Core Laboratories Inc (CLB) 2005 Q4 法說會逐字稿

Good morning. My name is April and I will be your conference operator today.

At this time, I would like to welcome everyone to the Core Lab fourth 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 session. [OPERATOR INSTRUCTIONS]

Thank you. Mr. Demshur, you may begin your conference.

Thanks, April. Good morning to all of our listeners in North America, and good afternoon in Europe and good evening in Asia-Pacific. Thanks for joining us on this conference call.

We'd like to welcome all of our shareholders, analysts, and most importantly, our employees, to Core Laboratories fourth quarter 2005 conference call. As usual, I am joined by Dick Bergmark, Core's Executive Vice President and CFO.

We're off site this morning in San Francisco, so we're getting an extra early start, as we are going to be the first speaker at the EnerCom Energy conference to be held here in San Francisco today and tomorrow.

The call will be divided into five segments. Dick will start by making remarks regarding forward-looking statements. I'll come back and give a brief consolidated Company overview and then Dick will follow with a detailed financial overview, and then we'll go into Core's three operating segments detailing our progress and discussing the continual successful introduction of new Core Lab technologies and services.

This quarter we'll emphasize how Core's technology is being applied to alter the production decline curve in optimizing the reservoir performance. Then we'll close with a Q&A session for everybody and I'll turn it back over to Dick for comments on forward-looking statements.

Dick?

Thank you, Dave. Good morning.

Before we begin the conference, I'll mention that some of the statements that we make during this call may include projections, estimates, and other forward-looking information. This would 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 [ACT] filings that may effect 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.

Now, with that said, I'll pass the discussion back to Dave.

Thanks, Dick.

We'll take a consolidated Company overviews. Core's operations posted the best quarter in the Company's 70-year history. It was very good, but still not great and we think we can still improve on our results.

Operations delivered all-time quarterly records for revenue, operating profit, operating margins and net income from operations. The quarter marked the eighth consecutive quarter in which Core operations posted record revenue and record operating profits.

The quarter also marked the 12th consecutive quarter in which Core has either met or exceeded our own internal targets, so we now have three years of outperformance by our operational guys, done a great job under the direction of Monty Davis.

The success emanates from our continued focus on delivering new technologies and services that enable our clients to produce the incremental barrel or barrel equivalent from their current producing assets. Simply put, we help our clients alter their production decline curve.

Our stated mission remains to help our clients do two things. Number one, optimize the production of oil and gas on a daily basis. In doing this, we have the highest initial production rate on wells, which is critical for altering the decline curve.

And number two, maximizing the ultimate recovery of those hydrocarbons from those producing fields. And in this case, by minimizing the slope of the decline curve, we yield the highest incremental production for our clients.

As we've highlighted in past conference calls, Core Lab has been a margin improvement story and continues to be a margin improvement story. This focus is producing remarkable results, including fourth quarter operating margins of 19%, a year-over-year improvement of over 600 basis points, sequential quarterly operating margins increasing by over 200 basis points, and finally year-over-year incremental margins of over 70%.

The significant increase in Core's profitability is directly related to the impact of recently introduced new technology and services, the high grading of international operating areas and the focus on larger integrated multidisciplinary studies utilizing Core's technology from our three operating segments, those being Reservoir Description, Production Enhancement and Reservoir Management. We'll highlight some of these technologies and related projects in the detailed operational review to follow.

I'll turn it back over to Dick and he'll give you a detailed financial review. Dick?

Okay.

If we look at the financials that were part of the earnings press release, I'll walk through line-by-line areas of interest and give explanations for variances. As Dave said, revenues were 128.9 million in the fourth quarter versus 116.1 million in the fourth quarter of last year and 120.2 million last quarter.

Revenues were up 11% year-over-year and up 7% sequentially. For the full year revenues were 483.5 million up about 56 million, or 13% over the prior year.

So in a moment, you'll see the positive impact on earnings that our efforts to focus on higher margin services has had.

Of these revenues, sales for the quarter were at 33.8 million, up when compared to 28.1 million in last year's fourth quarter. For the full year sales were 116.1 million compared to 97.9 million in the prior year.

Services for the quarter were 95.1 million, up when compared to 88 million of last year. For the full year in 2005 they were 367.4 million, up from 329.5 million in the prior year.

We look at cost of sales, in the fourth quarter they decreased to 74% versus 77% last quarter. And they were 78% for all of 2005 compared to 82% for the full year of '04.

We look at cost of services for the quarter. They are 73%, down from 77% in the last quarter and for the year they were 76%, down from 78 for the full year of 2004.

G&A for the quarter was 6.1 million, excluding the cost of equity-based comp, down from 6.4 million last quarter and down from 6.5 million in the last year's fourth quarter.

For 2005 G&A was 27.6 million, excluding equity-based comp, up from 24.9 million in the prior year. And for 2006, we expect G&A to come in around 28 to 29 million and that excludes the effect of any stock-based comp.

