Core Laboratories Inc (CLB) 2008 Q4 法說會逐字稿

Good morning. My name is precious and you will be your conference operator today. At this time, I would like to welcome everyone to the Core Labs Q4, 2008 earnings conference call. (Operator Instructions)

Mr. Demshur, you can begin your conference.

I would like to say good morning to everybody in North America, good afternoon to all our folks in Europe, and good evening to those listening in Asia-Pacific. We would like to welcome all of our shareholders, analysts and, most importantly, our employees Core Laboratories' fourth quarter 2008 earnings conference call. As usual, I'm joined by Dick Bergmark, Core's Executive Vice President and CFO. Also again this morning we by Core's COO, Monty Davis, who will present the detailed operational review as Monty has been the chief architect of core's long-term operational successes.

The call will be divided in five segments. Dick will start by making remarks regarding forward-looking statements. Then we'll come back and give a brief consolidated Company overview, touching on some financial and operational highlights. Also, we will have a couple of comments regarding the core strategic operational and technological positioning for the 2009 marketplace. Dick will then follow with a detailed financial overview and additional comments regarding our first quarter 2009 revenue and earnings guidance. And then Monty will go over Core's three operating segments detailing our progress and discussing the continued successful introduction of new Core Lab technology and services and then highlighting some of our operations. And then we'll open the phones for Q&A.

Turn it back over to Dick for remarks regarding forward-looking statements. Dick?

Before we start the conference this morning, I will mention that some of the statements 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 affect our outcome.

Should one or more of these risks or uncertainties materialize or should any of our assumptions prove incorrect, actual results may differ 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 1a, risk, factors in our Annual Report on Form 10-K for the fiscal year ended December 31st, 2007 as well as the other reports and registration statements filed by us with the SEC.

With that said, I will pass the discussion back to Dave.

Okay. Thanks Dick. We would like to look at a consolidated Company overview. Core's operations once again posted the highest quarterly EPS ever recorded in the Company's now 73 year history. It was an excellent quarter and we congratulate our operations team.

2009 will present a challenge. Core's operations are well positioned globally and technologically for this difficult operating environment. Let's remember that Core's long-term operational and technological focus has been outside of North America. As 70% of the Company's revenue originates from petroleum reservoirs located outside the United States. Also, 70% of the Company's revenue originates from crude-oil-related projects. Over 85% of the Company's revenue originates from development and production-related operations.

For the past 15 years, Core has the lead operation, exploration-related activities are just too volatile and too risky to base any long-term growth strategies on. Also, the Company's top five clients, ExxonMobil, BP, Shell, Chevron and Total will continue in 2009 with large internationally based crude-oil developments that should provide a stable basis for our international operations. Also of note internationally has been Core's recent decisions to deemphasize Russian operations several years ago which culminated with the Company selling our Russian real estate holdings a year ago for a large gain in sale that would not be possible today. And the significant downsizing of our Venezuelan, Mexican and Nigerian operations.

Our Reservoir Descriptions segment would be willing to return to Mexico, when we belive operating margins would warrant such an investment. Remember in the past we had as many as three laboratories located in Mexico to service Pemex. However, our returns there weren't just meeting our hurdle rate. In North America, Core's primary operation focus has been on Deepwater crude-oil in the Gulf of Mexico and we have been technologically focused on the big five, unconventional natural gas developments. In the Deepwater Gulf of Mexico, Core has worked on, or is currently working on, projects relating to nearly every Deepwater development, including the emerging and the exciting lower tertiary play in the ultra Deepwater offshore Texas and Louisiana. Core first referenced this play in our Q3, 2004 earnings release. So almost five years ago when little was known of this potentially giant to super giant play.

Also in North America, Core's technological focus has been on the big five unconventional natural gas play, those being the Barnett, Fayetteville, Haynesville, Marcelluis and the Mosqua in Canada. Core believes these shale plays can be economically developed at current net gas prices and that decreasing drilling and completion costs that will occur over the next several quarters will boost these returns further. Core's proprietary and patented completion stimulation-related technologies have continued to gain market acceptance and market share, which should help to mitigate the severe downturn expected in North American drilling.

On the corporate side, Core's low capital expenditure requirements provides the Company with additional flexibility during industry downturns. In 2009, Core's CapEx made less than 3% of the Company's revenues against industry averages of more than 10%. Our $20 million in CapEx will fully fund all of our maintenance of our existing base and fund projects that have the best growth prospects over the next couple of years. Moreover, our $20 million CapEx budget will be $3 million less than our anticipated depreciation, adding to our free cash generation for the year.

