5 Key Elements Core Laboratories Management Thinks You Should Know

By Tyler CroweFool.com

Image source: BP via flickr.com.

It's pretty easy for investors to get distracted by the constant barrage of news about oil prices and up-to-the-minute data on where the market is headed. In fact, though, much of that stuff is all noise that's not worth paying attention to.

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One thing that is worth your attention, though, is Core Laboratories' quarterly conference call. The insights management has about the industry as a whole are a great source for investors looking to get a better feel for the market. Here are five of the big themes discussed on Core's recent conference call that every energy investor should know, in terms of the company and the industry in general.

The U.S. isn't the only one looking to cutMany investors have been keeping a close eye on indicators such as U.S. production and inventory levels to see when the market might turn back up. But according to CEO David Demshur, there are some indications that the U.S. isn't the only place where we could see signs of a turnaround:

"Internationally, last quarter, Core believed that the ultrahigh levels of Middle East production were not sustainable, and production cuts were announced within weeks of our last quarterly EPS release. Core believes the Middle East production levels will continue to fall in Q4, led by declines in Iraq, notwithstanding unknown and unpredictable crude oil supplies from Iran."

This is probably the biggest reason to listen to Core Labs' quarterly conference call. As a company with clients ranging from mom-and-pop operations to the world's largest oil companies, management has a pretty good pulse on what's going on out there. In fact, some of the very issues Demshur mentioned during the call are starting to take hold.

We're a valueless company?If you've looked at Core Labs' balance sheet lately, something may seem off: It has a negative equity value. That isn't a mistake. According to Christopher Scott Hill, Core's chief accounting officer, it's actually by design:

This may sound counterintuitive, but Core has generated free cash flow at a faster rate than net income and has used much of that cash to repurchase shares. Based on GAAP reporting methods for balance sheets, this means it technically has negative equity value similar to a company that's generated more losses than gains. Now we all know that Core Labs' equity is worthless, but that makes it somewhat harder to use valuation metrics such as price-to-tangible book value and return on equity.

The turn hasn't happened yetOne question that so many want answered is whether we're at the bottom of this industry cycle. Prices are likely to be a big part of that, but for many companies it's all about the spending levels of producers. According to CFO Richard Bergmark, it's highly unlikely we'll see that happen this quarter:

Core's management are not the only ones that seem to think this way, either. Schlumberger CEO Paal Kibsgaard echoed some very similar sentiments during its recent conference call as well. According to Kibsgaard, the financial pressure on many of Sclumberger's clients has exhausted cash flows, and it will take a bit of a recovery in oil prices to replenish cash before it expects to see any pickup in activity.

Shale drilling still hasn't been optimizedMany U.S. operators have become quite adept at the whole hydraulic-fracturing thing. In a matter of less than a decade, companies have taken shale oil drilling from a fringe technique that would need absurd prices to be economical to a major production source that has proved to be one of the most economical sources of all. Clearly, a lot of progress has been made, but Demshur thinks we still have a long way to go before we have completely optimized shale drilling:

Pioneer Natrual Resources is a great example here. By moving from a 5,000- to a 10,000-foot lateral that Demshur mentioned, Pioneer has improved its net present value for a well by a specacular 247%:

Source: Pioneer Natural Resources investor presentation.

The business takes a joltSo as companies realize they're better at the fracking process, some are starting to realize that there's an immense opportunity to go back to some of its first fracked wells and get much more out of them. This is turning into a new opportunity for Core Labs, which management is keen to capitalize on while the market for new well work isn't as robust. Chief Operating Officer Monty L. Davis had this to say:

So overall, the market for new development and production will probably remain weak for some time, but Core is finding ways to eke out some opportunities to keep cash coming in the door. As long as the company continues to produce technology solutions that improve well economics, producers will line up for Core's services.

The article 5 Key Elements Core Laboratories Management Thinks You Should Know originally appeared on Fool.com.

Tyler Crowe owns shares of Core Laboratories.You can follow him at Fool.comor on Twitter@TylerCroweFool. 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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