Depreciation and amortization for the quarter, 4 million, down slightly from the 4.4 million incurred last year in the fourth quarter. For 2005 depreciation expense was 16.4 million for the full year and we expect depreciation in 2006 to total approximately 17 million.

We incurred an expense for equity-based compensation in the quarter due to our stock's continued outperformance over the plan's measurement period when compared to the OSX member companies. Recall that the Company instituted these performance-based restricted stock plans about four years ago, all designed to provide equity incentive to management to build shareholder value over the longer term.

The design of these plans requires that in the cases of PSAPs, our stock outperform the OSX members over a three-year measurement period or that we attained certain ROE targets, or in the case of the RSAPs that our stock price meet or exceed a targeted stock price during a specified time period.

These plans are designed to ensure that our shareholders benefit before management can benefit, or put another way, if our stock does not meet performance targets over the designated measurement period, there is no payout to management under the performance-based stock awards.

In quoting ISS, Institutional Shareholder Services, from their new policy position, "we agree with the principle of performance-based pay and want to strongly encourage better linkage between compensation and performance."

They went on to say, "indeed, several firms such as General Electric and Microsoft have been displacing executive stock options with performance shares or performance-based restricted stock. ISS has long advocated stock ownership on the part of officers and directors to better align their interests with shareholders."

Keep in mind this is precisely what we instituted at Core Lab four years ago when our stock price was in the low teens. So when you look at our executive ownership of shares of the Company, you'll find that the executives of Core have one of the highest beneficial ownership positions within the sector.

ISS went on to note, "studies have also found strong correlations between beneficial ownership, actual shares held by executives, and five-year total shareholder returns."

Core's share performance since moving away from options to performance-based restricted stock plans have moved just as those studies indicated they should, as our stock price appreciation has and away exceeded both the OSX and the S&P 500. These programs began in 2002 and since that time, our shareholders have enjoyed an increase in value of over 200%.

Had they invested in the OSX, they would have recorded a gain, but it would have been about 50% lower. And had they invested in the S&P 500, well, their return would be just about 10%.

So clearly, this has been a win-win program for our shareholders based on management delivering the superior performance. And we provide this visibility on stock compensation to you so that our operating results can be compared to other companies that have neither switched to performance-based awards, nor adopted the expensing of options.

This is provided so that you can make apples-to-apples comparisons. Going forward, the new FAS 123R rules will help make these comparisons easier for investors, as stock options will finally be expensed through the P&L beginning in 2006.

In the fourth quarter, we incurred 7.8 million in pretax expense relating to these performance-based plans for the following four awards.

First, we achieved the target for these 125,000-share PSAP tranche whose three-year measurement period ended at 12-31-05. This means that our shares significantly outperformed the 15 members of the OSX over this three-year measurement period that ended at year-end.

The return to our shareholders over that period was 240% compared to the OSX, which was up 113%. Only one member of the OSX over that time period outperformed us, and that was only by less than 1%.

We recorded an expense of $1 million in the fourth quarter relating to this tranche.

Second, we believe that it is probable we will exceed the performance hurdles for the 120,000-share PSAP award tranche whose three-year measurement period ends at the end of this year. Consequently, we must report a pretax expense of $3 million in the fourth quarter to reflect this probability.

The performance hurdles on this tranche relate to our shareholders return, vis-a-vis the members of the OSX, as well as our exceeding a specified target return on equity.

Third, we also believe that it is probable we will exceed the performance hurdle for the 120,000-share PSAP award tranche whose measurement period ends at the end of the following year. Consequently we must record a pretax expense of $1.5 million in the fourth quarter to reflect this probability.

The performance hurdle on this tranche relates to our shareholder return on equity remaining substantially higher than the prescribed target.

And fourth, we also believe that it is probable we will exceed the performance hurdle for the outstanding 143,000-share RSAP award. Therefore, we must record a tax expense of 2.4 million in the fourth quarter to reflect this possibility.

The performance hurdle for this award relates to our share price rising well above and beyond the target price prescribed in the plan.

The expense taken for the awards in the fourth quarter is about $0.13 on a per share basis for the PSAPs and $0.06 for the RSAP, both net of tax. And you can see this on the table in the earnings release.

Beginning in 2006 under the new FAS 123R rules, our equity incentive plan designs will call for monthly expensing over the life of the measurement periods rather than incurring one-off acceleration of expense, as we have recently incurred.

Our performance-based stock plan known internally as the PSAP will amortize over three years and our restricted stock plan, which replaced our stock option program known as the RSAP, will amortize over six years. This means that under the new 123R rules, the quarterly expense beginning in 2006 under the PSAP and RSAP plan should be about 4 or $0.05 per quarter assuming a $40 stock price.

And note that this per share amount is subject to share price performance, as it will go higher as the share price goes higher.

We highlight this 123R information for comparability purposes now that all companies will be in the same position, which we have been in over the last few years in that stock and option-based compensation will have to be expensed.

Now, we go down the list and look at other expense.

