Core Laboratories Inc (CLB) 2003 Q2 法說會逐字稿

Good morning. My name is Latoya (ph) and I will be your conference facilitator today. At this time, I would like to welcome you to the second quarter 2003 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question, simply press star and then number 1 on your telephone keypad. If you would like to withdraw the question, press the number key. Thank you.

Mr. Demshur, you may begin the conference.

Good morning, I like to welcome all of our shareholders, analysts and employees to the Core Laboratories second quarter 2003 earnings conference call. As usual I am joined by Dick Bergmark, our EVP and CFO.

This call will be broken down into six segments. Dick will remark about forward-looking statements and then I will follow-up with consolidated company overview of our operation. Then Dick will go into detail and talk about financial results for the second quarter. Then we will come back and talk about our three operating division and give a detailed update on our progress and some of the projects we are working on around the world. The fifth session will be our guidance and outlook for operations for Q3 and the rest of 2003. Then we will end by taking a question-and-answer session.

I will turn over to Dick to comment on forward-looking statements.

Thanks, David. Before we start Conference Call this morning, I mention some of the statements we make during this call may include projections, estimates and other forward-looking estimations. This would include any discussion of the company's business outlook. These types of forward-looking statements are subject to a number of risks and uncertainties relating to the oil and gas industry, business conditions, international markets, international political climate and other factors, including those discussed in 34-Act filing that may affect our outcome. These factors and other factors mentioned on this call could cause actual results to differ materially and we undertake no obligation to update or revise any forward-looking statements made during this discussion.

With that said, I will pass discussion back to David.

Thanks, Dick. I like to give a consolidated overview for Core Laboratories operation for Q2 2003. We posted a good quarter. I wouldn't say a great quarter, but posted a good quarter. We see a lot of positive operating trend. During the quarter, our revenues reached $100 million for the second time ever to have quarterly revenues exceeding $100 million in the company's history. And we reported earnings up 15 cents per fully diluted share. Look at the results and we see year-over-year quarterly growth exceeding 15% in almost reaching 16%. Its course highest internal growth rate in two years, actually one of the highest internal growth rate in the oil field services sector.

We continue to see a number of positive operating trends which makes us optimistic for second half of 2003. International projects remain strong in the quarter, especially those in West Africa, Asia-Pacific and after a mid-quarter lull, the Middle-East. North American activity was up significantly, especially going into Q3 where we see Canadian drilling activities reaching record highs. We also visited earlier this week the Director General Office of Penex down in Mexico to get an idea of their plans were for this year and then also looking at next year. Indeed those plans are robust.

Core's benefiting from operations both internationally and operations in the Americas. We see increasing market acceptance of some of our new technologies like SpectraChem, which we will talk about in detail during our detailed operational review and our Hero preferating (ph) line of preferating (ph) charges and gun systems.

We are also seeing increased market penetration of some of our existing services like Zero Wash fractured diagnostic technology and our SpectraFlood technology which is being used to several fields in Mexico right now to increase sweep efficiency on some of the fields they have under flood in Mexico. If we look at operational execution, that continued to improve in the second quarter and we will be stressed going into the third quarter and fourth quarter.

We will stress its (inaudible) Q3 and Q4 and Reservoir Management, we will be redirecting the expenditure of development dollars in Reservoir Management to cut expenses and we foresee return to profitability in the third quarter. Also like to point out this provide good upside leverage for us when this group returns to profitability. We will continue our expansion into new markets and seek further penetration of our services worldwide.

With that consolidated overview, I would like to turn it back to Dick for detailed financial review of our operations in Q2.

Thanks David. Revenues were $100.2 million and up 7.7% sequentially from $93 million last quarter and up almost 16% from $86.5 million in the second quarter of last year. This increase was due to the recent improvements in North American activity levels and continued growth in the international marketplace. Services in the quarter were $82.8 million, up from $72.7 million in last year's second quarter.

The sales component, $17.4 million, up from $13.8 in the prior year's second quarter. Cost of sales for second quarter was 85.9% versus 92% in the prior year. Cost of services in the quarter were 81%, which is unchanged from the prior quarter. G&A was $5 million, down slightly from last quarter while virtually the same as in the second quarter of last year. We expect G&A to run about $21 to $22 million in 2003.

