Core Laboratories Inc (CLB) 2005 Q1 法說會逐字稿

At this time, I would like to welcome everyone to the Core Labs first-quarter 2005 earnings 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. (OPERATOR INSTRUCTIONS). Thank you, Mr. Demshur, you may begin your conference.

Thank you. Good morning in North America and good afternoon in Europe and Asia-Pacific. We would like to welcome all of you, all of the shareholders, analysts, and most importantly, our employees to Core Laboratories' first-quarter 2005 earnings conference call. As usual I am joined by Dick Bergmark, Core's Executive Vice President and CFO, for the call.

The call will be broken down into five segments. First, Dick will start by making remarks regarding forward-looking statements. I will come back and give a brief consolidated company overview. Dick will then return and give a detailed financial overview of our company's operations. Then we will come back and go over Core's three operating segments, detailing our progress and discussing in detail the continued successful introduction of new Core Lab technology and the services. Then we will wrap the call with a question-and-answer period. I will turn it back over to Dick.

Before we start the conference this morning, I will mention that some of the statements that we make during this call may include projections, estimates and other forward-looking information. 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 our 34 (indiscernible) filings 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 statement made in this discussion.

With that said, I'll pass the discussion back to David.

Thanks, Dick. I'd like to take a consolidated company overview. Core had another exceptional quarter as operations posted record first-quarter revenues and earnings per diluted share. The quarter marked the fifth consecutive quarter in which Core's continuing operations posted record revenues and earnings per share. It also marked our ninth consecutive quarter in which Core has met or exceeded our own internal targets. We continue to be successful in introducing new technologies and services that increase the daily hydrocarbon production for our clients, and two, and probably more importantly, maximize the ultimate hydrocarbon recovery from our clients' producing assets.

The record quarter was driven by increased demand for Core's proprietary and patented reservoir-optimizing technologies and services, which included -- number one, Core's pressurized fluid imaging technology for hydrocarbon flow assurance; second, our saturation monitoring by the attenuation of x-rays, or SMAX, technology, which is used in designing today's more sophisticated enhanced recovery projects and field plugs; thirdly, we had unprecedented demand for Core's SpectraScan, which is our hydraulic fracture diagnostic technology which is improving the efficiency and effectiveness of hydraulic fractures, especially in tight gas sands; fourthly, our SpectraChem technology, which is used to maximize frac gel cleanup which maximizes the amount of hydrocarbon flow in the near-wellbore environment; and fifth, Core's new QuickRock Properties service that develops ultra-tight gas sand reservoirs throughout North America that have little to no permeability, although you can make commercial natural gas fields. We will highlight these technologies and their applications in the detailed operational review section that follows.

I will turn it back over to Dick for the detailed financial review.

Thanks, David. Revenues were 116 million in the first quarter versus 100.3 in the first quarter of last year and 116.1 last quarter. So, revenues were up 16% year-over-year, but flat sequentially. Encouraging to us, just pulling numbers from the Bloomberg, is the fact that our revenues have been down 11% on a sequential basis on average over the last five years.

Of these revenues, sales were 25.9 million, down from 28.1 million last quarter. Services were 90.1 million, up from 88 last quarter. Cost of sales in the first quarter improved to 79.3% versus 82.5 last quarter and compared to 81.9% for all of last year. Our cost of services for the quarter were 77.2%, relatively unchanged from last quarter, but slightly better than the 77.8% for the full year of '04.

G&A for the quarter was 7.7 million, up from 6.4 last quarter and 6.2 in last year's first quarter. And of course, most of this is due to the cost incurred relating to our Sarbanes-Oxley initiative, and to some extent, higher incentive compensation relating to the Company's improved performance in 2004. For the full year 2005, we expect G&A to run at levels of around 27 million.

Depreciation and amortization for the quarter -- 3.7 million, down from 4.5 million last year in the first quarter. From 2005 for the full year, we think depreciation expense will ramp up as expenditures increase through the year. So, by the end of the year, total depreciation expense -- probably in the 17 to $18 million range.

We had performance-based stock compensation expense of 300,000 in the quarter relating to the (indiscernible) tranche just awarded based on the prior three years' performance. Recall that the program is designed to provide incentives to certain senior management that tied restricted stock awards to the relative performance of Core Lab to the 15 members of the OSX over a three-year measurement period. The 125,000 share tranche, whose measurement period ends this year, does continue to perform well; however, we do not know at this point whether it is probable that our stock will hit its measurement hurdles vis-a-vis the members of the OSX. But if it did, the charge to earnings today would be about $3.2 million. As discussed on prior calls, all of our financial targets we have mentioned have excluded any expense that may be recorded as a result of these strictly performance-based incentives.