The Company will continue to stress free cash flow and returns as we recognize these attributes are the most sought after by Core Lab's shareholders. Speaking of shareholders, Core's executive management and members of the Company's supervisory directors currently hold over 5% of Core's outstanding shares. This is among top holdings of all oil field service companies. So we are aligned with all of the Company shareholders worldwide. So I will now turn it back over to Dick for a detailed financial review.

Thanks, David. Revenues were $201.2 million in the fourth quarter, versus $176.4 million in the fourth quarter of last year and $202.5 million last quarter. Revenues were up 14.1% year-over-year and were flat sequentially. For the full-year, revenues were $780.8 million, up $110.3 million or 16.4% over the prior year of $670.5 million. Of these revenues, product sales for the quarter were $51.2 million, up 18%, when compared to $42.5 million in last year's fourth quarter.

For the full-year, product sales were $183.1 million, compared to $162.5 million in the prior year, which represents a 12.7% increase and these significant increases in the sales were achieved against the backdrop of a softening North American market, which supports our thesis that our clients prefer to use our newer technologies, which improve well productivity. Services for the quarter were $151 million, up, when compared to $133.8 million last year which is an increase of $17.2 million or almost 13%. For the full-year in 2008, they were up 17.6% to $597.7 million, which is up from $508 million in the prior year. Moving on to cost of sales in the fourth quarter, our cost of sales improved by decreasing to 68.5% of revenues versus 70.4% in the prior quarter. And they were 69.7% for all of 2008. The cost of services for the quarter 63.5% for the year they were 64.8%, which is down from 66.2% for the full-year of 2007.

G&A for the quarter was $9.3 million versus $9 million in last year's fourth quarter. For 2008 G&A was $31.6 million, down 6.5% from $33.8 million in the prior year. Although the Company continued to expand, with our revenues growing over 16%, our G&A costs have continued to remain relatively flat, while decreasing as a percentage of revenue, now down to 4.1%. For 2009, we expect G&A to come in around $32 million.

Depreciation and amortization for the quarter, $5.7 million, up from the $5 million incurred in last year's fourth quarter which reflects increased levels of CapEx during '07 and '08. For the full-year 2008, depreciation, amortization expense was $21.8million and in '09 we expect it to total approximately $23 million to $24 million.

Other income this quarter was $4.7 million which includes an $8.3 million gain from the repurchase of our notes offset by a loss of $4.7 million in foreign exchange. For the year, other was $2.4 million of income, compared to $15.8 million of income in the prior year. And the prior year's other income as David mentioned was primary on the gain on the sale of our building in Moscow.

EBIT for the quarter was $60.7 million or on an adjusted basis, EBIT was $57 million if you exclude the gain from the note purchases and the F X losses. These fourth quarter adjusted earnings are up $8 million or 16.3% compared to $49 million earned in the fourth quarter of last year. Our fourth quarter adjusted EBIT represents EBIT margins of 28.3%, an improvement compared to margins of 27.8% in last year's fourth quarter.

Interest expense was $408,000 for the quarter, compared to $670,000 in the last year's fourth quarter. This is due to lower indebtedness as a result of us reducing the outstanding balance of our 0.25% senior exchangeable notes due 2011 by $61 million during the quarter. We repurchased the notes on the open market at an average price of just under 87% of face value, resulting in a gain of $8.3 million. So rather than $300 million in debt outstanding as we had at last quarter-end, we ended the year at $238.7 million in total long-term indebtedness. We expect our reported interest expense in 2009 to be a bit different as a result of F SP, APB 14-1 as discussed at length on last quarter's call and again on this quarter's earnings release.

Briefly, this is the new FASB requirement for issuers for this particular type of exchangeable instrument to bifurcate the debt balance into a debt component and an equity component at the end of this coming first quarter. Although we have not formally completed this determination, it appears that the debt outstanding net of discount on the balance sheet at January 1st, '09, will be approximately $195 million, with the corresponding increase in shareholder's equity for the equity component amount of about $44 million. So interest expense next year in '09, will be based on this new discounted debt balance of $195 million, carrying a reported effective interest rate of about 7.48%. Creating quarterly interest expense of $3.6 million. Remember, that only $150,000 in cash interest is actually being paid to note holders in the quarter. While $3.4 million or $0.10 per share is noncash interest expense being paid to no one.

For the full-year 2009, GAAP reported interest expense may be $15.1 million, while the cash interest paid will only be $600,000, representing approximately $0.40 in noncash expense in 2009. For the full-year 2008, interest expense was $1.3 million, excluding the $5 million of debt arrangement fees written off in the second quarter.

Income tax expense in the quarter was $19.2 million at an effective tax rate of 31.9%. For the full-year income tax expense was $65 million, up $4.8 million over the prior year due primarily to higher taxable earnings.