Depreciation and amortization for the quarter $5.4 million up from $5.2 million last quarter and $5 million in the second quarter of last year. For this year depreciation expense is expected to be approximately $21 million.

Other income in the quarter was fairly small at 247,000, single largest component was 180 thousand in FX gains. EBIT was $1.1 million, which is up 145% compared to 3.2% in the prior quarter and also up $4 million compared to a year ago. Margins are improving. In this quarter they were 8.1% compared to last quarter's 3.4% and last year's margin of 4.7%. These improved earnings represent 29% in incremental margins when comparing year-over-year performance. Interest expense of $1.8 million for the quarter was up from last quarter's $1.6 million due to higher borrowings, but lower than the $1.9 million incur last year due to borrowing cost.

Income tax expense of $1.7 million was reported based on 27% rate and we expect that rate will remain the same for the year. Net income for the quarter was $4.6 million, up when compared to $1.2 million last quarter and $1.3 million in the prior year. Earnings per fully diluted share was 15 cents compared to 4 cents reported last quarter and 4 cents last year in the second quarter. Now, going over to the balance sheet, I'll point out a few items as notes.

Cash was 414.6 million up from last year's balance of $10.7 million while similar to $14.9 million. Our day sales outstanding remain the same as last quarter with receivables $106.7 million, up from $98.8 million last quarter as sales have increased quarter-over-quarter. Revenue -- excuse me, receivables year-end stood at $100.6 million. We believe the collections will improve in third quarter, improving free cash flow.

Inventory continues to decline, now $34 million compared to year-end of $34.5 million. Other current assets are slightly lowered compared to year-end due to reduced balances and insurance prepay by $1.8 million. Other items on the asset side are virtually unchanged, although goodwill increased due to April 30 purchase of Goex and earlier purchase of Advanced Data Solutions.

On the other side, the balance sheet accounts payable are generally with recent experience, although current total assets -- liabilities were up compared to year-end balances with primary change from increase in VIT position by $3.4 million and $2.4 million increase in notes payable.

Long-term debt was $100.4 million, up from last quarter and up by $12.4 million compared to year-end. Out standings in our revolving credit facility were $25 million compared to $17 million last quarter. Revolver borrowings are currently at $44 million, as we drew to fund recent stock repurchases.

As we continue to generate free cash flow and will pay down debt, acquire technology or repurchase company stock are based upon market conditions and corporate activities at the time. The balance sheet continues to be strong as our debt to cap was 27.5% at the end of the quarter and it now stands at $32.5% still below the industry average of the mid 30s. Other long-term liabilities are virtually unchanged from year-end. Shareholders acuity end of the quarter $250.5 million down from the year-end balance of $258.1 million due to additions from quarterly earnings and reductions due to our stock buy back program. Capital expenditures for the quarter were $8.1 million, we continue to be on target 29 Capo (ph) program for 2003.

If we look at cash flow, cash provided by operations for the quarter was $19.3 million generating a $11.2 million in free cash flow after fully funding our $8.1 million capex program this quarter. Year to-date we've generated cash from operations at $24.6 million and free cash of $11.8 million. We continue to believe that we're on track to hit our target of generating $25 million in free cash flow during 2003. we've been active in our stock buy back program, during the quarter we purchased an additional 470,000 shares, they've cost about almost $4.7 million.

Yesterday we've purchased a further $1.5 million share at a cost of about $17.4 million. To date we've purchased in the aggregate 3.65 million shares at a cost of almost $40 million dollars. Our current shares outstanding are approximately 29.8 million shares.

Now we'd like to go over internal financial targets with you. Based upon discussions with our clients, our view of industry spending in 2003 is unchanged from prior guidance in the last call. Activity levels in North American are showing definitive signs of recovery and the international markets seem to continue at levels now slightly higher than last year. We believe that the majority of the improvements within our operations will come from increases in the North America markets with other international markets continuing at similar good levels experienced last year. So what does this mean for internal financial targets?

