Core Laboratories Inc (CLB) 2006 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the Core Lab quarter two 2006 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. I would now like to turn the call over to Mr. Demshur, Chairman, CEO, and President of Core Lab. Please go ahead, sir.

I would like to say good morning for all of our listeners in North America; good afternoon in Europe; and good evening in Asia-Pacific. We would like to welcome all of our shareholders, analysts, and most importantly our employees to Core Laboratories' second-quarter 2006 earnings conference call.

As usual, I'm joined by Dick Bergmark, Core's Executive Vice President and CFO. The call will be divided into five segments. First Dick will start by making remarks regarding forward-looking statements. Then we will come back and give a brief consolidated Company overview discussing some of Core's historical CapEx programs and the operating results that they produce, and then focus on a couple of new areas of technology development here at Core.

Dick will follow that with a detailed financial overview. Then we will come back and go over Core's three operating segments, detailing our progress and discussing the continued successful introduction of new Core Lab technologies and services. Then we will finish up the call with a Q&A session. I will turn it over to Dick for remarks on forward-looking statements.

Thank you, David. 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 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 affect our outcome.

Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

For a more detailed discussion of some of the foregoing risks and uncertainties, see Item IA, Risk Factors, in our annual report on Form 10-K for the fiscal year ended December 31, 2005, as well as the other reports and registration statements filed by us with the SEC.

Now with that said, I will pass the discussion back to David.

Okay, thanks, Dick. I would like to give a consolidated Company overview. Core's operations posted the most profitable quarter in the Company's 70-year history. It was an excellent quarter. Operations under the command of Monty Davis delivered all-time quarterly records for revenue, operating income, net income, and operating margins of 20%.

The quarter marked the 10th consecutive quarter in which Core's operations posted record revenue and operating income totals. During those past 10 quarters, Core has spent approximately $39 million for our CapEx programs, during which time the Company has generated over $170 million in operating income from our continuing operations.

Core's low capital needs -- as most people know, our annual capital expenditures usually equal our annual depreciation -- plus the leverage and scalability of Core's operations that we discussed in our quarter one earnings release has enabled the Company to generate industry-leading amounts of free cash flow per share, and free cash flow yield per share. Moreover, Core's return on total capital invested remains one of the highest in all companies in the universe of oilfield service providers.

Now for an update on a couple of new areas that Core continues to develop technology and services. The first is miscible gas floods. Core continues its development of miscible gas flood technologies. Remember that miscible gas floods utilize the reinjection of the heavier hydrocarbon gasses, C through C7, with combinations of nitrogen and/or carbon dioxide when they are economically available.

Core continues to test these programs in two fields that are sandstones in the North Sea and two carbonate reservoirs in the Middle East. We believe that miscible floods hold promise in further boosting recoveries from mature and ultra-mature fields, perhaps by a percent or two. So in a 100-million barrel field, maybe an additional yield of 1 to 2 million barrels.

In addition, miscible flood technology can be applied to fields that have already been subjected to intense water flooding, which could yield further hydrocarbon recovery that was once thought not possible. I will turn it back over to Dick for his detailed review.

Okay, thanks, David. If we go over to the financials that were attached to the press release, start with the P&L. Revenues were $140 million in the second quarter versus $118.4 million in the second quarter of last year and $137.3 million last quarter. So revenues were up 18.3% year-over-year and 2% sequentially.

In a moment, you will see the positive impact on earnings and our focus on higher-margin services, and from the leverage we can squeeze from our international base fixed-cost structure.

Now of these revenues, sales for the quarter were $33.7 million, up when compared to $26.5 million last year. Services for the quarter were $106.3 million, up when compared to $91.9 million last year.

Cost of sales in the second quarter, they improved to 73.8% versus 78.1% for all of last year. Cost of services for the quarter, they also improved to 70.9% compared to 75.5% for last year.