Our full-year annual effective tax rate was 31.2%, and we expect our effective tax rate in '09 to remain in the 31% to 32% range. Net income for the quarter excluding the items mentioned was $38.6 million, compared to $38.5 million in the last quarter and up from last year's fourth quarter income of $33.4 million on a comparable basis. And on that basis, net income for the fourth quarter was flat sequentially and up 15.5% on a year-over-year basis.

Income for the full-year 2008 was up almost 23.5% at $146.9 million compared to $119 million in 2007. Again, the '08 and '07 numbers have been adjusted to remove the gain on sale and other adjustments that we spoke of earlier to place these comparisons on a more operational basis. Earnings per share for the quarter was $1.76 and excluding the items mentioned in the quarter, adjusted EPS was $1.66 per share, compared to $1.64 reported as First Call's main street estimate. And this also compared to the $1.36 earned on that comparable basis from operations in Q4 of last year. So earnings are up almost 22.1% year-over-year and sequentially EPS is up $0.06 or almost 4%.

Now, if we go to the balance sheet, cash was up $10.5 million, to $36.1 million, compared to the prior year and balance of $25.6 million, and cash increased as a result of our taking a conservative, yet opportunistic stance we discussed on last quarter's call. Receivables stood at $144.3 million up from $137.2 million, at the prior year-end due to our increased revenues for the year. DSOs did improve throughout the year and finished strong in the fourth quarter at 65 days which compares very favorably to 70 days for fourth quarter '07 and down significantly from the 74 days for the prior full-year.

Inventory was up year-over-year to $34.8 million, while our product sales were also up about 13%. So our inventory turns were comparable to the prior year. Other current assets were $26.8 million, down slightly from the $28.5 million at last year-end. And we had a $10 million increase in PP&E due to additions from our CapEx program and the small acquisition in Turkey earlier this year. And our intangibles, goodwill and other long-term assets are virtually flat, unchanged from last year-end.

And now if we look at the liability side of the balance sheet, our accounts payables were $41.6 million up about $1.7 million when compared to the prior year-end balance of $39.9 million and that's reflective of the growth in our business in '08.

Other current liabilities a $54.1 million are down $4.1 million, from the prior year-end balance of $58.2 million, primarily due to a reduction of $3 million associated with our corporate insurance. Long-term debt is down by more than 20% to $238.7 million as we purchase $61.3 million of senior exchangeable notes during the fourth quarter at an average price just below 87 and as we already discussed, you should expect to see long-term indebtedness decrease in the upcoming first quarter as a result of the accounting changes required by FSP, APB 14.1 and we expect indebtedness on the balance sheet at next quarter end to be approximately $198 million. Also as a reminder, the notes do not mature until November 2011, which is almost three years from now.

Other long-term liabilities ended at $45.2 million, virtually no change from the prior year-end. Shareholders equity ended the year at $158.2 million, up from the prior year-end balance of $62.1 million , and that's primarily due to additions from earnings offset by share repurchases. Using annualized net income for the fourth quarter, our return on equity for the year was approximately 104% and this is certainly one of the highest returns earned in our industry.

Capital expenditures for the quarter were $9.3 million and for the full-year were $31 million, up from $23.8 million in the prior year. We are reducing our CapEx program in 2009 to approximately $20 million, reflecting the decrease expected in the industry activities. Looking at cash flow, cash flow from operating activities in the quarter was $45.1 million, and after paying for our $9.3 million in CapEx, our free cash was $35.8 million, and that's one of the highest quarterly free cash flow results that we have obtained. The annualized per share yield at year-end on this quarterly cash flow was just over 10%. And as promised, we used our free cash flow opportunistically in the fourth quarter by buying their notes at a significant discount to par.

For the full-year, cash flow from operating activities was $155.2 million while free cash flow after paying for our CapEx program was about $124.2 million, which is up 22% from $101.9 million in free cash flow in the prior year. Our free cash flow in 2008 equaled $5.33 per share and that's up from $4.17 per share in 2007 so more than a 24% increase in free cash flow per share, year-over-year. And for the full-year 2008, how did we use this free cash? We bought $61 million of our notes, paid $28 million in dividends and purchased $32 million in shares and paid cash for an acquisition. So certainly there is no mystery to how our cash was generated or where we spent it. It was all designed to enhance shareholder value. Free cash generation such as this give companies like Core Lab significant opportunities in the market environment that we are experiencing today.

And now I will turn the call over to Monty who will go into further detail on our strong operational

Thank you, Dick. 2008 was our seventh record year in a row and the fourth quarter was our 12th consecutive record quarter from operations. Our employees deserve all the credit and we thank them for the string of record performances.