First, we continue to see improving situation, primarily in North America, which demonstrated positive impact in second quarter on Production Enhancement operations.

Second, with slight improvement in international oil markets, we're now beginning to see, we expect growth rate in Reservoir Description unit to continue improving as the year progresses.

Third, we do expect to see return to profitability in our Reservoir Management unit as they improve execution of their business plan. With this view in mind, we continue to believe that our annual revenues could be in the area of $400 million for increase of about 10% over 2002 revenues.

With these revenue levels we believe that our EPS for the year will be in the 67 to 72 cent EPS range. This assumes 10 cents was used in the first quarter.

As mentioned earlier, we also expect that for the full year we will generate approximately $25 million in free cash flow from a combination of earnings and improvements in working capital. This is after paying for projected $20 million capex program for the year.

In the near term, our third quarter revenue target is in $100 million range. EPS around 18 to 22 cents, reflecting encouraging operational trends coming from improvements in results and margins in Reservoir Description unit due to increased activity levels internationally, as well as in North America, continued rebound in Production Enhancement due to increasing activity levels primarily in the North American markets and improvements in Reservoir Management as they continue to reduce cost structure while executing their business plan.

I would like to turn the presentation back to David.

Thanks, Dick. I would like to give detailed operational review in looking at the three reporting segments, the first being Reservoir Description. As Dick said, they had a solid quarter, led primarily by international, crude oil related projects.

During the second quarter they reported highest revenue ever for a second quarter. We believe this is significant because this business is somewhat seasonal and we tend to see ramping of revenues later in the year. For them to have a record second quarter level of revenue gives us encouragement because we now see activity levels significantly improving in Canada and to a lesser degree in the North Sea. Operating margins approaching 11% still are not satisfactory as this business in the past has had EBIT margins or operating margins greater than 15%.

However, sequential incremental margins were above 60%. Leading us to believe we can see margin improvement as we go later into this year. Projects of note, West Africa shelf and deep water development still continue to run strong both from the rocks and the fluid side.

In Asia-Pacific our activities there have been and remain robust, both looking at crude oil-related projects and natural gas projects for LNG export, mainly to the U.S. The Middle Eastern project returned to activity in quarter after the end of the hospitality in Iraq The quarter did see the end of the oil for food program in Iraq.

We have established a presence in Baghdad to look for opportunities that will occur there. We know the fields fairly well. There is a large amount of work that needs to be done due to extensive damage done to the reservoir and facilities there in Iraq.

We also visited, as I mentioned, with the executive management of Penex on Monday. Penex will spend estimated $9 to $10 million on capex. That will increase to $11 billion next year, tying the highest ever in 2003 dollars equivalent with what they spent in 1981. So, we see robust package of services and technology to provide to the Mexican marketplace and plan to expand our facilities and the availability of our technologies in Mexico.

Turning to Production Enhancement, as you know this is a segment that is certainly driven by North American natural gas related drilling and year-over-year we saw their second quarter revenues up 25% and year-over-year incremental operating margins up 44%.

We're seeing better penetration of some of our new technologies and better acceptance of these new technologies, two of which we mentioned in the press release, one being SpectraChem, this is a technology used to determine the percentage of fractured clean-up after a hydraulic fracture. In many cases, we are -- the amount of frac gel clean-up is limited to 25%, injected into the reservoir, leaving behind material that would impair hydrocarbon fl oto (ph) the well board. This will lead to better design of gels and breakers so we will have better well work clean-up.

Also, our Hero perforating system, line of products in Canada, these are high efficiency reservoir optimization perforating systems which are effective in shallow and mid-depth natural gas wells.

Also, we are seeing increased penetration of some of our existing services. Zero Wash fracture diagnostic will reach a high for number of jobs performed in third quarter of this year. Our Spectra services are being used to increase efficiency of sweeps under flood being well accepted in Mexico.

We continue to work on a large project in the Puerto Rico field. We injected 20 tracers there to determine the sweep efficiencies and flow rates in these fields. We have continued work on the (inaudible) fields in Mexico, the world's largest and most successful nitrogen flood in the year. Production increase Friday 1.2 million barrel per day range to over 2 million barrels per day with the injection of nitrogen at the flooding agent in the field we continue to do a large amount of field work there just look at the change of compensation of the fluids as the field is produced.

