Core Laboratories Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 2, 2023

There are 4 speakers on the call.

Operator

Good day, and welcome to the CORE Laboratories Third Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Larry Bruno, Chairman and CEO of Core Laboratories.

Operator

Please Go ahead.

Speaker 1

Thanks, Marlise. Good morning in the Americas. Good afternoon in Europe, Africa and the Middle East and good evening in Asia Pacific. We'd like to welcome all of our shareholders, analysts and most importantly, our employees to Core Laboratories' 3rd quarter 2023 earnings call. This morning, I'm joined by Chris Hill, Core's Chief Financial Officer and Gwen Gresham, Core's Senior Vice President and Head of Investor Relations.

Speaker 1

The call will be divided into 6 segments. Gwen will start by making remarks regarding forward looking statements. We'll then have some opening comments, The company employs to build long term shareholder value. Chris will then give a detailed financial overview and have additional comments regarding shareholder value. Following Chris, Gwen will provide some comments on the company's outlook and guidance.

Speaker 1

I'll then review Core's 2 operating segments,

Speaker 2

Before we start the conference this morning, I'll mention that some of the statements we make during this call may include projections, These types of forward looking statements are subject to a number of risks and uncertainties that could cause actual results to materially differ from our forward Looking statements. These risks and uncertainties are discussed in our most recent annual report on Form 10 ks as well as other reports and registration Statements filed by us with the SEC. We undertake no obligation to publicly update or revise any forward looking statements, whether as a result of new information, future events or otherwise. Our comments also include non GAAP financial measures. Reconciliation to the most directly comparable GAAP financial measures is included in the press release announcing our 3rd quarter results.

Speaker 2

Those non GAAP measures can also be found on our website. With that said, I'll pass the discussion back to Larry.

Speaker 1

Thanks, Gwen. Moving now to some high level comments about the Q3 of 2023. Core continued to build on the operational momentum established Over the past few quarters, while revenue was down slightly compared to Q2, we achieved sequential and year over year improvements in operating income, Operating margins and earnings per share. Ex items, operating income for the 3rd quarter was $16,000,000 up 2% sequentially And up 20% year over year. Operating margins were 13%, up from 12% in Q2 of 2023 and up from 11% in Q3 of 2022.

Speaker 1

3rd quarter 2023 operating margins Base continues to rise. Ex items, operating margins for Reservoir Description improved to 17%, the highest since Q2 of 2020. These improvements in Reservoir Description were partially offset by declines in revenue and operating income and Production Enhancement, Largely reflecting lower than anticipated U. S. Land completion activity, which was down 10% sequentially, along with some project delays in the Gulf of Mexico Some international product deliveries that were pushed into Q4.

Speaker 1

Production Enhancement operating margins, ex items, came in at just over 4% for the 3rd quarter, which was down both sequentially and year over year. Demand for Reservoir Description assay work on crude oil and derived products continued to stabilize throughout The quarter as trading patterns have realigned in response to sanctions. However, the ongoing Russia Ukraine conflict and associated sanctions As well as the emergent political turmoil in the Middle East that began in early Q4 still leave volatility and some uncertainties in the demand for these laboratory services. Lastly, for the full company, EPS was $0.22 per share, ex items, up from $0.21 in Q2 of 2023 and up from $0.18 in Q3 of 2022. As we look ahead, Core will continue to execute on its key strategic objectives by: 1, Introducing new product and service offerings in key geographic markets 2, maintaining a lean and focused organization and 3, Maintaining our commitment to delevering the company.

Speaker 1

Now to review Core Lab's strategies and the financial tenants that Core has used to build shareholder value Our 27 plus year history as a publicly traded company. The interest of our shareholders, clients and employees will always be well served by Core Lab's resilient culture, which relies on innovation, leveraging technology to solve problems and dedicated customer service. I'll talk more about some of our latest innovations in the operational review section of this call. While we navigate the current challenges and pursue growth opportunities, The company will remain focused on its 3 long standing long term financial tenets, those being to maximize free cash flow, for their dedication, loyalty and adaptability in meeting all of our clients' needs and for the commitment that many have shown as we navigate the moment and prepare for a more active market. I'll now turn it over to Chris for the detailed financial review.

Speaker 3

Thanks, Larry. Before we review the financial performance For the quarter, the guidance we gave on our last call and past calls specifically excluded the impact of any Gains or losses and assumed an effective tax rate of 20%. So accordingly, our discussion today excludes any foreign exchange gain or loss for current and prior periods. Additionally, the financial results for the Q3 of 2023 include a charge of 1,100,000 associated with the termination of our ATM program and secondly, facility exit costs, which are aligned with our continuing efforts to improve operational efficiencies. These items have also been excluded from the discussion of our financial results.