Speaking of stock compensation, just to give you a heads up, certain members of executive management still holds options that were issued almost 10 years ago on our IPO. Under the terms of the option agreements, they will expire as worthless if we do not exercise them over the next coming months. Managers may sell the exercised options or they may hold them, but in all cases, they must be exercised. So, please don't take this action as some type of valuation call just because you see management exercising options over the next few months right before they expire.

Going to other expense, this quarter is in the amount of 492,000, which came primarily from foreign exchange losses -- more specifically, from the devaluation of the Venezuelan b, which created a loss in the amount of 342,000, as well as losses related to the weakness of the dollar to other currencies. This compares to a foreign exchange gain last quarter of 1.2 million, creating a $1.7 million swing in pre-tax earnings just from foreign exchange on a sequential-quarter basis. And that amount of EBIT equals about $0.05 in earnings.

EBIT from continuing operations was 14 million in the quarter, providing margin of 12.1%, which compares favorably to last year's first quarter EBIT of 9.5 million and margins of 9.4%. Our 270 basis point improvement in margins continues to be driven for the most part by the incremental margins earned on the higher revenues combined with better utilization of our cost structure. Our EBIT was up 4.6 million, or 48%, while incremental margins approached 30%, coming in at 29.2. On a sequential basis, without the swing in FX, operational earnings were up over 5%.

On a year-over-year basis, our incremental margins in the quarter by segment were reservoir description 31.5%, production enhancement 19.2%, and they continue to improve in the reservoir management, now up to 83%.

Interest expense was 2 million for the quarter, the same as last year's first quarter. Income tax expense was 3.3 million for the quarter compared to 2 million in the prior year's first quarter, up on higher earnings. And we expect this year's tax rate to be about 27.2%.

Income from continuing operations for the quarter was 8.7 million compared to last year's first quarter income of 5.4 million. On that basis, net income was up almost 61%. Earnings per share from continuing operations for the quarter was $0.31, $0.03 above First Call's mean Street estimate of $0.28. This compares to the $0.19 earned in first quarter of last year, up 63%. Sequentially, if the swings in foreign exchange had not occurred, a 3% -- excuse me -- a $0.03 benefit in quarter four and a $0.02 cost in quarter one, EPS would actually be $0.02 higher than in Q4.

Compared to traditional earning patterns as we move from the fourth quarter into a first quarter, our earnings have traditionally decreased on average over the last five years by about 48%, due to our usual declines in revenues going into the first quarter. So this year, the old maxims of lower revenue and earnings in the first quarter certainly did not hold true, especially to the levels of prior years.

Now going over to the balance sheet, there are just not many changes from year-end to point out. Cash was up 1.8 million to 17.8. Receivables stood at 98.2 million, up by 2.8 million. Inventory was 29.3 million, down slightly from the year-end balance of 29.4 million. Other current assets were 12.1 million, up 1.3 from year-end, and the change was primarily due to tax payments made under local statutory requirements that represent payments of the expected current-year tax obligations in a certain foreign tax jurisdiction. And there are no real changes in either PP&E or intangibles or other long-term assets.

On the liability side of the balance sheet, no change in accounts payable for the quarter. Other current liabilities decreased from 2004 year-end balance by 2.4 million, for the most part due to the timing of interest payments on our Senior Notes. Long-term debt was 112.2 million, up slightly from the year-end level of 110.2, but down 13.4 million compared to last year's first-quarter balance of 125.6 million.

Outstandings under our revolving credit facilities were 37 million at quarter-end, down from 50 million at the end of the first quarter last year. As of today, our revolver is down an additional 3 million, down to 34 million, placing our net debt to cap at 30%, well in line with industry averages. So, our debt continues to come down through today at the same time that we have continued our share repurchase program. And more on that program in a minute.

Other long-term liabilities are 22.6 million, up 1.7 for year-end, primarily due to a slight increase in unearned billings for certain reservoir studies. This happens when a client asks us to bill them, but we're not able at that point in time to record it as revenue.

Shareholders' equity ended the quarter at 195.3 million, up from the year-end balance of 19.3. This increase over the year-end balance was due to additions from earnings and reductions due to our stock buyback program. Our return on equity for the quarter utilizing an annualized EBIT was 28.7%. Capital expenditures for the quarter were 3.2 million, up from 1.4 million in the first quarter last year, as we continued to invest in support of our growth objectives. We expect CapEx in 2005 to be about 19 million.