As Dick said, some of the sequential margin improvement has been led by continued efficiencies in cost reductions in our manufacturing process.

This is both in Canada and in Forth Worth, where we have a new facility under construction in the Godly, Texas area where we will unite all our manufacturing facilities there being grade efficiencies for the manufacturing of pro porting charges and gun systems.

Within the quarter, we received about $900,000 of revenue from the Goex acquisition that Dick mentioned. We find this significant because as we go into the third and fourth quarter we are beyond the break-up in Canada and see revenue strengthening from the Goex product line even more.

Turning to Reservoir Management operations once again, were about break even. Couple of items within Reservoir Management we now halted further development of in-reservoir Simic technology (ph) which ran us about $500,000 in the quarter. Last year the funding of the development and operating losses approached 1.6. We will offer this service at the current level of technology, we believe that there should be strong client demand for this technology.

We have not seen that yet. So, we will wait and continue to market this technology at its current level of technology and spend those development dollars elsewhere. also we have $350,000 of rollover cost from closing of the London office and the 350,000 additional closure, you have break even operation there. As Dick mentioned, the integrated reservoir solution projects are on schedule. We believe we will start to see positive results in the third quarter, giving us some upside leverage on our earnings for the second half of 2003.

What I'd like to do now is look at our operational outlook for Q3 and the second half of 2003. In Reservoir Description we still see robust level of international crude oil related projects which should continue to boost results because of the seasonality that takes place in this business. We look for Q3 margin expansion due to incremental revenues that will be generated from our worldwide operations. We look forward to another solid quarter from Reservoir Description.

On the Production Enhancement side, the drivers are North American natural gas drilling. We continue to see increased penetration of our existing services and increased acceptance of our new technologies. By the end of the third quarter, we will have completed the building of our manufacturing, new manufacturing facility in Godly, Texas. By that time, have the Goex product line integrated into the Colap (ph) product line. We see margin expansion there again via incremental revenue gains (inaudible). Within our Reservoir Management, as I mentioned, we've got about 20 integrated reservoir solution projects underway that should yield profitable Q3.

For all of Q3 as Dick mentioned we see revenues in the hundred million plus range and fully diluted EPS in the 18 to 22 cent range. I believe the Street total right now is about 18 cents. Annual revenues of approximately $400 million with 2003 operational earnings in the 67 to 72 cent range. We believe the Street right now is somewhere between 61 and 64 cents. Our annual free cash flow target will again be $25 million. We believe we are well on track for that. We will use that cash to either reduce debt, or buy back stock, or look to acquire complimentary technology.

What I would like to do now is open the call for question-and-answer session.

At this time, I would like to remind everyone in order to ask a question, please press star and then the number 1 on your telephone keypad. We will pause for just a moment to compile the Q and A roster.

Your first question comes from Ashish Gupta, Banc of America Securities.

Hi, guys. Good morning. Starting off with Reservoir Description could you guys talk about how much was recover from the accounts in Venezuela during the quarter?

Recovered from doubtful accounts? I guess what I can state is trade receivables actually went down 16%. They are paying.

OK.

They're beginning to pay. We have better experience as time goes on and they get systems back up and running. Compared to the year-end balance on receivables and June 30, they are down 16%.

I guess I am getting at incremental margins, if you factor that out or on a going-forward basis, if you will.

Right, I think the gains from recovery of doubtful accounts in Q2 were negligible with the margins the business did turn. Essentially in Venezuela we didn't have a recovery of doubtful accounts that led to significant uptick in EBIT in the quarter.

Actually, we took a stronger view and increased that account. If anything it has held if. we extract it, it would have helped margins.

Sounds great. Production Enhancement. Could you guys give a breakdown of your exposure to Canada versus the United States, just because I assume the seasonal break-up probably had more of an effect on revenue than we expected?