Reservoir description revenues rose to $109 million, a 9% growth over Q4 of 2007. Operating margins were 24.2%, excluding the FX losses. Annual revenue growth was 16% over 2007, and annual operating margins were 24.1%. In the fourth quarter, we completed a study for an Asian client, and were able to identify an additional 8% of recoverable oil by using our advanced laboratory technologies. This had had a huge impact on the 14 billion barrels of recoverable reserves from this field. Based on our performance for clients in the Middle East, we were awarded several new enhanced oil recovery studies, permissible gas injection and asphaltene onset in the UAE and Kuwait during the fourth quarter.

Work is continuing on our large shale projects, from North America with heavy emphasis from the Haynesville and the Marsalis shale gas plays. I will expand on this in the reservoir management discussion. In Q4 2008, Core Labs tight gas sand laboratory continues to see very strong demand for our quick rock properties based proprietary-type gas sand technologies, now expending through the Wind River and Green River basins of Wyoming. To date, over 100 unconventional tight gas sand studies have been conducted for 40 North American oil and gas companies with increasing demand for this technology occurring globally.

On December 16th, we opened our Canadian Center for Unconventional Oil and Gas in Canada. Due to the program reductions and delays recently announced by several clients, we now expect that Oil Sands analysis in 2009 will be down from 2008, for first time in many years. We are well positioned with our clients and expertise for the rebound in future years. The current outlook is for an increase in gas-shale activity in Canada, which our news center will be positioned to service.

Production enhancement revenues rose to $75 million, a 19% growth over 2007. With margins of 31% for the fourth quarter, excluding FX losses, annual growth for 2008 was 20% over 2007, with operating margins for the year of 32.6%. Our zero wash and spector scan fracture diagnostics led the way, helping customers evaluate their fractures and design best-in-class fracture practices. Our spector chem services allowed them to monitor cleanup of frac jobs and choose the best frac fluids from production in their reservoirs in particular places to verify communications between fracked wells.

In Q4, we kicked off a new fracture diagnostics campaign in tight gas sands for two international oil companies in Oman utilizing our zero wash and spector scan technologies We also started our first offshore open-hole gravel pack diagnostics with our pack scan technologies in India. We are monitoring the water flood in Equatorial Guinea for an international oil company using our spector flood technologies.

Our Hero and SuperHERO line of ultra-low debris perforating charges continue to gain market share with 46% growth in quantity over 2007, and 55% growth in revenue generated. These premium charges now make up 57% of all perforating charges that we sell. Oil companies around the globe are seeing the benefit of perforating with deep penetrating, ultra-low debris charges from Core Lab.

Reservoir management revenues hit a record high of $17 million in Q4. This was 30% growth over Q4 of 2007. Operating margins excluding FX losses reached 37% in this great quarter for these services and products. Several oil companies joined our gas-shale consortiums which now stand at 63 members for our gas-shales in North America study, 21 members in our Marsalis gas-shale study and 28 members in our Haynesville gas-shale study. These studies enable our clients to optimize production from these reservoirs and the application of best practices for stimulations and completions.

Petrohawk, one of our consortium members and one of the technical leaders in the Haynesville Shale play has supplied our technology to describe their formation, design their frac job and design the completion program to maximize their production. Petrohawk geologists and engineers have worked closely with our technical team to unlock the secrets of the Haynesville Shale to maximize their return on investment in the play. The initial production in their recent Haynesville wells speak to the application of the best technology.

Interest in tight gas sands is growing internationally and we now have 14 members in our global tight gas sands study. Our industry-leading expertise in gas-shales and tight gas sands has us well positioned for these areas of growing interest. In Q4, we also had record revenue for reservoir monitoring equipment installations. Major installations for SAGD monitoring in oil sands for large independent oil company in Canada and heavy oil reservoirs in Venezuela boosted reservoir management to a record quarter. We will now open the call to questions.

[Begin Q-And-A]

(Operator instructions) Your first question comes from James West with Barclays Capital.

Hey, good morning, guys.

Good morning, James.

David, when we think about your business, or when I think about your business, I agree with the argument that you make that during a downturn and during lower commodity prices, it's more important to use your services to increase production from existing reservoirs. I guess my question is, if we look at prior downcycles, does your customer base truly understand that and does that show up if we were to look at the past severe downturns and look at your growth during those periods or declines during the period and does that match up?

Yes, I think you make a good point this, James. We are not immune to downdrafts in commodity prices. We are worldwide activity levels. Yes, we would agree that the incremental barrel-equivalent of hydrocarbon in that reservoir is best captured with using technologies from Core Laboratories. However, when you have global budget cuts, too often technology goes along with that. So we will not be immune from this. I will say that we will be less affected than some of our other oil field service brethren, but still, we will be affected.