G&A for the quarter was $8.7 million, up from $7.6 million in last year's second quarter. This increase compared to last year in second quarter was due to slightly higher stock compensation expense and cost relating to employment benefits. As a percent of revenue, G&A is down slightly from a year ago, now at 6.2% of revenue. For 2006 expected G&A to come in around 34 to $36 million.

Depreciation and amortization for the quarter was $4.1 million, slightly lower than the $4.6 million incurred last year in the second quarter. We expect depreciation for the full-year 2006 to total approximately 16 to $17 million.

Other income this quarter is in the amount of $1.5 million, primarily from FX gains of $1.1 million compared to a gain in last year's second quarter of $534,000.

Operating income was $28.6 million. These earnings are up $12.5 million or 77% compared to the second quarter of last year and are also up $4.2 million or 17.3% sequentially over last quarter. This operating income represents operating margins of 20.4%, up some 670 basis points compared to the margins of 13.7% last year's second quarter.

Our continued improvement in margin has been driven by our focusing on obtaining commercial contracts that deliver higher product and service margins, thereby creating higher levels of incremental margins earned on those revenues; and then combine this with better utilization of our cost structure. The results are clearly demonstrated in our expanding margins.

On a year-over-year basis, our incremental margins in the quarter were 57.6%. By segment they were Reservoir Description, 66.2%; Production Enhancement, 54.3%; and Reservoir Management, 31.1%.

Interest expense was $1.5 million for the quarter, down from $2.1 million in last year's second quarter. We expect interest expense in 2006 to run in the range of $5 million.

Income tax expense was $8.1 million for the quarter compared to $3.8 million in the prior year's second quarter primarily due to higher taxable earnings in this quarter, coupled with an increase in the effective tax rate from 27.3% to 30%. As mentioned on the prior call, the annual effective tax rate is expected to be about 30% for all of 2006.

Net income for the quarter was $19 million compared to $16.1 million in the last quarter and last year's second quarter's income of $10.2 million. So net income was up 17.4% on a sequential quarterly basis and up 85% on a year-over-year basis.

Earnings per share for the quarter were $0.70. This is $0.10 or 16.7% above First Call's mean Street estimate of $0.60, which compares to the $0.37 earned in Q2 of last year. So earnings are up 89.2% year-over-year. Sequentially, EPS is up $0.12 or about 20.7%.

Now, if we go over the balance sheet, cash was down by $1.6 million to $12.1 million compared to the year-end balanced of $13.7 million.

Receivables stood at $106.5 million, up by $7.4 million from $99.1 million at the prior year end. But importantly, as revenues have grown, our DSOs have continued to improve, now down to 68 days compared to 74 days for the full year of 2005.

Inventory was $31.3 million, up by $2.2 million or about 7% from the $29.1 million at the prior year-end. Remember that our product sales were up almost 24% on an annualized basis; so inventory turns also improved compared to turns experienced last year.

Other current assets were unchanged from the first quarter, but are up $3.4 million when compared to the prior year-end balance of $11.3 million, as a result primarily from a reclass to current from long-term of a valuation reserve on certain NOLs. There were no material changes in PP&E or intangibles, goodwill, and other long-term assets.

On the liability side of the balance sheet, our accounts payables were up about $1.1 million when compared to the prior year-end balance, primarily due to the timing of vendor payments. Other current liabilities increased by $3.8 million from last quarter and from the prior year-end balance by about $11.1 million. The material changes from last quarter are an increase in accrued payroll by $2.3 million, and $2.2 million in taxes payable, offset by a $1 million reduction in debt.

Long-term debt was $103 million, up $16.9 million from the year-end balance of $86.1 million, as it was more accretive to our shareholders to invest proceeds under our revolver to buy back additional shares under our share repurchase program. Even with that, our net debt-to-cap at the end of the quarter was 29.7%. This compares to 23.7% at year-end.

Other long-term liabilities are virtually unchanged from last quarter at $35 million, but remained up from $24.7 million at year-end, primarily due to items like deferred revenues being higher by $3.5 million, and $2.4 million for compensation expense accruals, and $2.6 million for taxes.