Yes, in looking at the total revenue package there is somewhere for Canada, I would say probably looking at about 20% of those revenues to 25% of the revenues being generated from Canada as opposed to the other two markets that it serves in the U.S. and in Mexico.

OK. That's helpful. Finally, turning to Reservoir Management, could you guys maybe give a breakdown of how much capex was spent for the segment and more specifically in reservoir seismic technology?

For in-reservoir seismic technology, looking at historical, we had the purchase of what was at the time called Tomosize for about $10 million. I would say then follow-up capex into that, these are not development dollars, but capex, would be between $3 and $4 million. So, probably little over a million dollars per year since we owned Tomosize.

And that will be used to fund technology and production enhancement or description?

Capex would head that way. Development dollars and operation losses over the last two years exceeded $2 million and hopefully we can choke that off. Sooner or later if we keep on choking off in those areas we are losing money, Reservoir Management one day will make money and we believe that is in the third quarter.

OK thanks, guys.

Your next question comes from Neal Mcatee with Morgan Keegan.

Listen on production enhancement you said 20 to 25% of revenue was Canada in the second quarter. I assume larger percentage in the first quarter?

No, Neal, let me correct that. That is all over the year-on average. The second quarter it would have been more on the order of 10 to 12%. About $3 million

OK. First quarter probably 30 plus percent?

That is correct.

OK. What I'm working toward is I guess in the U.S. is there some lag that you guys experienced to drilling natural gas drilling before your services are brought on or is it pretty -

There is a lag, we have to get down to the reservoir, on average looking at 8 to 9000 foot well. You probably have 8-12-week gap before that rig goes on before we are doing either fractured diagnostics or some type of field flood diagnostics or sending out perforating systems in the gun well.

OK. If the U.S. rig count for gas were flat in the third quarter, would Canada pick up with the lag effect and with continued market penetration and I assume that means sort of some kind of organic growth, you could still post sequentially up revenue in third quarter at a production enhancement even with flattish U.S. rate count is that -

Yes, we expect even with flattish rate count we would expect incremental revenue to come into Production Enhancement in the third quarter and that is what we see in our internal company plan.

If rig count goes up maybe it goes up incrementally more than you thought.

We would be happy to see that.

Just in general, I know there is a lot of work in Iraq, could you just talk about maybe the amount of work you're looking at in the Middle East overall today versus say five years ago? Because if I listen to the conference calls of all the other service companies it seems like internationally one bright spot is the Middle East. Given their reservoirs have been so prolific and probably haven't needed you, are you seeing noted change in that? Would you see that as pick-up of activity there that would benefit you?

That is a good observation, Neal. We have talked about in our conference call before Middle East reservoir have been prolific. We have seen significant increase in the amount of water those reservoirs are being producing.

If you look at the fields in Saudi Arabia, Quar (ph) being one of note, they are making significant amounts of water. These number of fields are fractured carbonates. Once you start to make water, it is hard to abate. If you look at revenues trend over the last five years, you would see revenues go from couple of percentage points probably up to around 10% of our revenue stream now.

With the amount of work that's going to be needed in Iraq, because I think everybody realizes the amount of significant damage not only to the infrastructure, but the producing reservoirs themselves suggest that over the next two or three years there is going to have to be a Herculean effort to get it back to the mid 2.5 million barrel range. That bodes well for a company like Core Laboratories.

Great. Last question back to Dick. I missed the first few minutes of the conference call. I'm assuming you did say something about receivables. I want to make sure I understand in the second quarter it wasn't that you got paid for things you had done last year that you previously written off. You're just saying that as you move forward the new focus in Venezuela is on projects that where you think you can get paid and you are getting paid on those projects that the new focus is in fact paying off in the sense you are getting paid for what you are doing. Is that what you are saying?

We have seen an improvement giving us access to their FAP system where we can see our payables to us. They are queued up to be paid. As I mentioned earlier, receivable balance is down 16% there.

Also important distinction here, and I think this is along the lines of your question. If you look at services there we provide field services, those are the ones that right now we are concentrating on. Some of the long-term reservoir study projects we are working on were the ones we were having difficulty with.

