Beginning in 2016 oil prices bottomed, and began a stop-start recovery that has restored WTI and Brent (two globally recognized bench marks for oil) to about 65-70 percent of their 2014 levels. Major oil companies have recovered 75-90 of their 2014 prices, driven largely by surging profits from cost cutting. Oilfield service companies have not participated in the stock price recovery to the same extent as oil companies.
Segment leaders like Schlumberger, and Halliburton languish at levels that reflect about one third of their 2014 prices. Hit even harder are companies that would be early beneficiaries of a pronounced recovery. I am thinking of the offshore drillers primarily here. Transocean and Ensco, despite mergers and rig retirements, struggle currently at levels about 20 percent of their 2014 prices.
I discussed one of these companies, Transocean, in a recent OilPrice article, recommending it in the sub-$8.00/share range. In this article we will take a look at Core Laboratories, (CLB). Core is another company that will benefit early in the oilfield service recovery cycle I think could be in the offing. Accordingly, I think it presents a compelling value at today's prices.
Following Warren Buffett's advice, I like to buy good companies when others are fearful. There is certainly plenty of fear in the market right now!
Core sees signs of an early stage recovery
Core Laboratories, (CLB) participates in two upstream oilfield businesses primarily. Reservoir Description and Production Enhancement. They reported their first quarter a couple of weeks ago, and we can safely say the market was majorly under-impressed. CLB dropped like a stone during the call on Apr 25th. The intervening days haven't been any kinder. Hard to think just a year ago this upstream energy player was over $130 a share.
As investors learned in the conference call, oil company investments in offshore, deepwater exploration that Core Lab's has feasted upon in the past, are still very sparse. Things appear to be improving as Core's CEO, David Demshur commented in the quarterly conference call.
"The last and most important trend for Core is that client discussions have continued to increase for international and deepwater longer cycle projects that will be needed to meet future production demands. The foreshadow of the increase in activity has been evident in the 20 FIDs-Final Investment Decisions, approved in 2017, with another 30 announced in 2018, while 30 or more are queued up in 2019."
Revenue from these longer cycle projects is mainly been absent from Core's Reservoir Description revenue streams dating back to 2015 and should start to bolster revenue - description revenue in 2019.
Reservoir Description
When oil companies start exploring a new area, they often take cores during the operation. This is an expensive and to a certain extent risky use of rig time. But, it is also one that is absolutely necessary if they want to use petro-science to evaluate the rock they have been drilling, for its characteristics. Oil companies employ an entire cadre of geoscientists, often called "Rock Docs", who are passionately interested in examining the results of the "Core Test."
Source In this graphic you see whole core being taken as the hole is drilled. When the captured material is extracted it will be analyzed in laboratory conditions for the next 6-months to a year, and a Petrophysical Report issued to the client. This report can be hundreds of pages long, and contain intricate details of the rock properties. A report like this will cost big dollars to generate.
Given the risk and expense of "coring," you can probably figure out that it is only done in critical projects, where hundreds of millions, or billions of dollars of investment is at stake. A characteristic that describes Offshore, deepwater to a "t." This is the legacy Core Lab's business for which they are known globally.
Core Lab has been successful in marketing this service to the onshore industry to a certain extent, and may see more success as shale players begin to work in Tier II acreage. David Demshur, Core's CEO comments about this in the call.
"The reasons for more perf clusters and fewer stages are our clients changing the way that reservoir rock is being stimulated to produce maximum amounts of stimulated reservoir volume in close proximity to the wellbore. Long frac channels are to be aborted as they are the source of well interference. It is possible to realize more stimulated rock volume in the near wellbore region and avoid costly well interference program using more perf clusters."
My feeling from my experience is that CLB will continue to gain traction onshore with reservoir description services as companies grapple with maintaining production from poorer rock. Core kindly provided an example of what the deepwater play can mean to them in the call.
A Deepwater Case Study
During Core's 2018 Q4 conference call back on January 31 of 2019, Core announced that it had expanded its laboratory facility in Ciudad del Carmen in Mexico including the introduction of patented and proprietary wellsite core handling technologies required for upcoming offshore Mexico projects.
In line with this, in the first quarter of 2019, Core Lab under the direction of Talos Energy was engaged in wellsite processing, core stabilization and the initial stages of laboratory analysis of over 700 feet of conventional core recovered from the Talos Energy, Zama-2, ST01 delineation well, located in Block 7 of the Sureste Basin, Gulf of Mexico.
Core with its Mexico based facilities was selected by the operator to analyze these cores. So, what does this mean for potential investors in Core?
Relevance To Investors
Core has positioned itself to be a primary player in Mexico's deepwater play. Unlike the U.S. Mexico guards its domestic resources zealously and expects foreign players to make infrastructure investments to participate in their exploitation.
Core mentions that they took 700' of core from the Talos well. I don't have access to their pricing, but I will guess that this is a project with billings that will amount to a $ million or more. Probably more.