Speaker 3

So now looking at the income statement. Revenue was $125,300,000 in the 3rd quarter, down 2% compared to the prior quarter and flat year over year. Activity associated with international upstream projects continue to expand. However, lower than expected activity in the U. S.

Speaker 3

Was $92,900,000 for the quarter, flat sequentially and up 6% from last year. Committed work volumes for traditional reservoir rock and fluid analysis as well as carbon capture and storage projects Continue to build across our global laboratory network. However, revenue from our diagnostic services were down this quarter Due to a decrease in U. S. Onshore activity and some projects in the Gulf of Mexico moving from the Q3 into the Q4.

Speaker 3

Additionally, service revenue associated with crude assay work was stable during the Q3 of this year, but down a little when compared to the Q3 of last year, which was elevated in our European operations ahead of the sanctions that became effective late last year. Product sales, which is more equally tied to the U. S. And international activity, were $32,500,000 for the quarter, Down 6% sequentially and down 15% from last year. Despite the decrease in U.

Speaker 3

S. Onshore activity during the Q3 of 2020 3, product sales in the U. S. Were flat sequentially. The sequential decrease in our product sales in the 3rd quarter Primarily associated with lower international product sales.

Speaker 3

The year over year decrease is due to lower sales in both the U. S. And international markets. Some international product sales scheduled to be delivered in the Q3 of 2023 were delivered in October. Additionally, in 2023, some recurring international product orders which typically fall in the 3rd quarter are planned for the 4th quarter.

Speaker 3

Moving on to cost of services, ex items for the quarter was approximately 74% of service revenue, An improvement from 76% in the prior quarter and 77% compared to the prior year. We continue to see improvements in absorption of costs utilization of our global laboratory network and anticipate additional improvement with continuous growth in service revenue. Cost of sales ex item in the 3rd quarter was 85% of revenue compared to 84% last quarter, which increased slightly this quarter Due to reduced manufacturing efficiencies associated with lower international sales. G and A ex items for the quarter was 9,500,000 A slight increase from prior quarter, which was $8,700,000 For 2023, we expect G and A ex items to be approximately $38,000,000 to $39,000,000 Depreciation and amortization for the quarter was $3,900,000 flat compared to last EBIT ex items for the quarter was $16,000,000 an increase of over 2% compared to last quarter and yielding an EBIT margin of 13%, which expanded approximately 60 basis points sequentially. Year over year EBIT ex items increased $2,700,000 or up 20 percent and EBIT margins expanded 2 20 basis points.

Speaker 3

Our operating income for the quarter on a GAAP basis was $14,700,000 Interest expense of $3,100,000 senior notes, which carried a fixed interest rate of 4.1%. We used $71,000,000 of the borrowing capacity under our bank credit facility To partially fund the maturity of these notes, the credit facility has a variable interest rate and currently the borrowing rate under the facility is approximately 8 As such, we expect interest expense to increase approximately $600,000 next quarter. Income tax expense at an effective tax rate of 20% and ex items was $2,600,000 for the quarter. On a GAAP basis, Tax expense was $2,300,000 for the quarter, which was also at an effective tax rate of 20%. The effective tax rate will continue to be somewhat sensitive Net income ex items for the quarter was $10,300,000 up from $9,800,000 last quarter and $8,200,000 from the same quarter last year.

Speaker 3

On a GAAP basis, we recorded net income of $9,300,000 for the quarter. Earnings per diluted share ex items was $0.22 for the quarter, up from $0.21 last quarter and up from $0.18 compared to the Q3 of last year. On a GAAP basis, earnings per diluted share was $0.19 for the quarter. Turning to the balance sheet. Receivables was $104,100,000 and decreased approximately $2,800,000 from the prior quarter.

Speaker 3

Our DSOs for the Q3 improved slightly to 71 days from 72 days in the last quarter. Inventory was $75,100,000 at the end of this quarter, up approximately $3,400,000 from last quarter end. Inventory turns for the quarter decreased to 1.5 from 1.7 last quarter. The increase in inventory this quarter is a combined effect of a slowing U. S.