A number of those invoices have been reserved for bad debt, which we've talked about in the last two conference calls. A number of those projects are suspended and the reason being you had a lot of middle management, their engineering group between 2 and 10,000 people being laid off. To date, we have not entered into any of the new projects and until stability returns there we will not.

So, are any of those old projects showing up in the SAP system?

We keep pushing.

Good job. Thanks, guys.

If you would like to ask a question at this time, please press star and the number 1 on your telephone keypad. Your next question comes from Robert McKenzie, Friedman, Billings, Ramsey.

Good morning. This is Brad Sudard (ph). Quick question for you on the corporate and intercompany elimination line. What is in that line? It looked negligible for the quarter, what goes into that? This is on the operating income.

Where it says other, the majority of it was I think I said 180,000 in foreign exchange.

I'm talking about the operating income breakout by business segment. Corporate inter-company eliminations, there has been a lot of variability in that line.

To be honest, I don't know. I can get back with you. It is so small.

Sure. Another question. How do you see I mean given good color on revenue and given guidance 18 to 22 cents, what are the major factors that cause the variability there. How do you get to 22 cents?

I think we've got to look at our revenue stream. If we're on exceeding $100 million in revenue and we have a little better business execution, I think we get to the high end of that. We will see how the quarter plays out. That is kind of our best call. Our revenue was a little stronger than we thought this quarter and it took us to the upper end of the range. If that holds true into the third quarter, I think it's possible to get to upper end of the range in that quarter, as well.

Would you say the upside is more revenue driven or cost-improvement driven?

Well, certainly from a business execution standpoint, the margins that we reported in Q2 we're not pleased with because we've had these businesses that have been upper teens in margins. Combination of revenue increased and business execution, which we're seeing from our operations because of our greater focus there. I think the combination can get you there.

OK. Thanks.

Your next question comes from Allen Brooks with CIBC World Markets.

Good morning, guys. Got a few questions for you. Dick, you commented in your presentation about G&A being down sequentially modestly. It looked like about a 10% sequential drop. Anything important in that number?

No, no changes in our initiatives, probably just timing. We are continuing on aggressively with our rollout of the enterprise-wide financial system. Actually this weekend we're cutting over to the new 11-I version we've talked about in the past. We have to shut down for four days so it can be upgraded. It is a major undertaking we are pleased to get it done this week.

From that, we will carry on into Venezuela in September, Thailand and Australia right after that in October and then head down to South America in November. And by the end of the year we are on track to have about 84% of revenues covered. Next year Russia, we're told by Oracle, they will have all localizations done. They are slated in. Then, we will have others that should round us out into the high 90s as far as coverage of all revenues in 2004.

OK. Sounds good. You raised a subject that I was going to ask about, that's Russia. What is going on at the moment in Russia and what is your outlook there?

Actually Dick and I and the Board members will head over to Moscow tomorrow to have a board meeting there early next week. We will tour some of our facilities there. We are very upbeat on the activity level in Russia. A lot of the projects that we're working on are related right now in our Reservoir Description area of business.

Rocks and mainly fluids in the former Soviet Union and of course we see great potential there for our Production Enhancement team with fracture, fractured diagnostic, field flood diagnostics and perforating charges and gun systems. We are very robust on what we see in the former Soviet Union and will get a firsthand look early next week.

One reason we are going over, we have been quite successful over the last several years of building a business there and expect revenues out of Russia to approach $50 million annually by the end of this year.

OK. Sounds promising. Another question, Dick. You've obviously been aggressive in buying back stock and have used short-term debt to fund that purchase. With interest rates backing up is that change your sensitivity to buying more stock?

When we make a decision to buy stock we are looking at cost of capital and the incremental debt cost rolled into that. Our view is that we're pretty comfortable with our debt to cap in this range because it now is finally at industry averages. So, we will continue to look at it and you are right, that is a component. We do believe our free cash flow is going to pick up in the third quarter which in fact will enable us to probably reduce our debt a little bit.

OK. Last question, Dave. Reservoir Management, that business has not developed the way you or anybody else in the industry thought it would.

No, very disappointing.