This quarter it was in the amount of 1.9 million compared with a gain of last year's fourth quarter of 1.1 million, which was primarily from foreign exchange gain. For the year, "other" was an expense of almost 200,000 compared to net income of about 800,000 in the prior year.

EBIT from continuing operations was 16.6 million, or 24.5 million if you exclude the debt-free payment charge in stock comp compensation. These earnings are up 9.6 million, or 64% compared on the same basis to the fourth quarter of last year, and are also up from 20.2 million, or 21% sequentially over last quarter.

This EBIT represents operating margins of 19%, up, as David said, 616 basis points compared to margins of 12.9% in last year's fourth quarter. On a year-over-year basis, our incremental margins in the quarter grew 75% and by segment, for Reservoir Description, 181%.

Production has been 59% in Reservoir Management, they were 43%, and on a full year basis for incremental margins, they grew to almost 46% by segment, Reservoir Description, 51%, Production enhancement, 44%, Reservoir Management, they were 43%.

Our continued improvement in margins has been driven by the continued introduction of new technologies and services, as well as through our focus on obtaining commercial contracts that deliver higher product and service margins, thereby creating higher levels of incremental margins earned on those revenues, and combine this with better utilization of our cost structure.

The results are clearly demonstrated in our expanding margin. It's all about creating greater value from each dollar of revenue.

Interest expense was 2.2 million for the quarter, the same as last year's fourth quarter. We did incur a $6 million debt prepayment expense when we retired our senior notes in the fourth quarter, and with the prepayment of our senior notes, we expect interest expense in the first quarter of '06 to be about 1.2 million, or almost half of what interest expense had been running due to the lower interest rate now being applied to all of our indebtedness.

Income tax expense was 3.1 million for the quarter compared to 3.2 million in the prior year's fourth quarter, primarily due to lower taxable earnings in this quarter, principally due to the make-whole payment and stock comp expense. We did incur a higher effective tax rate for the quarter.

On the last call, we mentioned that we believed the annual effective tax rate for the year would be 30.9%, but due to the expense for the equity-based comp in this fourth quarter, it now needs to be 32%. So in this quarter we need to use a tax rate that brings the year-to-date average tax rate to 32%, and so that's why we used the rate of 37% in this quarter. And we expect our effective tax rate in 2006 to be about 30%.

Income from continuing operations for the quarter was 5.3 million, or 15.4 million before the debt repayment charge and equity-based compensation expense compared on the same basis to 11.2 million in the last quarter, and last year's fourth quarter's income of 9.5 million. So on that basis net income in the fourth quarter was up 37% on a sequential basis and up 62% on a year-over-year basis.

Income for the full year 2005 on that same basis was up 74% at 48.8 million compared to 28 million in 2004.

We look at earnings per share from continuing operations.

In the quarter it was $0.19, or at $0.55 before the debt prepayment charge and equity-based compensation and related tax effective expense. This is $0.05, or 10% above First Call's mean street estimate of $0.50, which compares to the $0.34 earned from continuing operations before equity-based comp in Q4 of last year.

So earnings are up 64% year-over-year. Sequentially EPS is up $0.15, or about 38%.

Now if we flip the page and look at the balance sheet, cash was down by 2.3 million to 13.7 compared to the prior year-end balance of 16 million.

Receivables stood at 99.2 million, up by 3.8 million from 95.4 at the prior year-end, importantly DSO's continued to improve. They're now down to 74 days compared to 80 days for the full year of 2004.

Inventory, you can see, is down slightly year-over-year, although our product sales were up about 16%. So this reflects the 14% improvement in inventory turns compared to the prior year, so better utilization of our inventory assets.

Our current assets were up 1.2 million, primarily due to an increase in tax withholdings in jurisdictions where we expect to receive refunds. And there are no material changes in PP&E or intangible, goodwill and other long-term assets.

Now if we look at the liability side of the balance sheet, our account payables were up about 4 million when compared to the prior year-end balance of 28.6 million, all pretty much reflective of a growing business, as well as the timing of vendor payments. Other current liabilities decreased from 2004 year-end balance by about 2.1 million, primarily from a decrease in accrued interest relating to the prepayment of our senior notes.

Long-term debt was 86.1 million, down more than 24 million from the year-end balance of 110.2 million and down by about 4 million from last quarter. Our long-term debt now resides under our revolving credit facility, which was expanded in the fourth quarter from a $75 million facility to now 125 million.

The facility expiration date was also extended giving it a five-year term through December 2010.

Interest expense is currently calculated at 75 basis points over LIBOR. As of today, the outstanding balance is down a further 7 million from the year-end balance. It now stands at 79 million.

Our net debt to cap at the end of the year stood at 23.3% compared to the low 30s at the prior year-end.

Other long-term liabilities are 24.7 million, up from 20.9 million from the prior year-end, primarily due to an increase in deferred compensation by 1.3 million and deferred revenues by 2.7 million, all of those offset by a few minor reductions.

