Core Laboratories Q2 2023 Earnings Call Transcript

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Provided by Quartr
July 27, 2023

There are 7 speakers on the call.

Operator

Good morning, and welcome to the Core Lab Q2 2023 Earnings Call. All participants will be in a listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Larry Bruno, Chairman and CEO. Please go ahead.

Speaker 1

Thanks, Danielle. 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' 2nd 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. The call will be divided into 6 segments.

Speaker 1

Gwen will start by making remarks regarding forward looking statements. We'll then have some opening comments, including a high level review of important factors In Core's Q2 performance, in addition, we'll review Core's strategies and the 3 financial tenets that 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. I'll then review Core's 2 operating segments detailing our progress And discussing the continued successful introduction and deployment of Core Lab's technologies as well as highlighting some of Core's operations and major projects worldwide.

Speaker 1

Then we'll open the phone for calls and a Q and A session. I'll now turn the call over to Gwen for remarks on forward looking statements.

Speaker 2

Before we start the conference this morning, I'll mention that some of the statements that we make during this call may include projections, estimates and other forward looking information. This would 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 are also In our comments, we also include non GAAP financial measures.

Speaker 2

Reconciliation to the most directly comparable GAAP financial measures is included in the press release announcing our Q2 results. 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 Q2 of 2023. Core continued to build on the operational momentum established over the past few quarters. While revenue was flat compared to Q1 at $128,000,000 we achieved continue to execute on our key financial strategies, including reducing net debt and strengthening our balance sheet. Year over year, the Q2 of 2023 showed a nearly 6% growth in revenue.

Speaker 1

Ex items, operating income for the Q2 was $15,600,000 Up 62% year over year and operating margins were 12% with year over year incrementals exceeding 85%. 2nd quarter 2023 operating margins as well as year over year and sequential incremental margins were particularly strong in Reservoir where demand for reservoir rock and fluid analysis across our global client base continues to rise. These improvements were partially offset By declines in revenue and operating income due to a quarter over quarter reduction in bulk international product sales and lower than anticipated U. S. Land completion activity.

Speaker 1

Still, Production Enhancement Margins, ex items, held at 10% in the 2nd quarter. Lastly, for the full company, ex items, EPS was $0.21 per share up from $0.19 in Q1 of 2023. 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. Now to review Core Lab's strategies and the financial tenets that Core has used to build shareholder value Over 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 services. I'll talk more about some of our latest innovations in the operational review section of this call.

Speaker 1

While we aggressively pursue growth opportunities, the company will remain focused on its 3 long standing long term financial tenets, Those being to maximize free cash flow, maximize return on invested capital and returning excess free cash to our shareholders. Before moving on, I want to thank our employees for their dedication, loyalty and adaptability in meeting all of our clients' needs and for the commitment that many have shown as we prepare for more active market. I'll now turn it over to Chris for the detailed financial review. 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 FX gains or losses And assumed an effective tax rate of 20%.

Speaker 1

So accordingly, our discussion today excludes any foreign exchange gain or loss for current and prior

Speaker 3

periods. Additionally, the financial results for the Q2 of 2023 include: 1, a tax benefit of approximately $11,600,000 $1,000,000 associated with proceeds received from company owned life insurance policies and a reversal of previously recognized stock compensation expense For certain performance share awards, which are no longer expected to vest. These items have also been excluded from our discussion of the financial results. So now looking at the income statement. Revenue was $127,900,000 in the 2nd quarter, flat compared to the prior quarter And up almost 6% year over year.

Speaker 3

Sequentially, international upstream projects continue to expand. However, this increase was offset by a decrease in product sales as the U. S. Onshore activity softened during the Q2. The year over year growth in revenue was primarily associated with improved activity on international upstream projects and also higher levels of in the U.

Speaker 3

S. When compared to last year. Of this revenue, service revenue, which is more international, Was $93,300,000 for the quarter, up over 2% sequentially and up over 9% from last year. International service revenue was up 4% sequentially and up over 7% year over year as activity on projects outside the U. S.