Shareholders equity ended the quarter at $192.1 million, down from the prior year-end balance of $214.3 million, primarily from our share buyback program, offset by additions from, among other things, our earnings. Our annualized return on equity for the quarter was 59.6% using EBIT, up from 28.4% in all of 2005.

Capital expenditures for the quarter were $5.6 million. For the first six months they were $9.9 million, which is up 15% from the $8.6 million invested in the prior year's first six months. This is indicative of our efforts to commit capital in support of our growth objectives. So we continue to expect CapEx in 2006 to be in the range of our depreciation, as David had said, falling in the 18 to $20 million range.

Looking at cash flow, cash from operations in the quarter was $26.6 million. After paying for our $5.6 million capital program, our free cash flow was $21 million or about $0.77 per diluted share in the second quarter. The annualized per share yield on this quarterly free cash flow was 5.1%; and that is almost twice that earned by the group.

How did we use the free cash flow in the quarter? Well, we gave it all back, and then some, to our shareholders through our share repurchases.

Now, about the share repurchase program. During the quarter, we purchased an additional 871,000 shares at a cost of about $50.2 million. The second-quarter purchases represent 3.4% of our quarter-ending share count; and they also represent 5.6% of our trading volume in the quarter.

Our program continues to be one of the most aggressive, if not the most aggressive, in the industry. Through yesterday, we purchased a further 97,600 shares in this third quarter at a cost of $6 million.

So from inception of the program we have purchased in the aggregate almost 11 million shares at a cost of just over $243 million, or about 33% of the shares outstanding at the time the program began in October of 2002. This has been a very successful program for our shareholders, as it has contributed to our shares increasing in value over sevenfold since inception of the program.

The return to our shareholders from inception has been over 650%, significantly higher than the OSX which rose 182%, or the S&P 500 which rose less than 70%.

Over the past year, our financial performance continued to strengthen. For example, our return on shareholders equity this quarter improved to 59.6% compared to 28.4$ for all of 2005, while providing our shareholders with one of the highest cash returns in the industry.

Now we would like to go over our internal financial targets with you. We are again raising our revenue target for the full-year 2006. We now believe our revenue should approximate $580 million, up from our prior target of $560 million. This new target is just over 20% higher than our 2005 revenues -- once again, exceeding the growth in activity levels by our clients.

We are again raising our target on earnings per share in the range of $2.85 to $2.90. This represents an increase over targets given on the prior call 10%. If we hit those targets, our earnings this year would be about 160% greater than our earnings in 2005.

For Q3, our revenue target is in the 145 to $150 million range. This is up 23% from the third quarter in the prior year. For EPS, we expect it to be around $0.75 to $0.80. These results if attained would reflect 185% increase in earnings per share over the $0.27 posted in the third quarter of last year.

Now, I will pass it back to David for more on our operations.

Well, thanks, Dick. I would like to go ahead and give a detailed operations review, started with Reservoir Description. Let's remember that these are technologies that describe the reservoir system, which is comprised of the porous or permeable rock and the three reservoir fluids contained within, those being natural gas, crude oil, and water.

Quarterly revenues topped $80 million for the first time in the history of the Company. They represented 57% of Core's quarterly revenues. Operating income margins reached a record 18%. Let's remember that these projects have an international focus and are mainly crude oil and crude oil field related developments.

It is a solid quarter for Reservoir Description as operations continue to high-grade projects that will yield increasing margins. This may be limiting some of the top-line growth; but incremental margins have topped 50% for the last five quarters. So we are doing a little less and earning a lot more.

Some projects of note, and there are some good ones in here. Offshore West Africa, Angola, we've got 1,400 foot of core in the shop. This is a field development project. Core was called in at the very early stages. They are going to look at the development of the field pressure maintenance projects and then also a follow-on enhanced recovery scheme, that will be based on the core analysis and reservoir fluid datasets that we generate for them now.