Shareholders equity ended the year at 214.2 million, up from the prior year-end balance of 190.3 million. Our return on equity for the year using EBIT before the charge and equity comp expense was 35.3%, and that's up from 26.2% at the prior year-end.

Capital expenditures in the quarter were 6.8 million and for the full year were 19.1 million. And that's up from 10.9 million for the prior year, so a substantial increase in Cap Ex year-over-year indicative of our efforts to commit capital in support of our growth objectives.

And we expect Cap Ex in 2006 to closely match depreciation, falling in the $18 million range.

Now, looking at cash flow, cash flows from operating activities in the quarter were 25 million, and after paying for our 6.8 million in Cap Ex, our free cash flow is 18.2 million, or about $0.65 per diluted share in the fourth quarter. And if we want to annualize that per share, we get a cash yield of about 7%.

How did we use our free cash in the quarter? Well, we gave back about 14 million to our shareholders through our share repurchases and we paid down debt by 4 million.

For the full year, our cash flows from operating activities was almost $81 million, while our free cash after paying for our Cap Ex program was about 62 million. We spent 37 million repurchasing shares and spent 26 million reducing our debt.

Now, if we look at our stock buyback program, during the quarter we purchased an additional 422,900 shares off the market at a cost of almost 13 million. This total was the most number of shares repurchased in a quarter since the second quarter of 2004.

During the year we repurchased approximately 1.3 million shares at a cost of 37.2 million, and from inception of the program, we have purchased in the aggregate approximately 9.2 million shares off the market at an [offset] just over $155 million and that represents about 25% of the shares outstanding at the time the program began in October of 2002.

So this has been a very successful program for our shareholders, as it has contributed to our shares increasing in value over four-fold since inception. The return to our shareholders from inception has been over 400%, significantly higher than the OSX which rose 164%, or the S&P 500, which rose 59%.

Over the past year, our financial ratios strengthened further. For example, our return on shareholders equity this year improved to 35% compared to 26% for 2004, and our net debt to cap is down to 23.6% from 30.4 a year ago.

We continued to improve our balance sheet and financial position while providing our shareholders with one of the highest cash returns in the industry.

Now finally, we'd like to go over our internal financial targets with you.

For the year 2006, we believe our revenue should approximate 550 million, or about 14% higher than in 2005. On the last call we gave an earnings target for 2006 in the $1.85 to $1.90 range and that excluded stock-based compensation.

Our view now is that our earnings should fall in the range of $2.21 to $2.31 excluding stock-based compensation. So this represents an increase over the targets given on our prior call by about 20% and that is also 30% higher than the 2005 results.

And if we include stock-base the compensation, assuming a $40 share price, our EPS in 2006 is expected to fall in the range of $2.05 to $2.15.

If we look at the first quarter, our revenue target is in the 125 to $130 million range and this target is up from the 120 million target we gave on the last call.

For EPS, we expect it to be around 44 to $0.45, or 48 to $0.50 if stock-base based comp is excluded. This is up from the targets we gave on the last call of 37 to $0.39 per share.

So these results, if attained, would reflect a 58% increase in earnings per share over the $0.31EPS posted from operations in the first quarter of last year.

So why the increase in our targets? Fairly simple. It's based on feedback from our clients about their expected activities aimed at optimizing the performance of their reservoirs.

Now, with that, I'll turn the discussion back to Dave for a little bit more on our operations.

Great, Dick. Thanks.

I'd like to give a detailed operation review starting with Reservoir Description. Let's remember that this business segment has technologies and services that are used to describe the reservoir system, which is composed of the porous rocks and the three fluids that are contained within those pore spaces, those being crude oil, natural gas and water.

The segment represents 56% of Core's fourth quarter revenues and that's down from the mid-60s several quarters ago. Remember this is a business that has international focus in mainly crude oil related projects, however, the group has been working with several domestic natural gas producers, like [Alter] Petroleum, to develop technologies such as QuickRock Properties, as they apply to the exploitation of North American tight gas sands and gas shales.

It was a solid quarter here, with all time highs for revenues, operating profit and especially those operating margins reaching 19%. Some of the highlights and interesting project that we worked on in the past quarter were continuations from projects earlier in the year.

In West Africa, the deep water reservoirs, these are tremendous reservoir systems of porosity and permeability systems that are very, very good.

Also in Asia-Pacific a lot of crude oil related projects, but now starting to see field development plans for natural gas that will ultimately be converted to LNG.

And in the Middle East, we continue our slow expansion into Saudi Arabia. Each quarter that passes, we see greater and greater challenges in significantly expanding the production capacity around the globe, especially in the Middle East.

So I think over the next several quarters, we'll keep a close eye on the developments there. Moreover, we are now starting to use and see different decline curve rates that may be applied to Middle East carbonate reservoirs.

In the past internally we had used about 1.5% per annum as a decline curve. This is now under review internally within Core because we believe that the client curve may have expanded by as much as 25 basis points per annum, up to 1.75%.