Speaker 3

Continues to build across multiple regions. Additionally, service revenue associated with crude assay work performed in our European operations Also had some recovery from the decrease last quarter. Service revenue in the U. S. Market was flat sequentially, But up over 13% year over year, primarily due to high use of our diagnostic services in the U.

Speaker 3

S. Land market. Product sales, which is more equally tied to North America and international activity, were $34,600,000 for the quarter, down 7% sequentially down 2% from last year. Product sales in the U. S.

Speaker 3

Decreased 3% sequentially as activity in the U. S. Land market peaked in April and softened in May June. Our international product sales, which are typically larger bulk orders and can vary from 1 quarter to another were also down slightly this quarter compared to last quarter. Moving on to cost of services, ex items for the quarter was approximately 76% of service revenue, an improvement from 78% in the prior quarter and 80% compared to the prior year.

Speaker 3

We continue to see improvements in absorption of costs and utilization of our global laboratory network and anticipate additional improvement with growth in service revenue. Cost of sales ex items in the 2nd quarter was 84% of revenue compared to 82% last quarter. The increase this quarter is a combination of reduced manufacturing efficiencies associated with lower activity in the U. S. Land market and lower international sales.

Speaker 3

We anticipate improvement in the manufacturing absorption rate in future quarters in line with our projected growth in product sales. G and A ex items for the quarter was $8,700,000 a decrease from prior quarter, which was $9,800,000 For 2023, we expect G and A ex items to be approximately $39,000,000 to 40,000,000 Depreciation and amortization for the quarter was $3,900,000 relatively flat compared to $4,000,000 last quarter. EBIT ex items for the quarter was $15,600,000 an increase of $1,100,000 over last quarter Yielding an EBIT margin of 12.2 percent, which expanded 90 basis points sequentially and 4 20 basis points from last year. Our operating income for the quarter on a GAAP basis was $18,900,000 which includes the $2,900,000 gain mentioned earlier. Interest expense of $3,200,000 decreased from $3,400,000 last quarter.

Speaker 3

Income tax expense an effective tax rate of 20% and ex items was $3,200,000 for the quarter. On a GAAP basis, we recorded a tax benefit of $7,300,000 for the quarter, which includes the $11,600,000 tax benefit associated with the company's re domestication transaction was completed on May 1. The effective tax rate will continue to be somewhat sensitive to the geographic mix of earnings across the globe And the impact of items discrete to each quarter. However, we continue to project the company's effective tax rate to be approximately 20%. Net income ex items for the quarter was $9,800,000 up from $8,800,000 last quarter and $5,400,000 from On a GAAP basis, we recorded net income of $22,800,000 for the quarter.

Speaker 3

Earnings per diluted share ex items $0.21 for the quarter, up from $0.19 last quarter and compared to last year, a significant improvement over the $0.12 in the Q2 of 2022. On a GAAP basis, earnings per diluted share was $0.48 for the quarter, up from $0.05 in the prior quarter. Turning to the balance sheet. Receivables was $106,800,000 and decreased approximately $3,900,000 from the prior quarter. Our DSOs for the Q2 improved slightly to 72 days from 73 days in last quarter.

Speaker 3

We anticipate that our DSO will continue improving $71,700,000 up approximately $4,300,000 from last quarter end. Inventory turns for the quarter decreased 1.7 from 1.9 last quarter. The increase in the quarter is a combined effect of a slowing U. S. Land market And also building stock in certain international locations to service some long term international contracts.

Speaker 3

On the liability side of the balance sheet, our long term debt was $185,000,000 at June 30 and considering cash of 26,200,000 Net debt was $158,800,000 or down $7,900,000 from last quarter. The decrease in net debt this quarter was primarily driven by free cash flow generated from operations. Our leverage ratio to 1.85 at June 30 compared to 2.18 last quarter. And we anticipate the leverage ratio will continue to increase during the remainder of 2023. As mentioned during our last call, the company issued $50,000,000 of new senior notes, Which funded on June 28, 2023.