Cash provided by operations in the quarter was 11.7 million, and after paying for our 3.2 million in CapEx, our free cash flow was 8.5 million, or about $0.30 per diluted share. How did we use the free cash flow in the quarter? Virtually all of it was given back to our shareholders through our repurchase of 8.8 million in Core Labs stock via our stock repurchase program.

So, we continue to be active in our program. During the quarter we repurchased an additional 365,000 shares at a cost of 8.8 million. And through yesterday we had purchased a further 57,000 shares in this second quarter at a cost of 1.4 million. From inception of the program, we have purchased in the aggregate 8.3 million shares at a cost of approximately 128.5 million, or about 25% of the shares that were outstanding at the time the program began in October of 2002, bringing our current diluted shares outstanding to about 28 million shares. This has been a very successful program for our shareholders as it has contributed to our shares almost tripling in value since inception of the program. The return to our shareholders from inception has been 190%, significantly higher than the OSX which rose 78%, or the S&P 500 which rose 44%.

Over the past year, our financial ratio strengthened further. Our return on shareholders' equity this quarter improved to 29% compared to 18% in last year's first quarter, and our long-term debt has come down from 125.6 million to 112.2 million, and our net debt to cap now stands at just 30%.

Now I would like to go over our internal financial targets with you. Based upon discussions with our clients, our view of industry spending calls for higher spending by our customers in 2005 over 2004, in all likelihood greater than the rate of increase suggested in earlier industry surveys, which had been calling for worldwide spending to be up 5 or 7%. We believe that the rate of growth in expenditures aimed at the market we participate in, that aimed at optimizing reservoir performance, may grow slightly faster than the overall blended rate of growth in industry spending.

We believe we are well positioned to capture our fair share of this growth in industry spending. As mentioned on the last call, we believe that we may grow faster than the 5 or 7% that the industry surveys suggest; perhaps we will experience a 10% rate of growth as we continue to develop new products and services and then put them out through our global network of facilities. Or perhaps maybe we'd grow a little bit more.

So, what does this mean for our internal financial targets? We believe that our revenues for 2005 could increase into the 465 to 470 million range. We also expect earnings to improve further in 2005 beyond what we talked about on the last call. Rather than earnings in the $1.25 to $1.30 EPS range as discussed before, we now believe our earnings could fall in the range of $1.35 to $1.40 per share, or about 30% higher than 2004. These earnings targets which we have given today exclude any costs associated with performance-based stock compensation.

So, what about the near-term? Our second-quarter revenue target is in the 118 to 122 million range; EPS of around $0.33 to $0.35, reflecting a 40% increase over the $0.24 posted from operations in the second quarter of last year. As with all of our guidance, this excludes any potential impact from expenses relating to our stock-based compensation.

And now I will turn it back to David for a bit more on our operations.

Thanks, Dick. I'd like to do a detailed operations review, starting with reservoir description. This continues to be a story of improving margins that we targeted last year at this time. Year-over-year margin improvement, as Dick had mentioned, was over 270 basis points, creating incremental margins exceeding 29%. This occurred in the historically-slow seasonal quarter for reservoir description.

If you think about reservoir description, this is now 58% of Core's revenue. These technologies have an international focus, mainly on crude oil-related projects. The stellar results were aided by the further acceptance of some new reservoir fluid technology, this being Core's pressurized fluid imaging services. This is used to maximize hydrocarbon mobility in the reservoir, but also more importantly in the flow lines to the surface.

What we do is we take a reservoir fluid and we put it under temperature and pressure, the envelope at which it is at in the reservoir. And then we modify the pressure and temperature differentials of that fluid. And we can optically view when you see the precipitation start of asphaltene and tar particles. These asphaltene and tar particles can plug pores or flow lines. This is especially true in ultra-deep reservoirs where you have high temperature and pressure regimes. So, as you lessen the pressure and temperature as this hydrocarbon is produced, you want to avoid the formation or precipitation of these asphaltic material.

So, what the technology does is it defines the pressure and temperature window at which you want to keep the fluid flowing at. And this assures hydrocarbon flow from the reservoir through the flow line to the surface. This is critical for deepwater developments. For instance, in the deepwater Gulf of Mexico, when you go from reservoirs at 400 degrees Fahrenheit and 15,000 PSI-plus, going to a temperature environment of a flow line that is surrounded by near-freezing water at the ocean floor at some 5 or 6000 feet. The technology defines the minimum temperature and pressure window needed to ensure uninterrupted flow. Shutting down some of these deepwater platforms can cost tens of millions of dollars a day in lost production. No other service company possesses such technology.