So certainly Core Lab services do have applications there for altering the decline curves of those carbonate reservoirs.

Turning to Production Enhancement, remember, these are technologies that are used to enhance the production of oil and natural gas while limiting the amount of water that's being produced from the well bore, represents 37% of Core's fourth quarter revenues. This is up from the 30% range several quarters ago.

This has a North American natural gas focus, although we have been exporting these technologies for uses in North Africa and also Asia-Pacific.

The segment has benefited from several recent technology and service introductions, including, and we've talked about these in the past, SpectraChem, which is used for well bore cleanup, SpectraFlood for tracking field floods, SpectraGuard, which limits formation damage, helps alter the decline curve, and of course our successful high efficiency reservoir optimization, or HERO, perforating charges and gun system. These systems have proven not only successful in medium to shallow-depth tight gas sands, but also very effective in the Barnett shale.

One of the projects that we did work on was a four-well Barnett shale test case, where a client combined Core's HERO charges, SpectraScan, SpectraStem, and our SpectraChem technologies, which yielded decline curves that were significantly different than the hundreds and hundreds of other Barnett well decline curves. Simply put, we altered the decline curve for these Barnett shale gas wells and how did we do that?

Well, the initial production rates were significantly higher in the initial production stages of these wells, and number two, the slope of the decline curve was more gently sloping as opposed to a severe decline that happens in the early ages of these Barnett shales. These two important factors helped optimize the production from Barnett shale wells and other wells around the globe and may increase production by as much as 10% of total recoverable gas and/or oil in different wells.

Turning now to Reservoir Management, it's 6% of Core's revenues, remember, this is an engineering focus, and these projects are oriented on a field-wide or basin-wide scale.

A recent focus here from client demand has been these unconventional natural gas reservoirs in North America. They now represent about 40% or 20 BCF of the gas produced on a daily basis in North America, and these unconventional reservoirs are rapidly becoming the conventional reservoirs to produce natural gas from in North America.

We do believe at this time next year, that these unconventional reservoirs will be referred to as the conventional reservoirs.

All the projects that we work on in Reservoir Management utilize significant data sets and the newest technologies from Core's two other reporting segments, that being Reservoir Description and Production Enhancement. So the projects that are worked on here benefit the other segments as well.

Reservoir Management operations had a great quarter, posting all-time quarterly highs for revenue, operating profit and operating margins.

Two multi-client projects to highlight, both focusing on these unconventional natural gas reservoirs in North America, are the reservoir characteristics and production properties of gas shales, to which we now have 29 participants, certainly to go over 30 here early in the year 2006, and our tight gas sand study, to which we now have 27 participants. Interest in unconventional natural gas reservoirs will continue to drive our Reservoir Management business.

Okay. April, what we'd like to do now is open the floor for questions.

Okay, thank you. [OPERATOR INSTRUCTIONS] Your first question comes from the line of James Wicklund with Banc of America.

Good morning, guys. It's actually Chris Gibson.

Good morning, Chris.

Good morning, Chris.

How are you?

We're doing well. It's a little early out here, but we're doing well.

In a previous call you guys talked about bumping up against tighter capacity levels as you approached the level of about $600 million, you know, per annum in revenues. Based upon your guidance, it looks like you guys will be on a run rate basis to hit that by Q3 of this year. What exactly are you doing to address those more near-term capacity issues?

Good question there, Chris. After doing a survey at our last global operations meeting in December, we now believe that we've got the capacity in the Company to put about $750 million of revenue on an annual basis through the Company.

Looking at just our work force and our brick and mortar around the globe, we've moved that up from the 600 range, which we had talked about in the past to 750 million. So that's what we believe is our internal capacity right now.

So at this point, we don't see any step function needed in additional brick and mortar, nor do we expect any large hiring needs over the next couple of years.

So you'll largely, I mean partially accomplish it through, you know, hiring that you made year-to-date or over the past year and is there an outsourcing component to also getting to that number?

No, all done internally, just a little bit better execution on moving work around. Right now we're quite busy in Asia-Pacific and our North American facilities, and we've been able to move work, for instance, from West Africa to our Aberdeen facility, where the North Sea may have been not as active as we would like.

So moving around work and executing the capacity that we have available has enabled us to enlarge what we think we can do internally.

And, Chris, that ties into the Cap Ex numbers that we talked about a little bit ago.

We spent almost 50% more in '05 than in '04, and all about-- that's investing in our own internal systems to be able to develop this capacity. And that's why we're pretty comfortable with that number, Dave just put out.

Okay. Richard, this one's directed at you.

I think when you were going really quick, did you give G&A guidance in '06?

Yes, I did. It runs 28, 29 million.

And depreciation guidance for '06?

Around 17 million. And we think Cap Ex will run around kind of matching that, too, 17, 18 million.

And one last one for you. I know you've got this in one of your filings, but what is the rate on your new revolver?

It's spread right now. We are at LIBOR plus 75.