Speaker 3

The new notes were split into 2 tranches, dollars 25,000,000 in each tranche, which have a 5 year and 7 year maturity. The proceeds from the notes were used to reduce the outstanding balance on our revolving credit facility. Therefore, at June 30, our debt is currently comprised of our senior notes at 185,000,000 balance under our bank revolving credit facility, which has a borrowing capacity of $135,000,000 The company will continue applying free cash towards reducing debt until the company reaches its target leverage ratio of 1.5 times or lower. Additionally, as we previously announced on July 17, 2023, the company terminated the ATM program that we launched in June of 22. No shares of the company's common stock was sold under the program.

Speaker 3

Looking at cash flow for the Q2 of 2023, cash flow from operating activities was approximately $800,000 and after paying for $2,200,000 of CapEx during the quarter, our free cash flow for the quarter was 6,600,000 We expect CapEx to modestly expand in the second half of twenty twenty three, but will continue to be aligned with activity levels. For the full year of 2023, we expect capital expenditures to be in the range of $11,000,000 to $13,000,000 Core will continue its strict capital discipline and asset light business model with capital expenditures primarily targeted at growth opportunities and initiatives. 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.

Speaker 3

We believe evaluating our company's ability to generate Free cash flow and free cash flow yield is an important metric for shareholders when comparing company's financial results, particularly for those shareholders I will now turn it over to Gwen for an update on our guidance and outlook.

Speaker 2

Thank you, Chris. Based on conversations with the company's global client base, we maintain our constructive Higher level of investment will be required to maintain and grow hydrocarbon production. The company anticipates to expand toward long cycle upstream projects in both onshore and offshore environments. In the near term, The recent OPEC plus production cuts Being implemented to support the current market are not expected to be maintained or required long term. Additionally, production growth in areas outside of OPEC Plus continue to face constraints due to prolonged underinvestment as well as loss of production due to natural declines from existing fields.

Speaker 2

We continue to anticipate a multiyear international recovery Supported by increased spending on exploration in many regions around the world and expanded development of existing fields to fortify crude oil and natural gas reserves. This underlies Core's outlook for continued improvement In international onshore and offshore activity with ongoing projects across the globe, most notably in the Middle East, South Atlantic Margins and West Africa. Turning to the U. S. Land activity For the first half of twenty twenty three, it was lower than expected as reflected by the declining U.

Speaker 2

S. Rig Core projects Reservoir Description's 3rd quarter 2023 revenue to be up sequentially by low single digits. While we expect our international revenue to increase sequentially, the segment's revenue will be slightly Additionally, the Russia Ukraine conflict continues to create uncertainties With respect to trading patterns of crude oil and associated crude oil assay services, which may impact Reservoir Description's Sales may offset the projected decline in U. S. Revenue.

Speaker 2

In summary, Core projects Q3 2023 revenue to range from $128,000,000 to $132,000,000 EPS for the 3rd quarter is expected to range from $0.21 to 0 point 2 $5 The company's Q3 2023 guidance is based on projections for underlying operations and excludes gains and losses in foreign exchange. 3rd quarter guidance also assumes an effective tax rate of 20%. And now I will turn the call 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 superior service to our clients. The team's collective dedication to servicing our clients The foundation of Core Lab's success. In July, the IEA updated its forecast for crude oil demand for 2023 To average a record high 102,100,000 barrels per day. That's up approximately 2,000,000 barrels per day from 2022, even after assessing current global financial forecasts.

Speaker 1

This continues to bode well for growing demand for the reservoir description services That will be required to grow production and replace the natural decline of existing producing fields. As we look ahead and see the growing international rig count Over the past year as a harbinger of an improving landscape for Reservoir Description, a trend that we project will play out for the next several quarters, particularly in the Middle East, North and South America as well as most other regions. Early movers in the oilfield service sector that are more exposed to well construction have already felt the impact of this cycle shift. Now for some operational highlights from the Q2. Turning first to Reservoir Description.