Equatorial Guinea, we will be working on a multiwell project involving thousands of feet of core and multiple series of reservoir fluid studies, again for field development, pressure maintenance, and then enhanced recovery projects over the next decade or so.

Closer to Houston, we received three new large core projects and are working on them in-house from the Deepwater Gulf of Mexico, with three more additional Deepwater projects on the way.

For those of you that have visited our Houston facility and viewed our large core lab room, we are now planning to expand into a warehouse space to accommodate all of rock we have in-house. It's a very good thing.

Turning over to Production Enhancement, remember these are technologies used to enhance the production and ultimate recovery of crude oil and natural gas. It is 37% of Core's quarterly revenues, down sequentially -- as let's remember that these technologies have proven more defective in natural gas reservoirs. So we do have some exposure to the seasonal breakup in Canada.

However, these seasonal effects were mostly offset with the continued market acceptance and market penetration of new Core Lab technology both in North America, the natural gas market, and internationally as applied to both natural gas and crude oil related projects. Year-over-year quarterly growth here was 27%, indicating the further market acceptance and penetration, again, both in North America and internationally.

Projects of note. Recent advancement in Core's patented Completion Profiler to function in more hostile wellbore conditions -- so read that deeper, hotter, higher-pressure environments -- has enabled Core to expand its revenue opportunities to the deeper wells that are now being drilled in the Gulf of Mexico and Deepwater wells around the globe.

Coupling Core's Completion Profiler with our SpectraScan and SpectraStim technologies is enabling clients to maximize the efficiency of their wellbore stimulation projects when they are trying to stimulate multiple zones of treatment at one time. This not only saves our client rig time and money pressure pumping, but maximizes hydrocarbon flow and, consequently, cash flow from the producing asset.

On the HERO front, an update on the New Zealand project that we detailed in our last earnings conference call. A Society of Petroleum Engineers technical paper has been prepared and will be presented at the Asia-Pacific SPE meeting to be held in September in Australia.

This paper details the three wells that had a total of 6,500 feet of reservoir rock that were successfully perforated using Core's HERO technology. Over 36,000 charges in over 300 perforating guns were used to perf the well. Superior flow results were achieved on all three wells. The technological success of this will be detailed in the paper and presented at that SPE meeting.

Looking at another technology development, one I owed you from earlier in the conference call, it has to do with optimizing hydrocarbon flow and ultimate recovery from gas shale reservoirs. Core's Production Enhancement engineering teams are developing a Super HERO or Super High Efficiency Reservoir Optimization perforating charge and related gun systems.

These design engineers will build off the successful introduction of Core's HERO series of perforating charges. They will utilize Core's massive database that our Reservoir Management operations are generating from cored intervals related to the industry-leading study entitled The Reservoir Characteristics and Production Properties of Gas Shales.

Moreover, the design engineers will test-fire these Super HERO charges into core samples of gas shale reservoirs. So formation-specific charges will be developed to optimize reservoir performance in the Barnett, Woodford, Fayetteville, and the other leading gas shale plays. So some exciting stuff in development within Production Enhancement.

Turning now to Reservoir Management, remember these are field-wide, basin-wide projects utilizing datasets primarily from Core's Reservoir Description and Production Enhancement segments. These projects have an engineering, petrophysical, and geomechanical focus; and it represents 6% of Core's quarterly revenues.

This technical team is recognized as the industry experts in the exploitation of nonconventional natural gas reservoirs. They are altering the decline curves from gas shales and tight gas sand reservoirs. Operators and oil companies are starting to understand just how valuable measured petrophysical, geological, and geomechanical datasets are from completing and stimulating these nonconventional natural gas reservoirs.

Core's two large industry studies, The Reservoir Characteristics and Production Properties of Gas Shales, and Core's study of tight gas sands now have over 35 participants each. These participating companies have requested that Core expand these projects into the international theater. So more to come on unconventional natural gas reservoirs around the globe from Core Laboratories in the quarters to come.