Year-end I think that was around 5.3, 5.4.

Right, percent, yeah.

Thank you, guys. That's all I got.

Okay, Chris.

Your next question comes from the line of Will Foley with Sidoti and Company.

Good morning, guys.

Hello, Will.

Just first question, in terms of the stock-based compensation as you'll be accounting for it going forward, will that be incorporated in your SG&A, or will you be kind of showing that separately?

It will always in the operating units to where the recipients reside, so it will not all go within G&A. So some will be in cost of sales or service, for example.

But what our intentions are, because 123R says now all companies are on the same foot, which we like, we'll give it to you both ways, with it and without it. That way you can work on how you want to do the comparabilities with peer groups.

Can you give me any sense of the sensitivity of that expense to the stock price? I think the numbers you provided are based on the $40 stock price. I know the stock price was 45. Can you [inaudible] sense of how that math works?

Yeah, the algorithm there, Will, is about $1 increase on core share price is about $0.01additional earnings expense to Core. So there's about 450,000 shares outstanding in the RSAPs and PSAPs and so we plan to keep that about level. So that incremental cost on a dollar of Core Lab share price is about a penny.

Okay.

In terms of the first quarter guidance you've given, can you give me a sense of the kind of the operating margins you're, anticipated or are incorporated in that guidance?

Yeah, they'll be a little bit lower just because of the mix. We lose some work in the North Sea, some parts of Northern Russia and so the operating margins company-wide will be a little bit lower, but not significantly lower. Certainly we will have year-over-year on a quarterly basis significant gains.

Okay.

And also, I know they typically improve as you move through the year. Can you give me a sense of the kind of improvement you see in those margins as you move through the year, or even just kind of the overall, what kind of range of operating margins we can think about for 2006 that are incorporated in your guidance?

Before I get to that question, though, I'll turn it to Dick, because he had a comment.

Yeah, just, Will, on the EBIT guidance and margin all for Q1, you know, remember, that's usually our lower revenue month or quarter, so we've got our fixed cost structure in place, so generally it's the lowest EBIT margin quarter that we have and then it does ramp up through the year.

So we start at 15 percent-ish in the quarter and we see it ramping up, and we don't expect the ramp to be different than prior years. We've seen nothing that would change that. So in your modeling just look at prior results and extrapolate from there.

And then for our internal targets, Will, we have moved those up at our last global operations meeting. Before we, I think we had talked to you guys about company-wide we had incentives somewhere around 16% EBIT margins.

We believe that the Company can do mid teens to high teens, and EBIT margins, and it would break down, we would ultimately look at mid teens for Reservoir Description and around low 20s for Production Enhancement and Reservoir Management. And I think we've moved those up a couple hundred basis points since the last time we talked to you guys.

Okay. And that's for the whole year?

Yeah, I think that should help you with your models.

Okay.

Those are our targets.

Okay.

So we're not putting those down in stone. Those are internal company targets.

And just my last question would be your track record has been that you've, you tend to do better than your guidance. So what are the kind of factors that could cause results to be at the high end or perhaps even better than guidance as we look to 2006?

I think it's the-- a lot has to do with the acceptance and increasing market penetration of the new technologies that we've talked about, Will, as those have surprised us on the upside here, especially over the last couple of quarters. Some of these certainly have reached the tipping point and are now being more rapidly accepted.

You know, a lot of our clients are from Missouri and it takes them a while, but once they see that indeed it can alter their decline curve, increase their initial production rate or lessen the slope of the decline curve, they asked us to bring it on. So on the upside surprise, I would think it would be better acceptance and greater market penetration of those new technologies.

Thank you very much.

Your next question comes from the line of Rob MacKenzie with FBR.

Good morning, guys.

Hello, Rob.

First off, Dave, my question's, I guess, a hot topic today with one of my competitors really making a downgrade call on the group here. What are you hearing from your domestically-leveraged clients, particularly those involved in unconventional gas reservoirs about how their plans are changing now that natural gas is $7 and it looks like it's headed lower?

We have seen no changes in their plans. I'm not aware of what one of your colleagues have done, but from the Core Lab standpoint, we remain very bullish on North American natural gas. With the technologies that we're rolling out, Rob, we think that they will maybe even come more in demand with the lower gas price.

Okay.

But does that necessarily apply for these quote, unquote, unconventional reservoirs where the economics probably only work at gas say above $6 an [M]?

Well, we think a lot of these unconventional natural gas plays, Barnett shale, worked very nicely at $6 an [M].

Okay. Question for Dick, just a housekeeping question.

I'm having trouble, when I plug a 37% tax rate in, Dick, to try and come up with a 55% number excluding everything else with a 37% tax rate on the items in the income statement. Can you give us some help on the post tax dollar amounts on the comp and the debt repayment?

Well, we put in a separate schedule in how we came across--

I saw that. If you had it on a per share basis. I was just trying to good get--

Oh, per share basis, the second schedule is per share, you know, we do the bridge from the $0.19 of net income.