Speaker 1

For the Q2 of 2023, revenue came in at $83,400,000 up 4% compared to Q1 and up 10% year over year. Operating income for Reservoir Description, ex items, was $13,300,000 and operating margins were over 13%. Margins, ex items, expanded approximately 3 70 basis points sequentially and 6 80 basis points year over year. Sequential incremental margins for Reservoir Description exceeded 100%, once again highlighting the operational leverage that exists in our Reservoir Description business model. The segment's financial performance in the 2nd quarter was underpinned by improving international client activity as well as indications that demand Crude oil and derived product assay work are continuing to stabilize as trading patterns realign in response to sanctions.

Speaker 1

With that being said, uncertainties and potential risks associated with the Russia Ukraine conflict and sanctions still remain. Now for some operational highlights. In the Q2 of 2023, industry adoption of Core's proprietary Web enabled data management system named Rapid continued to increase. Core Lab's Rapid data management platform was adopted by A U. S.-based international operating company conducting exploration and production operations in the Mexican waters of the Gulf of Mexico.

Speaker 1

Rapid provides this operator with centralized, consistent and easily accessible data in a secure format. Rapid enables the client to quickly and efficiently organize, retrieve, archive and analyze large quantities of geological, petrophysical, reservoir engineering, reservoir fluids data and will serve as the primary repository for this information. The Rapid platform also allows for sophisticated database queries from a user friendly interface. When coupled with other Core Lab digital solutions, such as the company's worldwide rock catalog, Relative permeability toolkit and other proprietary data tools, Rapid can be used to search for reservoir analogs, predict petrophysical and engineering parameters And also to integrate newly acquired laboratory data. Core Lab continues its leadership role in of the oilfield, connecting data analytical tools, data lakes and data mesh technologies.

Speaker 1

As the industry's pioneering database for subsurface reservoir data, Rapid has evolved and expanded over decades of commercial application and has become the primary data for a suite of independent, national and international operating companies. Also in the Q2 of 2023, Core Lab collaborated with a prominent Middle East National Oil Company to implement Core's cutting edge advanced rock typing technology branded as ART. The objective of this technology is to maximize the value of drill cuttings, which are small rock fragments recovered during the drilling process. Drill cuttings are typically not size or shape suitable for most of the traditional physical measurements that occur in the laboratory Can greatly improve reservoir evaluation programs. As one of Core's latest and most advanced digital artificial intelligence offerings, Art was employed to create a basin and specific and formation specific proprietary artificial intelligence model From existing geological and engineering data sets.

Speaker 1

The model is then used to predict petrophysical properties from drill where conventional core is not available. The generation of the art model represents a significant advancement, Enabling the National Oil Company to create an extensive data set that contributes to a more comprehensive understanding of reservoir variability. 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 $44,500,000 down approximately 8% sequentially and flat year over year. Operating income ex items was $5,500,000 Operating margins were 10% for the Q2 of 2023, Down 270 basis points from Q1.

Speaker 1

Q2 results were negatively impacted by a sequential decrease in bulk international orders Along with lower than expected U. S. Land activity, year over year operating margins expanded approximately 120 basis points. Now for some operational highlights. In the Q2, Core Lab continued to gain market acceptance for the company's proprietary Helios Plug an abandonment system with a North Sea operator.

Speaker 1

The Helios system uses an innovative energetic technology. It was designed in conjunction with the operator and a wireline service company specifically to help increase efficiencies with offshore plug and abandonment operations. North Sea abandonment regulations require new cement to be placed in the annular space of an existing well to fully isolate producing zones prior to abandonment. Legacy Technologies often struggle to accomplish this goal. Poor communication with the annulus base during the The removal of the original cement results in increased operation time and creates challenges in obtaining a high quality final cement barrier.