Speaker 3

Land market, continued building of stock in And now the liability side of the balance sheet. Our long term debt was $181,000,000 at September 30. And Considering cash of $16,600,000 net debt was $164,400,000 or up $5,600,000 from last quarter. We remain focused on reducing debt and improving the leverage ratio of the company. Although our leverage ratio increased slightly this quarter to 1.92, We have made considerable improvement from the leverage ratio of 2.29 at December 31, 2022.

Speaker 3

We will continue applying excess free cash towards the reduction of debt and anticipate the leverage ratio will decrease in future quarters. At the end of the quarter, we retired and fully settled the $75,000,000 of 12 year senior notes that were issued in 2011. As I stated earlier, we used $71,000,000 of the borrowing capacity under our bank revolving credit facility to partially fund the maturity of these notes. Therefore, at September 30, our debt is currently comprised of our senior notes at $110,000,000 and with $71,000,000 outstanding under our bank Our credit facility has a borrowing capacity of $135,000,000 of which approximately $56,000,000 was still available as of September 30, 2023. Looking at cash flow for the Q3 of 2023, cash flow used in operating activities Was approximately $200,000 And after paying for $3,500,000 of CapEx during the quarter, our free cash flow was negative $3,700,000 Cash from operations for the Q3 of 2023 was negatively affected by a build in working capital of 14,000,000 The build in working capital was primarily due to an increase in inventory and carrying a lower level of accounts payable at September 30.

Speaker 3

The change in working capital also includes $11,300,000 in cash tax payments during the quarter, which will partially be recovered in the 4th quarter. The company is expecting to receive approximately $7,100,000 in tax refunds during the Q4 of 2023. Looking ahead to the Q4, we are forecasting cash from operations to be much improved and positive With working capital remaining flat and additional cash in excess of $7,000,000 associated with the tax refunds, We will continue to manage investment in working capital during a period of growth. And additionally, we expect CapEx to remain aligned with activity levels. And for the full year of 2023, we expect capital expenditures to be in the range of $11,000,000 to 12,000,000 Core will continue its strict capital discipline and asset light business model with capital expenditures primarily targeted at growth opportunities and initiatives.

Speaker 3

Core Lab's operational leverage continues to provide the ability to grow revenue and profitability with minimal capital requirements. Capital expenditures have historically ranged from 2% to 4% of revenue even during periods of significant growth. That same level of laboratory infrastructure, intellectual property and leverage exists in the business today. I will now turn it over to Gwen for an update on our guidance and outlook.

Speaker 2

Thank you, Chris. Based on ongoing dialogue with our global client base, we maintain Stream projects in both onshore and offshore environments will continue to expand displaying an added level of sustainability for this up In the near term, the global crude oil market may remain volatile due to global recession fears, the Globally, crude oil production growth continues to face constraints due to prolonged underinvestment as well as the loss production due to natural decline from existing fields. We continue to anticipate a multiyear international recovery supported by increased spending on exploration in many regions across the globe and expanded development of existing fields to fortify Crude Oil and Natural Gas Reserves. This underlies Core's outlook for continued improvement in international on Sure and offshore activity with ongoing projects around the globe, most notably across the Middle East, South Atlantic Margin, Certain Areas of Asia Pacific and West Africa. Turning to the U.

Speaker 2

S. Onshore activity in 2023 has been lower than expected as reflected by the decreased U. S. Rig and frac spread CoreC's sequential onshore completion activity to be slightly down due to typical year end seasonality as operators complete their 2023 spending plans. Based on these factors, We project Reservoir Description's 4th quarter 2023 revenue to range from $84,000,000 to 86,000,000 and operating income of $11,600,000 to $13,300,000 while we expect Reservoir Description's international revenue To increase sequentially in several geographic regions, the ongoing Russia Ukraine conflict and more recent conflict in the Middle East are causing some disruptions to the movement and trade of crude oil.

Speaker 2

These two geopolitical situations have created uncertainties with respect to trading patterns of crude oil and derived products and the associated laboratory assay services. These situations have and may continue to adversely impact Despite these geopolitical uncertainties, client commitments on long term international projects have improved nicely year over year. However, the pace at which these long term projects are executed by Core's clients may vary from quarter to quarter as momentum builds. Shifting to Production Enhancement. The segment's $1,000,000 and operating income of $2,200,000 to $4,000,000 Growth in Production Enhancement International Sales And well diagnostic projects in the Gulf of Mexico are expected to offset a projected decline in U.