Mexico will be a vibrant area of growth for a couple of reasons. You can see that their auctions have drawn a lot of interest from some big players. Why are they coming?
(Click to enlarge)
Infrastructure in the nearby American side of the GoM. Prolific discoveries recently. Shell, (RDS.A) just announced another massive discovery in the Perdido corridor, for example.
My point here is that there is the opportunity for a number of studies like the one they did for Talos Energy, (TALO). This is just one area for deepwater development.
Production Enhancement
Probably what tanked Core's stock was the talk about reduced drilling activity in the second quarter of this year. The market was primed to hear that Q-1 was tough, but wanted nothing but optimism as regards the rest of the year. Gwen Schreffler, Core's Director of Investor Relations comments-
"Wells need to be drilled, logged and reservoir fluids samples and wells completed before Core realizes a revenue opportunity. The company projects the average second quarter 2019 U.S. rig count to be down but U.S. completion activity is expected to be flat sequentially."
North America drives this business largely, as the unconventional tight-oil reservoirs and complex completions lend themselves well to Core's advanced technology. Clients continue to seek technological solutions for increasing daily production and estimated ultimate recoveries from their reservoirs. Core has several new services and products which were led by the FLOW PROFILER EDS TMand HERO ® PerFRAC technologies.
Core is doing its part to help clients get their heads around the need for new technology to develop Tier II acreage. During the first quarter, Core hosted several conference calls and industry sessions for various industry groups and analysts to discuss issues with which the industry is grappling. Among them-
Core is uniquely positioned to host discussions like this that have the goal of minimizing the deleterious effects of horizontal well interference. Using customer supplied materials, Core performs detailed analysis of core and fluid samples provide information to the operator on-
Understanding the above qualities are part of the data funnel that helps to determine optimal well spacing and well positioning.
As horizontal wells are drilled, completed and stimulated, Core's SPECTRASTIM, SPECTRASCAN, and FLOWPROFILER EDS completing diagnostics technologies can verify that wells are not interfering with neighboring wells on the pad eliminating loss of production and maximizing producible reserves. This becomes more critical as well pads will soon see 24 or more wells being drilled from a single pad location.
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Source Here is a visualization of a multi-well pad.
Another aspect of Core's Production Enhancement division is their recent acquisition of Guardian Global Technologies. A new technology they have introduced is the "preassembled gun," called the Go-Gun.
The Go-Gun is an open architecture allowing all perforating guns to be used. Therefore each perforating program can be specifically designed based on the reservoir properties and the reservoir time.
The Select Fire Switch is the companion to the Go-Gun, and can fire multiple downhole elements and requires no electrical ramping. Remember the most critical component of any preassembled gun are the energetics or perforating charges in the gun and Core's charges are still industry-leading technology.
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Source This is a screen capture from a video off the Core site. It is worth a look and will improve your understanding of the reservoir treatment process. Suggest following the link!
Currently the market for pre-assembled guns is small. However Core projects that the market will grow to approximately $300 million in three years or less. Core is targeting sales of $100 million at the end of that 3-year program.
This is a value added service for Core, that ties into their Reservoir Description business.
Sequentially and YoY Core's key financial metrics were slightly down, particularly as pertains to net income for same period last year. Gains in the Reservoir Description business were offset by declines in Production Enhancement, another reason for the sell-off.
(Click to enlarge)
Yield- 3.67 percent, $2.20/yr
Core pays a nice dividend which looks solid, as it has been covered in FCF for the past two quarters. Core has a legacy of paying this for at least 70 prior quarters. Demshur recommitted to the dividend in the call.
Your takeaway
As I write this, it is just an awful day for equities in general, and oil equities specifically. Trade war fears are giving the market jitters. Oil is suffering from recent builds in EIA inventory estimates, and concerns about global growth. As we had a modest decline in inventories in the latest report, oil prices should see some support.
Core is a quality company with little debt. It will survive in any scenario, unlike some other players with big debt bombs on their balance sheets. It also has a substantial technological moat that makes it difficult for other companies to compete for its legacy Reservoir Description business.
The drivers for substantially increased revenue are in place for Core, and today's depressed price is an excellent entry point for this dividend payer. Oil companies are looking for ways to boost peaking production from legacy fields. Some will return to the deepwater plays as discussed in this article, and provide a revenue boost that should power this stock higher.
Others will be going shopping on Wall Street for reserves additions, as Chevron and Occidental have just done. Next week we will discuss the now certain deal for Occidental Petroleum to acquire Anadarko Petroleum.
By David Messler for Oilprice.com
Disclosure: The writer does not hold and does not intend to obtain a position in this stock within the next 72hrs. The author expresses his own opinions and has no business relationship with any company whose stock is mentioned in this article.
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Mr. Messler is an oilfield veteran, recently retired from a major service company. During his thirty-eight year career he worked on six-continents in field and… More