April, we will go ahead now and open the phone for the Q&A session.

(OPERATOR INSTRUCTIONS) Robert MacKenzie with FBR.

David, I had a question for you here. Looking at Production Enhancement, as part of a great quarter, it was a little bit of a steeper sequential decline than we had been expected. Was all of that the road bans in Canada? Or was there something else there -- you know, i.e., lower activity in the U.S. -- that we should be aware of?

No, all Canadian related, Rob. Probably had an impact of about $0.02 on earnings. But U.S. operations remained very strong.

In that vein, are you seeing any slowdown in demand for your services there, be it HERO charges or fracture diagnostics?

We had not had a job canceled or delayed and our quarter two. So operations in North America related to natural gas from Core Lab's prospectus remained right on target.

Great. You know, you guys had put up some pretty impressive incremental margins right now. The business seems very scalable to this point, based on what you delivered so far. What causes that potentially to slow down in the future? What should we look for to tell us that the growth might be slowing?

Well, I think we continue to high-grade projects in the international theater, Rob. We have our global operations meeting that we hold twice a year, and in there we set our targets for our margins as tied to incentive pay.

Moreover, we are looking at, as we have talked to investors, we want to add an additional 400 fields in which Core can work in. Right now, we work in about 800 of the world's 4,000 fields. So I think we have a lot of opportunity targets going forward.

Our visibility over the next two quarters, and that's about the visibility we see, business looks like it will remain pretty robust.

Okay. Then a follow-on to that is, based on your current capacity, roofline people, equipment, how much more incremental volume do you think you can put through that before you have to spend incrementally more CapEx and higher a lot more people?

Rob, we don't see that actually changing from the last guidance we gave on the previous call. We had said 750 to 800. We are pretty comfortable with that number, still.

During the quarter, we have probably added net 20 people. I have listened to some conference calls, and just a massive number of people have been added to some of these companies. But for us, about net 20 people -- because we thought that question would be asked on this call -- from our operating divisions.

Sure. Then my final question before I let someone else have a chance here is -- actually, second last question, sorry. David, you mentioned you're adding a building to store some of the core in, in Houston. What is the incremental CapEx and/or operating costs associated with that?

Nonmaterial, actually; it was warehouse space we already have. We're just going to move some of the field equipment to another area.

Okay, and the real last question just a housekeeping, Dick. What did you say CapEx was for the quarter?

Was -- I believe it was $5.9 million.

Great.

Let me confirm that. It's $5.6 million for the quarter; $9.9 million for the first six months; and that is up 15% from last year.

Okay, thank you, guys. Nice quarter.

(OPERATOR INSTRUCTIONS) James West with Lehman Brothers.

I had a question for you on the HERO charges. You had mentioned last quarter, David, that about one in every four of the charges you sold were HERO charges; and you thought that could get to four of four at some point in the future. Have you sees any growth related in your share in the second quarter?

Balancing off what we look at in the North American natural gas market, especially Canada, we still held at about one of every four charges sold. We think that certainly will tick up in the third quarter.

James, I think the key here is the exposure in the international theater that the HERO is now starting to get. We are, in that one project that we discussed, using 36,000 in completing the three wells in New Zealand.

On the back of the HERO charge, we think that we could pick market share as we develop our Super HERO. Now we have got a lot of work to do on that yet.

I know that you guys have always asked us for what is in Core Lab's technological pipeline. So as we develop this Super HERO charge, I think it starts to replace and gain market penetration and market share in North America even further than where we are at now.

How should we think about commercialization of the Super HERO suite of products? Is this something -- are we six months, a year out, or is it longer?

Yes, let's say six months at this time. We will try to give you guys an update every quarter on how we are doing on that.

Okay, then one more question, David. I know you guys are generating a lot of cash, you have been buying back a lot of stock in here. What are your thoughts on acquisitions at this point? Are you actively looking at bolt-on acquisitions? Is there anything in the pipeline?