Another proprietary Core Lab technology that is driving reservoir description results relates to determining the relative permeabilities of the three reservoir fluids -- those being natural gas, crude oil and water -- as they move in the reservoir. Each of these three fluids will have their own inherent permeability, and the relative permeability of these fluids to each other is critical in maximizing hydrocarbon production and minimizing water production, which we know now worldwide is of chief concern, especially in aging reservoirs that we find in the Middle East. Our saturation monitoring by the attenuation of x-rays, or SMAX, technologies, enables our engineers and our clients' engineers to image the movement of these three fluids as we conduct dynamic flow tests. And of course, the idea is to maximize the permeability of the natural gas or the crude oil, or both, while minimizing the permeability of water. This maximizes hydrocarbon flow, and more importantly, the ultimate hydrocarbon recovery from the reservoir. No other service company possesses such technology.

Turning to production enhancement, this is now up to 37% of Core's revenue, up from 30% of our revenues just a couple of years ago, owing to growth rate differentials. This has a North American focus and natural gas field and project-related. It's the most rapidly growing segment of Core, owing to three technologies that have certainly moved to the head of the class within Core Laboratories.

The first one being SpectraScan. This is a technology that optimizes hydraulic fracture stimulation programs by ensuring that all zones have taken proppant. In multi-zone wells, more often than not, almost 60% of the time, one zone is left unstimulated. We may pump as much as 1 million pounds of proppant, but in most cases, only two or one of the three zones in a three-zone well will have been stimulated. SpectraScan tells the operator looking in real-time which zones have not taken proppant, so they can then indeed be stimulated to make sure that all zones take proppant.

The second being SpectraChem. This optimizes frac gel cleanup in the near-well environment, ensuring maximum hydrocarbon flow to the wellbore. In many cases, there are large amounts of frac gel that is left behind; it's simply not cleaned up out of the reservoir. This impedes flow of natural gas from the near-wellbore environment and it restricts the flow and ultimately restricts the maximum recovery of natural gas from that reservoir. So, SpectraScan and SpectraChem in tandem have done a lot to optimize hydraulic fracturing technology throughout North America.

The third within production enhancement is a technology that we have talked about on some of our last conference calls. These are high-efficiency reservoir optimization, or HERO, perforating charges and gun systems. They are now proven to optimize natural gas flow in medium to shallow natural gas wells.

There is a new HERO development for thick chrome alloy tubulars that will be used in the 25,000-plus-foot wells that are currently drilling on the shelf. These tubulars are more than one inch in thickness. And this project, which is referred to as Project Genesis, we have developed in conjunction with ChevronTexaco. We have successfully designed and tested HERO charges that produce a one-inch perforating tunnel in the thick tubular while minimizing formation damage. This will ensure maximum hydrocarbon flow in the near-wellbore environment and maximize recovery from the reservoir. Again, no other service company possesses the technologies that production enhancement does.

Turning lastly to reservoir management, which is 5% of Core's business. Remember this has an engineering focus and may look at field-wide, basin-wide or province-wide studies. Currently, one of the hottest projects they're working on is the study of North American natural gas -- tight natural gas sands. Over 20 companies are participating in the study. We are currently employing a specialized nuclear magnetic resonance technology to develop the viability of ultra-low permeability reservoirs recently thought to be sub-commercial, known around Core Laboratories as Tombstone. It has found that reservoirs that have micro to nanodarcy permeabilities can indeed be turned into commercial reservoirs. And our QuickRock Properties technology is enabling many of the players in the tight gas sand market to do exactly that. No other service company possesses such technology.

That is a wrap on Core's operations. So, Christie, we would now like to open the lines for Q&A.

(OPERATOR INSTRUCTIONS). Jim Wicklund, Banc of America Securities.

Nice quarter. I apologize if our heads-up didn't give you full credit for the seasonal strength ex FX. In reservoir description, David, you talk about how the pressurized fluid imaging -- the hydrocarbon mobility -- I mean, that is huge and it's a big issue. And you talk about how it's very useful on deepwater fields. How many deepwater fields -- as an example, say, on the Gulf of Mexico -- how many of the fields in the Gulf of Mexico are you currently applying this technology to?

Great question, Jim. I would say right now it is five or less. Brand-new technology, and so we will be rolling that out in earnest as we go through 2005.

Just in terms of scale, because we all know you do a fabulous job, but it's scale. If all the fields in the Gulf of Mexico over the next two years said gee this is fabulous and would use it, what kind of revenue can you generate?

Additional revenue would be in the tens of millions of dollars.