Okay. And then if your business in the Middle East in recent years has grown significantly, given OPEC cutbacks in here, are you going to be severely impacted by that? It sounds like you are not because I know Monty just went through a couple of contract awards, but let me get your perspective on at least that area of the road.

We - - James, I was over there in January, and around the regions. I won't mention exactly the customers, but most of our customers in the region are expecting to continue and indeed grow slightly their programs for this year. There are some areas where they are still reevaluating, but overall, I think the Middle East will be one of our stronger areas for 2009.

Okay.

James, let me make a follow-up point to your global question. If we just look at our Q1 guidance, we have year-over-year recount in North America down by now over 20%, and actually, year-over-year rig count now down internationally, and we still think that we can guide our revenues up, albeit small, but still up against those activity declines.

Okay. That's very helpful. And then just one last question from me, when you look at the current environment and the uses of cash in here, are acquisitions more attractive than putting money back into R&D and new technologies internally?

James, we talked about our potential uses of cash quite frequently and they are unchanged. We are looking for the best use that's going to be most accretive to our owners. So whether it's repurchase of our notes, repurchase of our shares, whether it's acquisitions, further CapEx we will look at them individually. As it relates to private company acquisitions, for example, it depends on whether or not valuations make sense. Public company valuations you see every day, private companies take a little bit longer for them to absorb realities. Many of the opportunities put in front of us recently, they are still thinking that their businesses have not been impacted and that we should continue to think of paying multiples in excess of public company multiples and, of course, we will not do that.

Sure. Okay. That's very helpful. Thanks, Dick.

Yes.

Your next question comes from Kevin Pollard with JPMorgan.

Thank you, guys.

Good morning, Kevin.

I was wondering, David, I think in the past you talked about the Barnett being a potential revenue opportunity of up to like $300,000 per well now as I recall. I was wondering if you could give us a similar figure for the Haynesville now that you've had a little bit more experience in that market.

Well, if we look at the Haynesville, much more complicated reservoir revenue opportunities there, although we are in the very early days of the drilling of that reservoir. Actually out of the big five plays, we believe only the core area of the Barnett is now starting to become understood from a petrophysical standpoint. So very early on the drill of the Haynesville. However, because of the complexity, higher pressure, multi-stage simul-fracs that we are seeing there, revenue opportunities have the potential there to be greater. How much greater at this point, we don't know. But we like, as Monty made reference to, the cooperation of a company like Petrohawk, with Core Lab is paying dividends for both companies.

Okay. I guess where I was going with the question is obviously activity in the Barnett is going down. Not all shale plays are immune from activity declines. And so I'm wondering if the combination of increased market penetration, market share, however you want to characterize it, of some of your technologies coupled with the emergence of some plays like the Haynesville that are probably going to be considerably higher revenue per well opportunities just given the complexity, if those two factors would be enough to offset the overall market decline from Core's revenue perspective.

Well, that would have to deal with our production enhancement segment which is most exposed to North American natural gas drilling. As we have given guidance on overall revenue for Q1 2009 compared to last year being flattish, let's just say that we can probably surmise that we have been not affected anywhere near the amount of some of our other oil field service brothers that will be affected by the severe downturn in the number of rigs turning to the right in North America. So what degree we can comment at this time? It's still uncertain. But as we roll out more quarters, I think we will get a better idea of that picture.

Okay.

But certainly we have seen - - or we are projecting certainly a lot less of an effect on the downturn than some of the other companies that might be tied to the more commodity end of the businesses in providing drilling and pressure pumping services.

We have the leading position in knowledge on these reservoirs from a geological and stimulation studies that we have done. We have looked at cores from a number of companies in the play, and in our consortium, and that way we are probably better positioned than anyone for those plays that we mentioned earlier, particularly Haynesville, Marsalis, but other North American gas plays that we have done a lot of study on.

Okay. And as I look at your revenue guidance per Q1, it's up slightly year-over-year and I know Q1 is usually it's quarterly on a sequential base and a down quarter. Would you expect that the revenue will begin to build off of that Q1 going forward as it normally - - as the pattern is normally in the past, or is it too early to tell?

Too early to tell on that. I think we will give you some insight at the end of the first quarter when we do our call then.

Don't forget the seasonal pattern in the industry as a whole, going into Q2, particularly if you have Canadian exposure. You will see the impact of that.

Right.

As the break up.

Okay. Thanks, guys.

All right, Kevin.

Your next question comes from Robert MacKenzie with FBR Capital Markets.