Yes, with respect to our stock buyback as you know, James, during the quarter the stock went on sale, on a massive sale, a couple of times. It enabled us, we thought, to pick up some very, very cheap shares. So we thought that was a good application of the cash and actually a little bit of a debt.

On the acquisition front, I think our focus would be in the Production Enhancement area. There are a couple of technologies that we are looking at. I don't think that these would be earth shattering from a revenue add or a bottom-line add over the next couple of quarters.

These would be technologies that we would add to bolster some of the services that we're providing, perhaps in the perforating charge area, or in providing services at the well site. These probably would be in the $10 million range and be cash related.

Okay, great. That's all I had. Thanks, guys.

Robert Christensen with Buckingham Research.

Just great quarter. On the acquisition question just asked, did you guys look at the company out in, what, Utah, Schlumberger acquired. I guess it is more rock mechanics. I can't remember the name of the company off the top of my head. Were you at all in the bidding there? Does that kind of thing fit you?

It is a company that we have known for some time, and they have been for sale for some time. But it is a service that we do provide in-house. It is one that we actually use in many of our services to help characterize the reservoir from, as you said, a rock mechanics perspective. The idea for us is to help our clients better understand that reservoir when they are designing, for example, fractures.

It is still a very nice market for us. Ours is very commercially oriented. It was interesting, when we read the press release announcing it, that it was going into some kind of Center of Excellence, which sounds to us like some kind of R&D department. So that is really all we know about it.

You already offer the service; and it's a little more commercial, get money revenue; as opposed to let's understand science and then develop revenue off of it later.

Remember that we are already -- for example, if we bring in some of these cores, we are already taking those cores through a suite of services. This would be just another one that we would add to those existing services. It's a great way for us to deliver incremental margins.

So we can give that rock mechanic dataset to the client along with other petrophysical datasets. Then it just goes back to the client in the form of better information. So it maybe a one-off product line for that company, but for us it is just one of a series.

Sure. A little more insight if you might; and my last question. You know, the Canadian oil sands, you really surprised us, I want to say, two quarters ago, on the contribution there. Can you put a little more on the table as to what is transpiring up there for your business, and give us some sort of proportionality? How much is that contributing to your revenues and operating?

Okay, Bob. The Canadian oil sands remain a technological focus for us, really in two areas. We have expanded our facilities to look at more and more cores from oil sands, and then get a better understanding for the placement of steam injectors and recovery wells for SAGD projects.

On the first front, certainly we go to our clients there and we recommend a highly detailed coring program throughout the entire oil sand body. This is like assay in ore, where we bring really thousands of feet of core samples in, and we assay the richness of the bitumen so we can tell the client what is the best area to develop first, where he's got his richest bitumen deposits. So literally, analyzing thousands and thousands of feet of these oil sands and oil sand cores.

On the second front, when it can't be mined from the surface and we need to drill a steam injector followed by -- these are horizontal wells, underneath that a producing well, again using core analysis data to try to locate the best places for steam injectors and also for the producing wells.

Let's remember that Canada represents about 10% of Core Lab revenue; and I imagine about 10% of that would be related to the oil sands. So all over with Core, if we generate somewhere between 5 in $7 million of revenue out of that for this year, it'd probably give you a ballpark estimate on the contribution of Core Lab.

Any additional questions, April?

Matt McGeary.

From Sentinel Asset Management, by the way. Just sort of curious, you guys -- particularly for a company your size -- have a pretty unique perspective on the global market given that you operate in most places. Just wondering if you would give us maybe the 1,000-foot view of what you are seeing out there in the market right now. Particularly what you are -- if you're hearing anything different from your customers.

Obviously you mentioned that your stock went on sale a couple times this quarter. Obviously, there is a lot of disagreement in the marketplace right now about the sustainability of this cycle and so forth. So just sort of curious if you can give us your rundown of what you are seeing out there.