Okay. That's impressive and that's what we hope for and expect you would eventually do. The sooner the better. What is the biggest holdup from only five or less? I realize it's new technology, but what will be the biggest holdup from all the operators in the Gulf of Mexico using this to optimize production rates from deepwater fields?

As you know, Jim, in this industry we've got a lot of people that are from Missouri. So, as we roll out some technical papers and can actually physical show the engineers this system, we think acceptance will be Gulf-wide. I wouldn't limit the technology to the deepwater and the Gulf; we have a lot of asphaltic crudes (multiple speakers). The reservoirs off of West Africa as well. So, we think its potential would be a big winner for us.

That's fine. Second question if I could. Reservoir management -- I realize this is a small part of the business and field studies and all. The 20 companies that are participating -- I assume that when you finish this, the 20 companies have underwritten the study, and then you will sell it to other companies?

That's correct. It's a multi-client study. But, I would like to remind everybody that we do not put any expense on the balance sheet. This is paid for as we go with billings that occur as the study progresses. (multiple speakers) as Dick mentioned, there are some revenues that we have actually invoiced for but we have not been able to book as revenue that remain on the balance sheet.

That's a high-class enough problem, and we'll forgive you that. What will the cost of this study be to the 20 companies that don't play initially?

That will vary. And depending on point of entry and the amount of cores and information they give to the study, we're probably looking on the order of between 200 to $300,000.

Wow. That is significantly larger than I would have expected. That's great. I wish you look there. Last one. On your HERO technology, you're saying that nobody else has the HERO capability that you do. And you guys do perforations differently than everybody else. Can you talk just for a second, Dick and Dave, about the difference between how you do it -- because I think you're -- I don't think you're one of the -- you're not the largest perforating company, are you?

We are the largest independent maker of perforating charges and gun systems in the world.

Okay. The non-independent companies are who?

You have large oilfield service companies that do manufacture and use their products in-house, but those companies are also clients of Core. Not significant clients, but they are indeed clients.

If you could just spend a couple of seconds talking about how they're all, like you say, bigger than you. You say you've got the only technology. Can you give us just a few seconds of differentiation at a basic level between your technology and the conventional technology that they use? It's a little remedial; I apologize.

That's fine, Jim. And of course, remember that we are -- we provide perforating charges and gun systems. We actually do not perforate wellbores, for those that might not be familiar with that.

The technology and its difference. We have a powdered metal technology that minimizes the amount of formation damage that occurs when a shape charge is fired. Many conventional charges have solid metal liners that, when the hot jet of gas perforates the casing and then creates the perforating tunnel, fills that tunnel with debris. I often see adverts in some of the industry magazines saying our perforating tunnel can be as deep as six feet. What they don't say is they damaged the formation severely. So, the trick here is to go ahead and perforate the casing while leaving the perforating tunnel clean. So, what the powdered metal -- when you flash the perforating charge, the powdered metal vaporizes, leaving no debris in the tunnel. And it's a special powdered metal blend that does exactly that. So, therein lies the inherent advantage of using HERO technology.

A quick story. Up in the Powder River Basin we had a client that was reluctant to use the HERO charge because of the amount that we charge for that. His normal procedure was he would perforate his natural gas wellbore, and then before the wellbore would come in, he would have to hydraulically frac the formation. He used our HERO charge and the well came in straightaway. Now, he still went ahead and fraced that wellbore, but it was the best well that he has drilled in a number of years. He is now a total HERO perforating charge user.

My last question if I could. All of the technologies you've talked about are significant in improving the recovery of hydrocarbon from wells. Do you still see that in terms of returns to your customers? Do they still see this as the Holy Grail that it should be?

Jim, we're still working on that. Work in progress; more to come later this year.

Jim Crandall, Lehman Brothers.

Great quarter, Dave. Dave, you cited many of your newer products as driving revenue growth. Can you come up with an estimate of your revenue that comes from products introduced either in the past year or the past couple of years or the past three years, or however you want to define it?

Jim, as we have always said, the technologies at Core tend to be more evolutionary as opposed to revolutionary. And we probably have a revenue turn of over a three-year period. Probably 35% of the revenue has been replaced by updated or evolved technology. So, once you go through an eight-year period, essentially you're generating revenue from a totally new base of services.

Dave, how much of your revenue are you -- as a percentage are you spending on R&D, and how has that changed the last couple of years?