Speaker 2

S. Onshore revenue. In summary, the company's 4th quarter 2023 revenue is projected to range from $125,000,000 to $132,000,000 and operating income of $13,800,000 to $17,300,000 yielding operating margins of approximately 12%. EPS for the Q4 2023 is expected to range from $0.17 to $0.23 The company's 4th quarter 2023 guidance is based on projections for underlying operations and excludes gains and losses in foreign exchange. Our 4th quarter 20 '23 guidance also assumes an effective tax rate of 20%.

Speaker 2

Now I will turn the discussion back over to Larry.

Speaker 1

Thanks, Gwen. First, I'd like to thank our global team of employees for providing innovative solutions, integrity and The team's collective dedication to servicing our clients is the foundation of Core Lab's success. In October, the IEA updated its forecast for crude oil demand for 2023 to average a record high 100 and 1,900,000 barrels per day. That's up by approximately 2,300,000 barrels per day from 2022, Even after assessing current global financial forecasts, this continues to bode well for increasing demand for the reservoir As we look ahead, we see the rising international rig count over the past year as a harbinger of an improving landscape for reservoir description, a trend that we project Early movers in the oilfield service sector that are more exposed to well construction have already felt the impact of this cycle shift. Production Enhancement also has growing opportunities in international areas such as with unconventional plays in the Middle East And emerging conventional plays in a number of regions as well as plug in abandonment programs in mature offshore basins.

Speaker 1

Now let's review the Q3 performance of our 2 business segments. Turning first to Reservoir Description. For the Q3 of 2023, Revenue came in at $85,100,000 up 2% compared to Q2 and up 8% year over year. Operating income for Reservoir Description, ex items, was $14,100,000 and operating margins were 17%, the highest margins since Q2 of 2020. Margins, ex items, expanded approximately 3 20 basis points sequentially and 5.90 basis points year over year.

Speaker 1

Incremental margins were over 100% sequentially and over 90% year over year, nicely reflecting the operational leverage in this segment. The segment's financial performance is an indication of improving client activity across our global network. Now for some operational highlights from Reservoir Description. During the Q3, Core Lab's advanced reservoir characterization team embarked on an expansive multi well study aimed at evaluating a tight carbonate reservoir in the Middle East. This comprehensive study entailed the collection and synthesis of substantial volumes of laboratory and well log data.

Speaker 1

These data sets were then employed to develop petrophysical models, enabling the assessment of production variations Across a suite of lateral wells, an integral component of this study involved the application of Core's DECODE service. DECODE is a proprietary geological and petrophysical modeling application in which readily available drilling data are used to determine key reservoir parameters. These high resolution interpreted logs offer a detailed profile of the rock properties In the drilled intervals, which is especially beneficial in scenarios where obtaining sufficient material for physical laboratory measurements proves to be operational challenging. Also in the Q3 of 2023, Core's Middle East clients continued their plans to expand future production capacity, Increasing the need for evaluation of complex unconventional reservoirs. For these unconventional plays, Determination of the in situ gas oil ratio is critical.

Speaker 1

Given the complex fluid and fluid flow behaviors Of these low permeability reservoirs, the gas oil ratio determined from traditional downhole fluid samples may not be representative of the in situ fluid proportions that exists in the reservoir. In line with these challenges and under a collaborative agreement with CoreSite International, A team of Core Lab Reservoir Optimization Specialists executed a successful multi well pressure core campaign For Middle East National Oil Company, pressure cores allow for intervals of the target reservoir zone to be cut And safely brought to the surface, all while maintaining in situ reservoir pressure. This technology ensures that all 3 reservoir fluid phases are captured and maintained at reservoir pressure within the core barrel. Upon reaching the surface, Core Lab and CoreSite specialists Orchestrated a meticulously controlled depressurization process, enabling the systematic capture of all reservoir fluids. The captured reservoir fluids were then quantified and comprehensive compositional analyses were conducted.

Speaker 1

The process enabled Core Lab's specialists to accurately determine the in situ gas oil ratio as well as other hydrocarbon properties. This pressure core data will improve reservoir models, Now moving to Production Enhancement, where Core Lab's technologies continue to help our clients optimize their well completions and improve production. Revenue for Production Enhancement came in at $40,200,000 down approximately 10% sequentially and 14% year over year. Operating income ex items was $1,600,000 and operating margins were 4% for the Q3 of 2023, Which can vary from quarter to quarter and a sequential 10% decline in U. S.