The question I've got for you, do you have any thoughts as to why this hasn't developed what is the hesitation or is it technology or what is the issue in your view?

Well, I think it's a combination of a number of factors, some of which was -- some of the technology was commoditized at a rapid rate. And we did have some patent protection on some of the technologies and they seem to be commoditized very quickly.

If we look at our in-reservoir seismic technology, which we all think is a very good technology and maybe fell too much in love with it, it could be a technology a little bit before its time. It is the 10 ultimate 4-D seismic on a local scale.

Yet, when we look at trying to market and sell this to a client, cutting-edge technology, we are asked significantly discount this service, which we don't understand.

So, from our standpoint, Allen, there comes a time where you have to draw a line on trying to continue to improve the technology at which level we feel is very robust now for providing some real insight into the movement of the fluids in the reservoir.

So, from our standpoint, it's a combination of some of the technology becoming commoditized and maybe some of the technology a bit before its time.

So, just from our standpoint, we need to know when to say when and on in-reservoir seismic, certainly we've done that because we can't continue to fund development and dollars and take operational losses and as you know, it's not enjoyable to talk about Reservoir Management over the last 12 quarters and the failures we've had there.

We will continue to choke off these loss points and we believe Reservoir Management from more of the engineering side, more of the make-up of Core Laboratories can provide upside leverage as we go forward. Hopefully on next quarter's call we can talk about that.

I applaud your strategy and your efforts. I guess two kind of ancillary questions related to that. One, haven't you been able to demonstrate on the projects to the customers, the value of it? Is there a problem in doing that?

Well, obviously we thought we have, but in the customers' eyes I don't believe they've seen that. From our standpoint, the value is in the eye of the beholder and the beholder happens to be the client.

Right.

So, from the technology like in-reservoir seismic, certainly we will downgrade our emphasis on that and more of the engineering-type studies, for instance the product we conducted for Swift in New Zealand where we generated $50 million of value for Swift. I think it was evident and those projects will become a more dominant role within our Reservoir Management group. When you see the results of those, you will see yes, indeed, clients see value in these more engineering-related projects.

Last point. The in-reservoir seismic, would you characterize that as being in sort of the same or having the same evolutionary pattern as 3-D seismic because that started in the late '70s or early '80s and didn't become commercial until the '90s?

Since we hold the patent on a lot of the technology, I hope that is the case. As it stands right now we are not real encouraged right now by the acceptance. Although we will continue to market and sell the technology, the answer is I don't know. I hope that would be the case because of the money that we've invested over the years, not only from a capex standpoint, but for our operating losses over the last 12 quarters.

Right. OK. Good quarter.

Your next question comes from Mary Safrrai (ph), Carl H. Boy Timer & Company (ph).

Good morning, it is Mary. You highlighted the deep shelf gas on the first quarter conference call. I'm wondering what you are seeing there if you have seen more interest or inquiry for your services?

Yes, Mary, this is a reference we made about the New field in the deep gulf that is about to be 50-feet plus discovery. We are indeed seeing a number of companies with increased emphasis there. We've talked to people about maybe a renewed interest of the majors in the deep shelf gas. But at this point you do have a large number of independents that are better located for some of the deep shelf gas.

You do have a smaller number of majors still positioned to look at that. I think as we see later this year in going to the next year we'll see a significant increase in the amount of deep gas drawing on the shelf. So the answer to your question, for a company like Core Lab where you tend to have more difficult reservoirs with deep from our pressure and temperature standpoint, I think this bodes well for our services in the deep shelf.

Thank you.

There are no further questions at this time.

Great. We will go ahead and then summarize and say that Core Lab posted a solid quarter, not a great quarter. We hope we've got a couple of those in front of us, showing excellent revenue growth. Operations will stress margin expansion for second half of 2003 should lead to increased profitability. Our targets for Q3 will be $100 million plus in revenue and 18 to 22 cents in earnings per diluter share. We believe the improved business and operational execution should produce excellent second half for Core. We'd like to thank the shareholders, analysts and especially our hard-working employees for sharing their morning with us. Thank you and goodbye.

This now concludes today's Core Lab conference call. You may all disconnect.