Basically it hasn't changed, Jim. We estimate that because we have no centralized R&D, what we have through the Company through our advanced technology centers are small r and big d, where they're more development projects along with our clients. We estimate that to be 2 to 3 to 4% of our revenues. And right now we happen to be in a sweet spot with the five technologies that I mentioned -- all appear to be -- are going to make a significant impact for us, where in the past we have never had a confluence of as many as five of those. And as you know, some of these technologies that we've tried in the past, like in-reservoir seismic, seem to be a real winner for us, but then really never did produce the revenues and the earnings that we thought. But, we think these five have moved to the head of the class.

Dave, how much of your revenues this quarter approximately were outside North America and outside of the U.S., which we know is strong here? Which geographies are you currently seeing the greatest pickup in, and prospectively over the course of '05, do you expect to see the best pickup in?

This is Dick. I'll take that one. Historically we talk about the U.S. as around 40% and Canada over time has grown in importance starting around 10 or 12. What we have seen in the recent quarter for trends is slightly more in Canada -- naturally, makes sense in the first quarter; they were actually up a couple of percent compared to a year ago -- running around 15%. I think in our K we have them at 13%. So, they have moved up a notch. But, the other areas that have moved up -- certainly, Asia-Pacific for us has moved up a notch. And the Middle East is in process of moving up. We've talked about increasing the size of our facilities there, so you will begin to see that turn into numbers very shortly. But, what has come down is the other side. And that's certainly in the news. It's our involvement in Russia. We have talked about (technical difficulty) over the last couple of quarters, where we pulled equipment out where we could to put them in markets where we could put them right to work. And certainly in some Latin American areas we have pulled them down as well. So, those are the two offsets. You look at Mexico and Russia being offset by nice gains in Canada, Asia-Pacific and in-process Middle East.

One other financial question. Dick, is there -- your margins in your reservoir description business have more or less consistently, with a couple of exceptions, been in double digits. And granted they're up from the very depressed levels of a year ago. But, other than the seasonality of the NOC spending, is there any other reason why the first-quarter margins in that business were in single digits?

I don't want to say that we're happy with the margins at this level, because clearly we are not. But, you hit the nail on the head a bit with the typical seasonality of first quarter always being lower. But, under the skin, you pull back a little bit on the onion and you do see activities going on in the Company to consolidate some facilities, review under-performing offices, work flows, etcetera, to bring those margins up. Yes, this was the best first quarter we have had, but we want to make sure we improve upon that.

Where would you hope to see margins in that business 12 to 18 months out, not on this quarter basis, but on an annualized basis?

I'd be happy to say on this quarter basis. It should be double digits. We would like to get it to a 12 in a first quarter. And on an annualized basis, this thing should be mid-teens.

Last question. In the U.S., where you're seeing a nice pickup in your business due to these new products, how important overall is the unconventional gas play to your production enhancement business?

Jim, it makes an impact for our reservoir management group, but then also for -- with respect to our HERO charges, in production enhancement. So, the continued development of those trends -- and we think our QuickRock Properties technology will aid in developing some of these reservoirs that were thought to be Tombstones in the past into commercial developments in he Rocky Mountains -- we think that will aid the development of those trends as we go forward.

Rob MacKenzie, FBR.

I wanted to build a little bit on some of Jim's questions, looking at your existing technologies and extrapolate that and take it further, and see if you could give us a rundown of what you're looking at in your pipeline to help extend or secure your lead in many of these areas?

Rob, we have probably in the pipeline got as many as 40 new technologies that we're trying to develop. And to detail those on this conference call, I think, is beyond the limits. I would say right now, the concentrations of new technologies are still in production enhancement. And probably leading those developments are HERO charge development for -- remember, we've already looked at medium to shallow depth natural gas reservoirs, but we think this has real application for some of the softer reservoirs that we find in the Gulf of Mexico, West Africa, and some of the reservoirs in the Asia-Pacific area. So, that would be one area of real concentration.

The other one would be fluids technology up in reservoir description. As we have said, now more than half of our revenue comes from analyzing the dynamic changes of the three reservoir fluids. So, I think if you stay tuned, you will see more developments there. I think fluids represent greater than 52, 53% percent of our business. It's not inconceivable that in five years it could represent 60% of our business. I don't think we're going to change the name of the company from Core Lab to Fluid Lab, but certainly, the more that we know about the dynamic relationships, the phase behavior relationships of those three fluids, the greater the recovery factor will be in these reservoirs.

How about Reservoir Lab?

Don't like it.

Following-up a little bit on your guidance -- great quarter this quarter; $0.65, in essence, guidance for the first half of this year. Historically in good years -- and this year probably qualifies as such -- first-half earnings -- at least looking back at my model -- have been 40 to 45% of the total for the year. That would imply, potentially, guidance of, or earnings potential of $1.45 to north of $1.60. Are numbers like that reasonable, or did we have something in this first quarter in terms of the budgetary spending patterns that leads you to believe that the seasonal pattern is more muted this year?