Speaker 1

Land completion activity along with some Gulf of Mexico work that pushed to the right. Now for some operational highlights. In the Q3 of 2023, Core's Production Enhancement segment was engaged by a client in the North Sea Core leverages its expertise in energetics as an alternative to traditional casing section milling, which is both slower and more costly. Capitalizing on Core's proprietary plug and abandonment perforating system or PAC technology, the company's ballistic engineering design team created a system To address the additional depth of controlled penetration required to create communication in the annulus base between the 13.3eight inches diameter casing and the 20 inches diameter outer casing string. Core's new PAC Extended range energetic system successfully accomplished the task.

Speaker 1

Importantly, the extended range PAC technology was delivered With a 4.5 inches gun, eliminating the need to run a secondary retrieval operation to remove the downhole restrictions that would have been required For a larger diameter gun system, Core's PAC Technology successfully created communication between the casing strings, Maintain the integrity of the 20 inches outer casing and reduced rig time, all while allowing for the efficient recovery of the inner casing. Also during the Q3, Core's expertise in completion diagnostics were employed to assess various refrac methodologies. Refrax presents an opportunity to cost effectively add hydrocarbon production from under stimulated wells. Core's completion diagnostic technologies allow operators to assess various refrac methods to establish the most Profitable and effective approach in a given area. An operator was seeking a method to improve overall zonal coverage in Tire lateral in a single stage known as bullhead frac, known as a bullhead frac, were unable to effectively stimulate the toe half or the far end of the lateral.

Speaker 1

As a possible solution, a liner was placed inside the heel half of the original lateral, making it Possible to refrac the tow half of the well in multiple stages. While somewhat successful, this option came at a substantial cost. Alternatively, the operator implemented a treatment design involving the placement of an expandable liner to isolate the heel half of the lateral. This also enabled refracing in multiple stages. The operator enlisted Core Lab to run its flow profiler engineered oil tracers to assess the post frac Oil contribution from each stage of the refrac and to evaluate the effectiveness of this novel hybrid treatment design.

Speaker 1

Flowback oil samples analyzed in Core's analytical laboratory indicated overall improved treatment coverage Core Lab's expertise in completion diagnostics can be used to better understand how the process actually worked in the subsurface. That concludes our operational review. We appreciate your participation, and Marlise will now open the call for questions.

Operator

Since there are no questions posed at this moment, I would like to turn the conference back over to Larry Bruno for closing remarks. Please go ahead.

Speaker 1

Thanks, Marlise. Okay, we'll wrap up here. In summary, Core's operational leadership continues to position the company for improving client Activity levels in both the U. S. And international markets for 2023 and beyond.

Speaker 1

We have never been better operationally or technologically positioned to help our global client base optimize their reservoirs and to address their evolving needs. We remain uniquely focused and are the most technologically advanced Client focused reservoir optimization company in the oilfield service sector. The company will remain focused on maximizing free cash and returns on invested capital. In addition to our quarterly dividends, we'll bring value to our shareholders via growth opportunities driven by both the introduction of problem In the near term, Core will continue to use free cash to strengthen its balance sheet, While always investing in growth opportunities. So in closing, we thank and appreciate all of our shareholders and the analysts that cover Core Lab.

Speaker 1

The executive management team and the Board of Core Laboratories give a special thanks to our worldwide employees that have made these results possible. We're proud to be associated with the continuing achievements. So thanks for spending time with us, and we look forward to our next update. Goodbye for now.

Operator

And the conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect.

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Key Takeaways

  • Core Laboratories reported ex-items operating income of $16 M in Q3, up 2% sequentially and 20% year-over-year, with overall operating margins rising to 13% and Reservoir Description margins reaching 17% — the highest since Q2 2020.
  • The Production Enhancement segment saw revenue decline 10% sequentially and 14% year-over-year, driving ex-items operating margins down to just over 4% due to lower U.S. onshore completion activity and project delays in the Gulf of Mexico.
  • Q3 free cash flow was negative $3.7 M due to a working capital build and $3.5 M in CapEx, while net debt rose to $164.4 M with a leverage ratio improving to 1.92, and management plans to use excess free cash flow to further reduce debt.
  • For Q4 2023, Core forecasts revenue of $125 M–$132 M, operating income of $13.8 M–$17.3 M, and EPS of $0.17–$0.23, citing ongoing international expansion but warning that geopolitical conflicts may continue to create volatility.
  • Operationally, Core advanced its DECODE reservoir modeling service and pressure-core sampling in the Middle East to better characterize tight reservoirs and measure in situ gas-oil ratios, while successfully deploying extended-range PAC and refrac diagnostics in well completions.
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Earnings Conference Call
Core Laboratories Q3 2023
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