Speaker 1

The Helios gun system with its unique perforating design has proven to provide increased efficiencies in the removal Of the original annular cement, which when combined with more efficient placement of the final cement barrier yields a superior well abandonment operation in much less time. Also in the Q2 of 2023, an Oklahoma operator called upon Core's expertise in completion diagnostics To help them understand the causes behind the production variability from 2 landing intervals in a well with stacked horizontal targets. 1 of the 2 landing intervals was significantly harder to drill than the other. Core's technical advisers recommended the incorporation Of course, SPECTRASTIM proppant tracers and SPECTRASCAN gamma ray logging technologies along with flow filer water and gas tracers to evaluate multistage completion efficiencies, well spacing and inter well communication. The SpectraSCAN logs revealed effective completion efficiencies, but also demonstrated the need to improve isolation between stages.

Speaker 1

Flowback water and gas diagnostic tracer results indicated no significant differences in production between the two landing zones. However, it was noted that significant inter well communication had occurred. Corus engineering staff advised That the operator could drill and stimulate the less problematic landing zone with no compromise in overall well performance. In the process, The operator could save 5 to 7 days of drilling time at a cost savings of more than $1,000,000 per well. In addition, Based on the extent of cross wellbore communication that was observed with the diagnostic tracers, the operator was able to optimize their

Operator

The first question comes from Stephen Gengaro from Stifel. Please go ahead.

Speaker 4

Thanks and good morning everybody. Good morning. Two things from me. The first Just from a bigger picture perspective, when we think about the multiyear growth you're expecting, I think others are expecting internationally, How should we think about the RD growth relative to activity and what does that mean for incremental margins?

Speaker 1

Yes. I think Steve first is it's a really good question and I think it's a lot of focus in our within our company on 2. The first thing I think that I want to get across here is as much as and I said this last quarter, I think, as much as we'd like it to be, It's not y equals mx plus b yet. The linearity, that we would all like to see is just not there yet. The client pacing on projects From the time we're awarded or even throughout the projects is not quite up to what we've historically come to expect, but it's picking up In a nice term here.

Speaker 1

I think what we see is that we can get on a path to getting into, call it high teens margins Over the next year, year and a half. And I think the growth there is going to accelerate pretty quickly Once we get more projects sort of shingled in at the same time, right now if a project slips and we just had a project in for example for Q3 that we incorporated into our guidance thinking. We had a project a multi well core project Offshore, South Atlanta margin, and it just pushed the client just informed us it pushed from Q3 to Q4. If we had more projects going at one time, you probably wouldn't see that in the results. But right now that still affects the performance for the quarter.

Speaker 1

So I think we're on a nice path of growth there. I don't know that I get wet to 100% incremental margins every quarter, But I do think that what we just accomplished and what we accomplished in the previous few quarters seeing high incremental margins It just shows the operational leverage in that group. We'll achieve that. And I think we can see segment Segment margins, EBIT margins getting into the mid to high teens within the next year, year and a half.

Speaker 4

Great. Thanks. That's good color. And then the other question, the if you look at Core Labs historically, right, the returns on capital and the free cash flow generation were Extremely good. And over the last several years, it's been less so.

Speaker 4

But I think and I was just kind of looking for validation and thoughts on this, but I think A lot of that has to do with the R and D business internationally being a real big driver of free cash flow. Am I thinking about that right? And so should we start to see the free cash flow profile change if RD does what we think it's going to do?

Speaker 1

Yes. I think that's right. I mean the margins in that group and our business model in that group are going to put cash down very nicely. The cost of Doing that business, we don't need any more roof line. We've got some expansion that we're doing.

Speaker 1

I talked about it in release. We're introducing some new services in the Middle East. But yes, I think that's going to be the bulwark of driving free cash. And Chris, anything you wanted to add to that?

Speaker 3

No, I think that's exactly right. High Margins turns into free cash because there's not much CapEx required to grow from where we're at. So Just the last several years, we've been at this sort of base level where we've got a similar footprint than what we had before. We have reduced staff, but again, we're kind of at a low level and it's going to free cash will grow Significantly from there driven by Reservoir Description.