Good morning, guys.

Good morning, Rob.

Question for you David, continuing Kevin's conversation, can you give us an indication of how much volumes started to decline say from peak to now in the fractured diagnostics and the perforated charges in the US predominantly?

Well, through - - certainly through the end of the fourth quarter, we did not see a dramatic effect because our production enhancement business certainly put up its best quarter ever. And with our all over flat guidance for year-over-year revenues, certainly production enhancement will be affected more than reservoir description, but not significant amounts. Quantitatively, too hard to put a number on it.

Okay. We have seen a dramatic drop in the recount, and yet you guys- - have you seen any impact in the first quarter or much impact?

But not all rigs for us are created equal. We have a year-over-year 20% down on total rigs, but when we look at horizontal rigs which is what we are interested in, the decrease in number of horizontal rigs year-on-year is quite different.

Alright. That's what I was trying to get a feel for. How have you buys been related to that here with the drop.

Yes, we are keeping a very close eye on the horizontal rig count as opposed to the vertical rig count. Because if you are drilling shallow, vertical wells midcontinent, that's not a big ticket item for us. So it's that horizontal rig count that we look at is going to be a key. And although that is down from its peak year-over-year, it's still a much better comparable than let's just say all rigs.

Okay. Next question relates to the cycle as you guys see it here. You guys have been around through many ups and downs. How do you compare this cycle? What's the closest analog in the past that you guys are looking at as potentially similar to what we are going through and will probably go through here the next year or so.

All depends on severity of the decrease in the all over rig count, Rob. I have seen totals as low as 800 rigs. I think that might be more comparable to, let's say, the early '90s. It would be -- I think that would be a comparable cycle. If it's shallower than that, it might be a 2001, 2002 cycle that we're looking at. Again, we tend to be a little bit more insulated because of our crude-oil nature, and international exposure. But as we made mention to James West, we are not certainly immune from certainly that downturn.

Right. Right. Are there any things project-oriented items, say, for example, a bunch of yet to be processed cores from oil sands or other items in markets we know are weak are going to carry you guys through that we might otherwise appreciate.

I think the only area that we can say that is in the gas-shale area. We have a lot of work to do in the gas-shale cores that we're getting for the study. They continue on Haynesville, Marsalis and others. So we have a pretty good workload for that. The oil sands works on a purely annual, seasonal basis. And right now, oil sands cores are coming in to our new Canadian center for evaluation of unconventional oil and gas. So we are in the season when the oil sands cores are being taken and brought to us, or sent to us for evaluation. That season runs through the second quarter, really, for evaluations to take place. And then the reporting aspect of that in the third quarter, but there's no real - - it's not really a backlog situation because it is a strict seasonal flow of work in the oil sands.

Okay. Thanks, Monty. I guess my next question is for David and/or Dick is related to the guidance for first quarter as f the midpoint of the range of revenue guidance and 182 5 and then midpoint of EPS guidance call it 135. With all the other inputs, I'm coming up with an implied operating profit margin of about 27.2% in the midpoint of that range, which is above what you guys earn for all of '08, and close to a record high operating margin. With - - what do you attribute that to? Is that a better mix of business as some of the commodity stuff trickles off, the revenue side, you are having a higher profit margin of what is left, or how else do you explain that?

Rob when you look at it on a year-over-year basis of Q1 of a year ago, Certainly we made improvements throughout '08, without the introduction with our newer products and newer services and certainly those are priced a little bit better than the ones that they may replace. So, on that same revenue base we do believe it is quite possible for us to generate earnings and as you mentioned margins that would be better than the past first quarter.

Okay. Thanks. I will turn it back.

The next question comes from [Neil De'Mond] with Wunderlich Securities.

Good morning guys. Referring to the first quarter guidance. I guess what conviction, or is a good bit of that covered with contract coverage already and then I guess for David, what would you have to see, I guess in order to give us more guidance as far as the second and the third quarter. Are you looking for specifically more contracts executed or just what the overall market is looking like?

Yes, Neil, from looking at for the guidance for the first quarter, we are halfway through first quarter now. So if you look at the normal life span of a job within Core Labs, it's about six weeks. We can look out over the next six weeks and we have pretty good conviction of what we are saying here in Q1. As we get to posting earnings for Q1, I think we will be able to have pretty good insight for Q2.

This is a multi-variant equation here with the factors of how many rigs are going to be dropping in North America, especially those horizontally-directed rigs, what price do we get net gas at the this summer. Do they have gas-on-gas competition, that we reached $3, $3.50 on net gas? All of these questions come in as a major factor.