No. We think when we have looked at the full year, we looked at the results of the first quarter, for us, we're comfortable with the guidance we gave. We can understand the math and the way our historical trends have been, but we're comfortable with the guidance we gave you.

Rob, as we develop -- things stay as they are as we go forward. Certainly, there is certainly a chance that we can. And as Dick said, the guidance that we have given, really over the last six quarters has been pretty conservative. And we're comfortable with the guidance that we have given at this point.

Okay. In terms of the solid first quarter here really bucking the trend (indiscernible) big shall sequential decline in revenues and earnings, was there any one region or company that contributed to that, or was it pretty broad-based?

It was pretty broad-based, because look, we had record revenues for all three of our operating segments. So we're pretty pleased, really across the board. And I am in my 27th year here now at Core, and I compare the level of volume of work that we have on a relative basis to '81 -- to 1980, '81. And certainly, so much of that work was so concentrated in one area, that being rocks -- as I look at the diversity of the Company now and our workloads in all three of our operating segments, certainly speaks for the strength that we see across the Company, and, I think, our mantra of trying to optimize reservoir performance, mostly for ultimate recovery of the hydrocarbons, and of course daily oil production as well.

Rob, you layer on top of that the point you were making; our typical seasonal patterns' great start, and we usually have a good follow-through through the year. So, that's why David and I are very comfortable with the guidance we gave.

Sure. In terms of that guidance, I apologize if I missed it. What was the revenue guidance at the high-end of the range.

470.

In terms of percentage uptick?

We did 427 in '04.

We were 427 (multiple speakers)

I understand that in the context of the dated surveys that showed 5 7%. But, what we've seen in just tracking worldwide announcements of CapEx budgets at national oil companies, etcetera, is that the sum comes somewhere around 12% globally. Would you still expect to exceed that kind of revenue growth if that works out to be accurate?

I think historically, Rob, if you see 12% global CapEx growth with respect to the targeted businesses that we have, you can expect year-over-year revenue growth probably 2 to 3, 400 basis points higher than that. So, you can do the mathematics. It may well indeed -- if the level of expenditures stays at 12%, we will indeed be higher than the range that we have given you.

Final question. In the past you have mentioned PEMEX as a big fan of the HERO perforating charges. Would you also give us a rundown of some of your other top customers there?

In production enhancement, we still have our footprint in Mexico, as Dick had mentioned. We have taken a lot of -- mobilized a lot of our equipment in reservoir description out of Mexico, just because we can get a higher return on it in other places; projects that would take six weeks would take six months. But certainly, in the Burgos Basin they've had quite an impact on some of the shallow natural gas developments there. Truly, the HERO charge has made an impact in Canada with the independents, and then right up the spine of the Rocky Mountains here for the independents as well. So, when we are looking at shallow to medium depth natural gas, it has been an independence play. And so, that has been really our target. In changing the technology a little bit in Project Genesis, those target companies for HERO technology will change a bit as the development was with ChevronTexaco for some of these deeper shelf wells.

Will Foley, Sidoti & Co.

Just a question on pricing power here. I guess the guidance you have given I assume anticipates an improvement in your margins as you move through the year. How much of that is related to expected improvements in pricing as opposed to just improved margins just related to increased activity? What aspects of the business have the best, I guess, pricing power at the moment?

Will, for purposes of our guidance, we have taken our current views of the marketplace. Of our current pricing trends, we have not assumed any large price increase, so it's just a combination. The improvement in our guidance is a combination of earnings based on volume and existing prices.

How much pricing leverage is there generally in the business, aside from whatever you have got in guidance? What is the general view on pricing, just given the positive environment you have?

Remember that we're not like a driller or a pressure pumper where we're talking about capacity and is that capacity constrained? And if it is, we're just going to jack prices up until the cycle is over and then our prices are going to come falling down. That is not our pricing model at all. We work with our clients as we develop these technologies so that they have a good return and we have a great margin. So, on every any given day we're not going to the clients saying we need a 15% price increase. We may go to them and discuss pricing over time. And it does allow us and we have been successful in improving prices, and our margins do reflect that improvement. So, we do have room. And wherever we have room, we push it to the limit that we can. To go through each individual product line I don't think would be tremendously beneficial.

That's fine. Last question. From what I understand on the production enhancement side, increased penetration of those markets are an important component of your growth. Can you just give me a sense here of the progress you're making in terms of just penetrating the market, in terms of production enhancement?