Right.

And then that's what we use to add back, so we clearly see the $0.55.

Okay. But-- not on a per share basis, but on an absolute basis.

Okay. On absolute basis, it would be just above that.

Oh, okay. I saw that as operating income, not net income. Fair enough. I missed that.

In terms of your, the, sorry, pardon me here, looking for my note. The discontinued operation, can you give us some more color on what was shut down specifically and if there's going to be any more further discontinued operations charges in the first quarter of this year?

No, that was like 500,000 aftertax. I think that's just pretty much wrap-up of all the loose ends, no particular individual item, and then it's finished. So I don't think we'll see any further activity in those accounts.

We had a final balance sheet true-up with Paradigm, Rob, and we closed that in the fourth quarter.

Okay. So that's all there is and you don't expect any other items like that to roll through in 2006?

No.

No, sir.

Okay.

Going back to the sensitivity analysis on the FAS 123R calculation, so if I was to assume that Core Lab hits my price target above $50, that would imply that an extra, what--

Extra dime.

An extra dime in terms of executive comp costs, right?

That is correct.

And can you give us a better feel for how much of those costs are in the individual segments versus in corporate, kind of percentage ballpark?

Right here right now in San Francisco, that's a little difficult. The majority would be in G&A, in corporate.

Yeah, we'll give you-- we can give you some more color on that off line, Rob, because out here in San Francisco, we just don't have that handy.

Okay. Fair enough.

Then separately, you know, you mentioned you're going to spin off a ton of free cash flow consistent with our expectations. What are your inclinations to do with that?

Clearly share repurchase still seems accretive. What about acquisitions? What's your feeling on one versus the other and what are the asking prices like for things you've looked at recently?

Rob, we're very comfortable doing as we have with our free cash. We think over the last three, four years it's been a successful program of either buying in shares or paying down debt or investing within the Company.

You saw we doubled this year our internal investments and then looking at acquisition opportunities, and we continue to do that.

And if you look back, Rob, over the past couple three years, we've added some nice technological add-ons in production enhancement. One had a direct bearing on the development, the successful development of our HERO charges. We continue to emphasize looking for M&A activity on the Production Enhancement side.

I think you make a good point. Things are a little bit expensive. Where between-- our metrics where we like to pay between 5 and 6 times EBIT as opposed to a public company multiple maybe of 10 or 11 times EBIT, we're somewhere in between there now.

I think some people are realizing that they're not going to get near a public company valuation and just through some of our discussions over the last several months, maybe some of the private management teams resolve is weakening a little bit and maybe they become more reasonable to purchase, to add on technologies to Core Lab.

So still a focus there and I think the last time we talked with you guys, we had mentioned we still want to add some field services, production enhancement on the well site and that's what we continue to concentrate on. We reviewed a number of those at our last global operations meeting in December, and we're actively pursuing those.

So on the cash basis, as Dick mentioned, we'll continue to use it to either repurchase shares, debt, or internal Cap Ex. But we would not rule out M&A activity in 2006.

Okay. And my last question is about unconventional gas. Again, a different tack.

What percentage would you say right now of Reservoir Description is analyzing unconventional gas cores in reservoirs and where do you see that potentially going over the next one, two, three years?

Yeah, I would say that's probably about 10% of revenue and certainly when we do look at Reservoir Description, especially with new technologies like QuickRock Properties, that can certainly double or triple over the next couple of years.

All right. Thanks, guys. I'll turn it back.

Okay, Rob.

Your next question comes from the line of Thad Vayda with First Albany Capital.

Good morning, guys. It's Graham Madison [inaudible] at the moment.

Hi.

Most of the questions have been asked already, but I guess more on a general basis, times are really good for you guys right now. What is it that worries you? Is it commodity prices coming down? Competition, technological changes? What are your concerns going forward?

Yeah, from our standpoint, we feel the biggest danger is the commodity risk on pricing, where you have too many projects geared at higher levels of commodity prices. I don't think we viewed that as of yet, because I think people are still using very reasonable numbers in looking at their economical evaluations for a number of these projects.

I think we're shielded a little bit more from that ground because we are more international. Those projects tend to be over a longer period of time with lower commodity prices in there.

So I guess the thing that we were most concerned about were high commodity prices and demand destruction and to a certain extent I think we saw that North America natural gas take place.

I think on a worldwide basis, more from a crude oil standpoint, we still are very, very bullish for our work in the international theater. We've seen no project that approaches where crude oil prices are today or even in the 40s yet, so we're still pretty comfortable with that.

Okay.

And then on the Reservoir Management side, the two ongoing projects that you're working on, if gas-- are margins sustainable if gas prices continue to come down, or are those completely unrelated to that?

Unrelated. These are projects that are multi-clients, so these are multi-year projects where we have commitments for these clients in funding over a period of two, three-- for instance we've got a deep water reservoir rock study that's been going for ten years.