Internationally, we are more comfortable there. So as we head into the second quarter, I think when we report Q1 earnings, we will be able to get a look at Q2 and depending on the stabilization of North America and the direction for crude-oil prices, might be able to give Q2 and a look at Q3. So that's where we stand and what our thinking is on this guidance now.

That makes a lot of sense. And, Dave, does that six weeks or so - - I know that's always kind of been the case, does that hold true for the reservoir management? Obviously, you have an exceptional quarter there and in the press release mentioned about the record number of monitoring systems, as well as some of the joint industry studies and was wondering, are those queued up and are those in a longer than six week cycle or does that still follow the trend.

No, I think you are correct there Neil. That is a little bit longer based business there. This business has always been rather lumpy. So when we have a good quarter, the thing that we know - - the next question we are going to get the next quarter, if it's down a little bit in comparison sequentially is what happened to that business. But let's remember, historically that business is a little bit more lumpier. It is a smaller sized business within Core and I say that probably it will revert to the mean for growth in that business. What we have seen over the past several years.

Got it. Got it. And then last question --

Yes, I don't think we are in any new operating level there.

Okay. Okay. That's good follow-up. And then last question, as far as acquisitions or uses of cash, are you being approached? I know obviously other oil fill services here in Houston, the company management are being approached in this market, both by public and private folks. Number one, are you being approached? And number two, what does that environment look like? Are you seeing things out there trading at definitely a level significantly lower than a year or so ago? What does that landscape look like?

A couple of things, we haven't -- well to answer your first question, yes, we have been approached multiple times. It seems like several of the private companies are saying, hey, we have working capital issues at home. It will be hard for us to grow. We don't have access to capital anymore. Maybe it makes sense to tie up with a larger, more stable oil service companies, and we have gotten those type of calls.

What we noticed is several of them still haven't gotten the message on the realities of valuations. And that's why we haven't been too tremendously active. But, remember, our own internal pipeline for development of new services, we think is still pretty strong and we think it can get pretty good results from a return on investment if you just continue to invest internally. So we have been very happy with doing that and the results over the last five years prove that out as well.

Got it. Got it. Great quarter.

Thanks Neil.

Your next question comes from Victor Marchon with RBC Capital Markets.

Thank you. Good morning, guys.

Good morning, Victor.

The first question on production enhancements. You guys had mentioned some new projects internationally. I just wanted to look at that business through '09 and maybe get a revenue split that piece of the business in North America versus international today and how that could progress through the year, because it seems that any dow side or downturn in North America, want to see if some international awards could provide some offset to that as well as we walk our way through '09?

Certainly. The [debt] business is pretty much 80% US and 20% outside. And the reason is the tremendous growth we've had in the shale plays. Now, that - - from my discussions with most clients, at a pretty high level, those prolific shale plays that we have talked about are going to be the most active part of the US North America service business.

Internationally, we have a lot of opportunity for growth. We are very pleased with the new introductions. I mentioned India and Oman as areas where we are just on the front edge of providing these services. We also right now are involved in some projects in China. Those are areas that for this - - these particular fractured diagnostic services, we are just starting, really. We are on the early days.

So that gives us a lot of opportunity to prove the value, which we think we have proven great value where we have done this, and hopefully have some growth opportunity in those areas. International looks to be the area where we would be able to grow those services.

And if you look at that split over the long term call it two, three, four years out, does that split move up to a 70/30, or could it be even more weighted towards international?

I think that depends on the ramp up of international gas-shale plays, which these would be very natural transportation of technologies from here, Central Europe, India, China, Australia, Northern Africa where we feel there are five areas that have dynamite gas-shale play developments that will that we will see over the next several years.

So if those do ramp up, Victor, yes, we could see a 70/30 switch, maybe go into a 60/40 switch, but currently those gas-shale plays are in their infancies. We have had vertical wells drilled into those and we have looked at cores for those and we have great confidence that over time, those will be real money spinners for us. The pace of that, unknown at this point.

The other area that that's - - these services are going to really grow in is tight- gas sands in the Middle East. That is an area we'll be talking more about, I'm sure, in the next coming calls.

Yes, that's a good point. They are trying to certainly back out using crude-oil for export into their power generation and desalination plants and they want to power all of their petrochemical plants with the nat gas as well. And some of the tight gas there, the the [Permian Cough] Formation the very tight sand-gas sand prolific and these services could be well utilized there as well.

Thank you for that. The second one I had is just as it relates to pricing and margins. I wonder if you could just talk to the prior downturns, what you saw on pricing, as well as on a decrimentals and what your view is on a go-forward basis as to comparing to the current environment and the outlook versus prior downturns to just pricing and decrimental margins.

