field discovery offshore West Africa. Both of these discoveries are world-class in nature, with recoverable crude oil equivalent reserves expected to exceed one billion barrels.

Last year was the industry's worst fornew oil discoveries since 1940. That said, Core is playing a significant role in studying the largest finds, such as Exxon's huge Guyana oil discovery, which should continue to drive revenue and earnings for the company in 2017.

Core also noted that it has been working with Pioneer Natural Resources (NYSE: PXD) and another partner over the past 18 months on a technical alliance to develop new applications that will enhance the development of the Permian Basin. The net result is that Core signed an agreement with Pioneer Natural Resources to commercialize the applications developed through their collaboration. These applications should help producers boost production and returns, while driving revenue growth for Core.

Looking forward

Core Labs wrote in its press release that the company's "third-quarter results established the bottom of the expected 'V-shaped' recovery that will continue into 2017." Driving this view is that the oil market shifted from oversupply to undersupply in part because of OPEC's production cuts, which should lead to higher oil prices this year. Improving pricing has already led oil companies from ExxonMobil to Pioneer Natural Resources to increase their activities in North America. However, Core anticipates that international and offshore markets will start recovering in the first half of this year because oil companies are expected to sanction twice as many projects as they approved last year.

That said, the company sees its results flattening out in the first quarter, with revenue of around $150 million and adjusted earnings of $0.42 per share. However, results should reaccelerate in upcoming quarters, thanks to stronger onshore drilling activities and the start-up of several major offshore projects.

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Matt DiLallo owns shares of Core Laboratories. The Motley Fool owns shares of and recommends Core Laboratories. The Motley Fool owns shares of ExxonMobil. The Motley Fool has a disclosure policy.