Speaker 1

And then on the Production Enhancement side, the service side of that business also can yield nice incrementals and generate nice free cash out of that as well. And then as we see demand internationally Growing for more projects, we think absorption in our product manufacturing will also generate higher margins.

Speaker 4

Good. Thank you for the details.

Speaker 3

Sure. You bet. You're welcome. Have a good one.

Operator

The next question comes from John Daniel Daniel Energy Partners, please go ahead.

Speaker 5

Hey, guys. Good morning. Quick question on the Xpand Technology you referenced in your release, you noted it was used with an Australian operator. I'm just curious how often you see that used in the Lower 48?

Speaker 1

Yes. We see it used over the global sort of field of play here. And it's got a lot of applications for Where people have sort of split casing or they're trying to isolate a zone or they've got corrosion problems like the case That we talked about in the example from Australia, we'll see XBAN deployed. And it uses an energetic Trigger to in place that patch. And it's a material science Expertise in the company too that creates that bond between the pipe and the patch.

Speaker 1

So I think if we look out over any place where there's older fields or where there's highly corrosive Production either very high salinity, poor fluids or H2S, things that could lead to the corrosion of tubulars, There's expand opportunities.

Speaker 5

Okay. And when you look at some of the I don't know the economics of expand And all the numbers behind it, but is there a certain category of wells where it doesn't make sense because the production is so low? I'm just trying to get a feel for Old stripper wells and opportunity sets longer term?

Speaker 1

Yes. I think with older stripper wells, you get to a point here where remediation just Doesn't make sense at all. And it's just simpler to think about plug and abandonment. Yes. I'd say probably the biggest field of play for us Is on higher dollar, more complex wells.

Speaker 3

Right. So offshore, It's definitely a less expensive alternative to replacing casing or doing other forms of remediation. So it could be an opportunity.

Speaker 5

Okay. Got it. And then one just big picture as you look across what looks to be in a much improving international market. Are there any Mark is up to this point have disappointed you and when would you expect them to kick in?

Speaker 1

So a couple of thoughts on that John. A good question here. We've talked about obviously the Middle East, South Atlantic margin being real bulwarks for us. Offshore West Africa, we about Namibia projects and a few others. I think all those look good.

Speaker 1

We did see some recent announcement about discoveries in Malaysia. And so I'd say that's been an area that had been lagging, but it's nice to see some discoveries being announced because that As we've talked about for Core Lab, we're not really an exploration exposed company that much. When things get into development I'm sorry, Appraisal Development and Production, that's really the wheelhouse for our 2 business segments. So, I think Asia Pac Is hopefully starting to get back into play here after a pretty long prolonged period of being quiet. I would also point out the we didn't really highlight it in this release, but our carbon capture and storage business continues to grow very nicely.

Speaker 1

Saudi Aramco has joined our consortium project. And so between the consortium and a number of proprietary projects we've got going on, That's bringing some nice play both in the U. S. And from an international perspective as that sort of emerging Project spending on carbon capture and storage is attracting reservoir rock and fluid evaluation.

Speaker 5

Okay. Thank you for letting me ask some questions.

Speaker 1

Sure. Appreciate it, John. The

Operator

next question comes from Don Crist of Johnson Rice. Please go ahead.

Speaker 2

Good morning, Don. Good

Speaker 6

morning, guys. How are you all this morning?

Speaker 1

All right, Don. Good morning. Good morning.

Speaker 6

I wanted to ask about the Middle East. Obviously, it Sounds like you got a lot of engagements across several different countries in the Middle East. But how different is the drilling now Going into the kind of unconventional type reservoirs versus what they've been doing in And kind of where are they in that transition from your opinion?

Speaker 1

Yes. So they're very capable. All the NOCs are very capable Proportionately that means a lot fewer wells in the past and they're going to need to exploit unconventional resources. And so I'd say They're quickly getting up to speed understanding what it's going to take to properly drill and complete Stimulate horizontal wells, multistage horizontal wells, thinking about things about maximizing or optimizing well spacing. That plays right into our expertise and what we can bring to bear.