Okay, let's remember, Matt, that we are more then 70% international in scope. So our exposure to North American natural gas is rather limited. I understand during the quarter that there was a lot of concern about North American natural gas prices.

Well, we tend to be more of an international company. So for us, our growth is being fueled by areas like the CIS, the Middle East, the Eastern Hemisphere. These are the areas that fueled our growth.

So from our standpoint, we have made the Company more international in scope, more crude oil related; and our technologies that we are rolling out will continue to do that. I think Dick had a couple of points as well that he would like to make.

Just an observation. These are not private discussions with E&Ps, you know, our clients. But we attended the IPAA conference over in London a few weeks ago, and the majority of the presenters were the independent naturally producers.

Almost all of them said they were adding rigs here and there; and they were excited about their projects. They didn't have the same tone that we often hear from folks that are in your shoes, for example, of -- gee, things must slow down.

All these people had a very, very positive outlook at least as it related to their particular company. They were stepping up activity levels. So just an observation.

Thank you.

(OPERATOR INSTRUCTIONS) Robert Christensen.

Yes, there have been a number of articles appearing about heavy oil and steam flooding using Western-style technology, Wall Street Journal (inaudible) other day. For Saudi Arabia, I know Kuwait is studying it. You are in the region. How much analysis is being provided to these countries for potential steam flooding right now?

Just looking at the Middle East in general, Bob, very, very little. I think if you're looking at the development of some of the lighter or some of the higher sulfur crudes, that might be on the order of between 20 and 30 gravity, these are going to cost a lot less to develop, as opposed to anything that would involve a steam flood.

So I know that these have been talked about. We have talked to some of our clients about there. But from Core Lab's perspective, little or no revenue is being generated at this time from those types of projects.

But using our experience up in Canada, this would be very transportable down to the Middle East. Actually still our Middle East operations are now headed up by a gentleman that did spend a number of years in Canada with us. So when that does roll along I think we will be prepared for it.

Thank you.

Robert MacKenzie.

A follow-up, guys, on miscible floods. Two-part question. First, you've had some of these studies ongoing for a while now. Can you give us an update on when you might expect to get some kind of results from that?

The second part is, can you help me understand how a miscible flood might actually work? Once the water is -- the field's already been heavily flooded with water, it is probably water wet. How do you get the hydrocarbons out in that scenario?

Very good question from a petroleum engineer. Rob, on the first half question, we are generating some revenues from miscible flood, studying miscible floods technology up in our Aberdeen facility, as we are being funded by a big producer out of Norway to look at that. Also, out of the Middle East we are generating some revenues from that.

So, I think the commercial viability of that will be related to -- let's keep crude oil prices above $60. As more people get comfortable with the technology, I will see; I'll think that Core Lab will start generating additional revenues from that.

Second point on water wet reservoirs; you're absolutely correct. When we look at fields that have been water flooded, if we have changed the wettability of those rocks, you're absolutely right -- miscible flood would not be applicable to that field.

It would only be in a case where we have conducted a water flood and some zones may have not made the transition from going from water wet to oil wet that the miscible flood will be applicable.

So those fields are out there. So it won't be applicable for all fields, but it will be applicable for some fields that have been water flooded.

Great, thank you.

Okay, April. I think we are going to -- in summary, Core posted our most profitable quarter in the Company's 70-year history. We have never been better technologically positioned to help our clients expand their existing production base.

We remain uniquely focused and are the most technologically advanced reservoir optimization company in the universe; and this positions Core for continued growth in 2006 and beyond.

Just a side-bar note, over the next couple of days or maybe even this morning, the Investor Business Daily was going to do a nice profile on Core and talk about a couple of our new technologies, which included QuickRock Properties, which we talked about in the past, and also miscible floods.

So in closing we would like to thank all of our shareholders, the analysts that follow Core, and especially all of our hard-working employees for spending their morning with us. We look forward to our next update at the end of the third quarter of 2006. Thank you and goodbye.

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