3 Things to Watch When Core Laboratories N.V. Reports Earnings

By Matthew DiLallo Markets Fool.com

Core Laboratories (NYSE: CLB) ended 2016 on a high note, delivering expectation-beating earnings after its highly anticipated recovery finally started to take hold. However, the company did warn that the recovery would take a slight breather during the first quarter as seasonal and tax headwinds would hold back growth. Given those expectations, here are a few things investors should watch when Core Labs reports earnings later this week.

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Look to see if the results matched its guidance

Last quarter, Core Labs' financial results finally hit bottom after a long slide and started to bounce back:

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%

Data source: Core Labs.

Driving Core Labs' improvement last quarter was a sharp activity rebound in onshore U.S. markets thanks to a pickup in shale drilling. That said, the company noted that international and offshore markets had yet to bounce back. It expects those market dynamics to remain in place during the first quarter with a continued rebound in North America offsetting weakness in international and offshore markets, causing revenue to flatten out at about $150 million. Meanwhile, higher taxes due to increasing earnings from North America would cause unadjusted earnings to come in at around $0.35 per share, which would be roughly flat with unadjusted earnings last quarter.

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Given those expectations, investors should see if anything caused actual results to miss the mark. In particular, look to see if sliding oil prices in the quarter caused drilling activity to come in below expectations.

Image source: Getty Images.

See what it says about the oil market

Core Labs has been one of the most outspoken bulls on the oil market recovery, expecting that the market will see a "V-shaped" recovery in 2017. Fueling that view is its belief that the oil market has switched from having a glut to being under-supplied. It backs that opinion up with data from the International Energy Agency showing a decline in global oil inventory data for the last five months of 2016, which -- when combined with OPEC's production cuts -- should lead to "extended worldwide inventory declines and a continuing rally in energy prices throughout 2017."

That said, recent data in the U.S. has continued to show oil supplies piling up in storage, which weighed on oil prices last month. Given the recent slump in the oil market, investors should look to see if it has changed Core's view in any way. In particular, look to see what it says about the rapid rise in shale output as drillers race to increase production. For example, leading shale producer EOG Resources (NYSE: EOG) expects to grow its crude oil volume 18% this year while living within cash flow at $50 oil. Fueling EOG's growth are its ultra-low costs and highly productive wells. Meanwhile, other drillers like PDC Energy (NASDAQ: PDCE) plan to outspend cash flow this year on new wells thanks to the robust returns it can earn at current oil prices. In PDC Energy's case, it plans to outspend cash flow by $200 million on a capital budget of up to $775 million this year in a bid to boost oil output 50%. Given this rapid shale growth, it's possible that oil supplies could quickly refill, which might cause Core's V-shaped recovery to fizzle out.

Keep an eye on guidance for 2017

Given those completing market dynamics, investors should look to see if Core still holds to the view that its third-quarter results marked the bottom and that the "'V-shaped' recovery ... will continue into 2017." In addition to reaffirming that belief, there are two other things investors should look for in its report that would back up that view.

First, look to see if the company's guidance for the second quarter anticipates that revenue and earnings will rise sequentially. Second, look for visible signs that international and offshore markets are improving through either new capital project announcements from major clients or assurances from customers that those approvals are upcoming. For example, last quarter Core Labs noted that the industry should approve 20 major projects this year, up from nine last year. As such, check to see if that view still holds, or if sliding oil prices last month could delay these projects.

Investor takeaway

Core Labs' financial results appeared to turn the corner last quarter. However, the recovery is in a fragile state at the moment, due to the rapid rise in shale output and continued weakness offshore and internationally. That's why investors should keep a close any eye out for any cracks in the company's view that a "V-shaped" recovery is taking hold.

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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 EOG Resources. The Motley Fool has a disclosure policy.