So these are very, very long projects and so the short-term swings in natural gas prices, the economics do not affect these at all. Remember, we do have these companies under contract throughout the length of the study.

Okay, great. Thank you very much.

Okay, Graham.

Again, if you would like to ask a question, please press star one on your telephone keypad. Your next question comes from Robert Christensen with Buckingham Research.

Just following on to that question by the previous analyst, those multi-client studies, how are the revenues booked and, you know, if someone comes into the study, I guess it's another component to revenues. I'm just not sure how the revenues flow over ten years of the deep water or three years on a shale study.

Yeah, Bob, I think we do treat these differently than the multi-client approach from the seismic side.

Let's say, for instance, on one of these shale gas studies, let's say the entry target is $500,000 per company. We will look at the work plan that takes into account the cores that are going to be submitted by that client and the other clients in there and plan out a work project for, let's say, four years based on the 30 participants.

If more participants come in, that work program might be a longer work program and essentially what we do is just take revenues as work is done. I think Dick's got some other color on that.

Yeah, if you want to get down into the accounting, it's kind of interesting because the clients are going to pay us cash along the way and we may not recognize the revenue. That's why I mentioned in our other long-term liabilities on the balance sheet where I mentioned they're up 24.7 million over last year. 2.7 million of that delta, that increase, had to do with our clients paying us in advance, where we really can't take the revenue yet.

So it's kind of the opposite of some of those seismic studies, where maybe they've taken the revenue but haven't been paid. In this case we've got the cash in hand waiting for the ability to recognize that revenue.

When you say you have a group interested in understanding North American shale, I mean there's a lot of different shales throughout the country. Is it one overall view or is it broken sort of regionally, Appalachia?

Exactly, Bob. We'll take shale core samples from many of the ongoing plays and potential plays to look at their potential.

So it is scattered all over North America. So you got the Devonian shales from the Northeast, you've got the Fayetteville shale, you've got the Barnett shale. So there would be many, many over the entire North American theater.

And coming back to the shale question, are you seeing more interest in sort of what, I guess, is viewed as the new shales, Fayetteville and Appalachia? I don't consider them new, but some may.

You know, there have been some new entrants into these plays. Are you seeing a rising interest in futures?

Yes, we are, because I think acreage positions are open there, where in some of the older plays those acreage positions are pretty much locked.

See, I see Appalachia as locked.

Excuse me?

I see Appalachia as largely locked, but such old rock that let's revisit it with new technologies. Whereas the Fayetteville is still I guess viewed as open and some other areas are open.

Yeah, certainly, but even if you look at recently as a couple of years ago in Johnson County, Texas, where that was thought to be the fringe of the Barnett, and now you have wells there making a couple 3 million Ms a day.

Can you describe a little more of the four well, I guess was it a pilot test? Is that information going to eventually attract use of more business tools that you provide?

I mean does that become available to the industry? I mean this is just one individual company that you had worked for.

That is correct, and in general terms, we describe what the project is. Now, whether that operator wants to put that in an SPE paper is totally up to them.

We would love to see the SPE paper and have encouraged them to do that. Now, whether they do or not is certainly up to them. So we'll have to stay tuned to see if that becomes available. We think it would be a very, very interesting study.

Let me understand what you said about those. Those four wells, were they, what, horizontal wells that were close together, or were they in different sections of their acreage? Are they, I guess, discreet, or are they one in sort of the same? And give us a little more of the profile on the IP and the EUR that the tests showed.

I think the general description I give, have given, Bob, is about in-depth detail as we're going to go.

Okay.

Without express written permission from the operator. We've talked to them about this test and told them how we were going to describe it and they were okay with that. Certainly there's some proprietary technology at work there from their standpoint as well, so just in general, that description I think is about as far as we can go.

What were the incremental costs of using your services versus a traditional approach to the wells? Was it--

Well there were incremental costs to them, but from a payout standpoint, peanuts. We're talking--

And one final one.

Your coming to, let's say, the Mid East, were your comments about the decline curves accelerating, were they specific to your view of Saudi Arabia going from a 1.5% per annum decline curve to a 1.75% per annum decline curve? Was it specific to one country or the area because it said, you said carbonates.

Yeah, I said Middle East carbonate reservoirs, we believe that now we have to review, because internally we had used 1.5 per annum and might now justify 1.75. And we'll give more color on that as we do a little bit more work internally within Core.

I'll get back in the queue. I've got one final question. I'll let others go. Thank you.

Okay.

Actually, guys, we've run our hour's time and in summary, Core's posted our best quarter in the Company's 70-year history. We have never been technologically better positioned to assist our worldwide clients in expanding their production base.

With the worldwide challenge to produce more hydrocarbons becoming more difficult every day, Core's decade-long laser focus on providing reservoir optimizing technologies has the Company dynamically positioned for continued growth in 2006 and beyond.

So in closing, we would like to thank everybody for joining us this morning and we look forward to talking to you at the end of the first quarter, letting you know what our progress was in early 2006. Thank you very much.

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