Speaker 1

One of the things that within Correlab within our Reservoir Description We've done these multi company unconventional reservoir studies in every basin in the U. S. And a number of international basins. And So what we see some of these NOCs in the Middle East doing is they're buying we own that data from these consortiums. They're interested in acquiring some of that from us, so they can rank, hey, how does this compare to an Eagle Ford?

Speaker 1

Or how does this compare to a Marcellus? Or how does it compare to a Barnett or one of the Permian Basin targets? They want to know and rank what they're getting, what they're finding in their local resources compared to some proven unconventional fields. And so tied to that is there's quite a bit of drilling and coring And fluid sampling going on with these unconventional reservoirs. And that's why we talked about in the release, we're bringing some of these Technologies that were developed primarily for the U.

Speaker 1

S. Market, now we get a chance to move those into an emerging unconventional market. I will add one other thought to that Don is, I don't think outside of the Middle East, there's many places where unconventionals Are going to have a big sort of upside. There's too many Difficult things that have to come together. You have to have the resource base.

Speaker 1

You have to have an accommodative government that's going to allow or land ownership that's going to allow For thousands and thousands of wells to be drilled and you're also going to need an incredible pipeline of people and material to support the high cadence that goes along with an unconventional project. So the operators in the Middle East can clearly get that done. They've got the expertise, the will and the sort of accommodative Thoughts towards drilling the wells? That will work. They've got the natural resource to do it.

Speaker 1

A lot of other places on the planet, it'd be tough to replicate that model. That's worked in the U. S.

Speaker 6

Right. I agree. We saw that in the France basins, right? So are we still in the 1st or second innings of that? Or how far down the pipeline are they?

Speaker 1

I think that's right. In the first few innings on that, I'd Say not everybody is in the same spot. Maybe some people in the 3rd or 4th inning, some in the 1st or second inning of that. We've had a long term I'll call it over the last couple of years we've done a project for one of the NOCs, evaluating a whole basin For them with multiple unconventional targets and I'd say they're a little closer to getting to call it the point of production.

Speaker 6

I appreciate all the color. Thank you. I'll turn it back. Sure, Dawn.

Speaker 2

Thank you, Dawn.

Operator

Seeing that there are no further questions, I would like to turn the conference back over to Mr. Bruno for closing remarks.

Speaker 1

Okay. I think we've got a pretty active earnings call day today, a lot of There are calls going on. And so I think 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.

Speaker 1

And international markets for 2023 and beyond. 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 solving technologies and new market penetration.

Speaker 1

In the near term, Core will continue to use free cash to strengthen its balance sheet, We're always investing in growth opportunities. So in closing, we thank and appreciate all of our shareholders and the analysts that cover Core Lab. 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 our continuing achievements. So thanks for spending time with us and we look forward to our next update.

Speaker 1

Goodbye for now.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now

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Key Takeaways

  • In Q2 2023, Core Lab reported flat sequential revenue at $127.9 million (+6% YoY), ex-items operating income of $15.6 million (+62% YoY), 12.2% operating margins and $0.21 EPS.
  • The company reduced net debt to $158.8 million (leverage 1.85×) and generated $6.6 million of free cash flow, aiming to lower leverage to 1.5× while maintaining strict capital discipline.
  • Q3 2023 guidance projects $128–132 million revenue and EPS of $0.21–0.25, driven by continued international project growth offsetting softer U.S. land activity.
  • Reservoir Description posted $83.4 million in revenue (+4% QoQ, +10% YoY) with >13% margins and >100% incremental margins, underpinned by expanded adoption of its Rapid data platform and ART AI rock-typing technology.
  • The firm reaffirms its focus on maximizing free cash flow, return on invested capital and returning excess cash via dividends, while keeping CapEx at 2–4% of revenue.
AI Generated. May Contain Errors.
Earnings Conference Call
Core Laboratories Q2 2023
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