Most of that technology in the revenue stream is throughout the North American natural gas market, although we have talked in past conference calls that we have started to target North Africa and Asia-Pacific for some of these technologies. So, you will see over time, Will, production enhancement revenues start to migrate from North America. And we have projects now going in North Africa. I think we've mentioned the SpectraFlood project in Nigeria for Shell. And throughout Asia-Pacific we're now trying to increase the penetration of those technologies.

As we see more and more enhanced recovery projects going in those theaters of the world, we will see more production enhancement services being used. And of course, an area that is going to become ripe for production enhancement will be the former Soviet Union, because most of the techniques here used to date have been a simple frac and inserting an electrical submersible pump in a lot of these shallow to medium-depth oil wells. And now you can see that they're going to need more sophisticated techniques, as I believe production in -- certainly in Russia has stagnated here at the 9.2, 9.3 million barrel a day. And actually, I think, over the last four of the six months, we have actually seen production declines. So, interesting times there ahead for us.

Neal McKay (ph), Red Rock Partners.

Pressure pumping -- there's a lot of talk about how much capacity is being added, and debate over whether -- I mean, I think there's no debate there's going to be a lot of activity in the third and fourth quarter. The debate is how profitable all this incremental capacity is going to be. Can you talk about your exposure to that? And how proprietary -- you don't care really what happens on the equipment side because it gives you an opportunity to -- as long as they are growing, you can grow without any repercussions.

Neal, from our standpoint, the more pressure pumping horsepower that's out there, the better for us. So, for us, the more equipment that can be on multiple sites, it gives us an opportunity or a candidate for a SpectraScan, SpectraChem job. So, the more horsepower, the more equipment, the more sites that are being fraced, the better it is for us.

By my calculations, looking at your CapEx and depreciation before changes in working capital, Dick, we're looking at maybe 40 to 45 million of free cash flow this year. And I guess the question then is, what kind of working capital needs are you that -- are you going to have on this growth in revenue, or are you going to be able to maybe keep those needs flat? I know you have done a great job on harvesting the balance sheet, but how much more room do you have on that?

Neal, we have spent the last two, three years really trying to get our DSOs down, our days in inventory down. So, I think some of the absolute dollar gains in working capital have already been absorbed into us. We have already brought those down to reasonable levels. So, now I think you will see, just as you did this last quarter, slight investments in working capital, based on traditional DSOs and inventory. Maybe it goes up a little bit as business goes up, but we will continue to generate free cash. Maybe you could use net income as a proxy.

Dave, this is more of a question. I look at you guys generating almost a 30% ROE -- I mean, you are growing. You're really in the sweet spot of the whole industry, I think. You are (indiscernible) at less than 10 times EBITDA; depending on what number you want to use for this year, 15, 18 times earnings. To me, it seems like you would be accretive to almost anybody that wanted to take a look at you. What are you -- do you look over your shoulder, or are you just keeping your head down and doing what you're supposed be doing? What's your thought on somebody taking a hard look at buying you?

The way I've looked at it, the Company has engaged in buying a lot of cheap stock since October of 2002. And if it continues to be at a discount, we have a very long-term investor here named Core Laboratories. So, we will continue to use that free cash to buy back what we see as undervalued shares. And if you look at the directors and the executive management of Core, we now almost own 9% of the Company. I don't think any of us are going to rush to the gates to sell our shares, especially at these levels. So, the Company will continue to invest that money the best way they can. And if we're trading at those levels that you spoke of, we still will continue to buy a lot of cheap stock.

Great. I've known you guys for a long time and this is a tremendous first quarter. Congratulations.

Thad Vayda, First Albany Capital.

Just one quick question you guys. Business is going well. Where are you adding head? And are you having difficulty finding -- what types of people are you adding if you are adding additional personnel?

Thad, the biggest focus for us is in production enhancement at the field level. Most of David's discussions were talking about getting those technologies out to the field, and certainly that requires some headcount. So, that is our biggest impetus.

At this time there are no further questions.

I think we're going to go ahead and wrap the call. In summary, Core posted our best first quarter in our company's history. We have never been technically better positioned to assist our worldwide client to expand their existing production base. With worldwide hydrocarbon production nearing peak levels, Core's decade-long laser focus on providing reservoir-optimizing technologies has the Company dynamically positioned for continued growth in 2005 and beyond. We would like to thank everybody for joining us this morning and we look forward to talking to you at the end of our second quarter. Thank you and good-bye.

This concludes today's Core Labs first quarter 2005 earnings conference call. You may now disconnect.