Yes, if you look at our prior cycles the last one in '01/02, our revenues were down just say 3%. I think that's indicative a little bit about pricing. We don't really have big pricing increases on the ramp up, like the commodity service providers based on capacity being constrained so they can charge more. And on the downside, when the capacity becomes available, they have to charge less in an effort to utilize whatever they can. We don't have that pricing model.

So we are not expecting large changes or swings in our pricing. So it's really going to be based on the activity levels in the field and our customers still interested in better describing the reservoirs and enhancing production and we think they will be. And so that's why we think relative to the group, we'll do okay, but as David said we are not immune.

Okay. Great. That's all I had had thank you.

Your next question comes from Cindy Du with Jefferies & Company.

Good morning. I just had a few questions following up on the pricing. So if I get this right, have you seen any pricing push back from the customers on any of your charges or diagnostic services at this point?

No. We have seen no meaningful - - we've had no meaningful discussions on really globally our price structure.

Okay. And then trying to push ahead on the '09 outlook, I know in the prior quarter, you threw out some numbers mid to high teens for Reservoir Description and 10% year-over-year growth for production enhancement. At this point, do you think it's still achievable?

Those numbers were decades ago!

Okay.

And compared to the commodity prices back then were substantially different than where they are today. So we are not -- Yes, I think David is correct. Those are off the table.

Okay. That's fair enough. And then you mentioned the importance of the horizontal rig count. Could you be able to tell us what your assumptions for the horizontal rig activity would be in North America for '09?

Don't have a clue.

Okay. Does your forecast for the first quarter assume some number?

Yes. The forecast for the remainder of the first quarter is that where we stand on horizontal rig count today will be pretty consistent with where we are at six weeks from now.

Okay. And then on to the international work, I was just wondering if you could provide some color on those types of relationships or contracts when you get awarded the work. Is it based off of a competitive bid or just like a long-standing relationship with a customer?

We tried, Cindy, to price everything on value. And the examples I gave, certainly we have competition, but we we are winning the lions share, the big lions share of the enhanced oil recovery studies we are doing in the Middle East. That type of studies. Because of the value, the expertise, the quality, that we can bring to the clients. So relationship and delivering that value is what builds those relationships is -- is the key element.

I mentioned also - - and like I said, I usually don't like to mention client names unless we have their permission, like Petrohawk. An Asian client we did a study for, huge value to them. Increased their recoverable oil by 8% on a 14 billion-barrel field, even at $40 a barrel, that's a huge number. And great value to them. Obviously our charge to do that is just a tiny percentage. You noticed our Hero charges, Hero, SuperHERO, and SuperHERO Plus, that load of (inaudible) charges has gained -- it's now 57% of the charges we sell. So that's the value of that unique technology coming through to the clients. So that's the key for us.

Okay.

Go ahead.

Who are you competing with on the international front, other large oil service companies?.

No. That's one of the biggest misconceptions that other large service companies do what we do. Actually, almost none of them do what we do on the international scope. Our main competition there in the international horizon are the service centers and technology centers of our five largest clients. For instance, ExxonMobil most important client to Core and probably our largest competitor with their in-house and the same would be true for Total, Chevron and BP. That's our main competition globally.

Okay. And then just one last question, what was there any benefit to reduction in the share count that was related to the repurchase of the converts?

No. No. The share count as it relates to the converts has to do with the share price, not with whether or not we bought back shares.

Okay. That's all for me. Thank you.

All right, Cindy. We'll take one more question, if you have one.

Your next question comes from Karen David-Green with Oppenheimer Funds.

Thanks. Good morning. Most of my questions have been answered but I had a couple of areas I wish you could address. As you look across the globe right now, certainly the US and Canada are obviously going to be down year-over-year. You mentioned the Middle East is somewhat of an offsetting factor to that. Could you give us an idea of what other regions you operate in that you are looking to see improvement year-over-year in '09 or maybe even just a flat environment?

Yes, certainly West Africa, the Middle East, Asia Pacific are rich target environments for us. As you know, we deemphasized Russia, but the southern Caspian is a target rich area for us, and we must point out that our reservoir fluids business up in the North Sea remains rather strong. So those are areas that we feel that are either going to maintain the level of activity and some of those may actually see some upticks with projects that will start later this year.

Great. And then can you also give us an idea of the percentage of your revenue that's coming from the US shale plays?

About 10% of our revenue.

Okay. And then lastly, looking across the activity levels for 2009, do you think your cost structure is aligned with the potential activity levels?

Not yet. Because we still need the employees and these assets in place to generate the revenues that are running through the operations right now. So no anticipatory cuts, but if they do occur, the rig count continues to go down and there's weakness in our businesses, remember that our cost structure is 60 plus percent variable and we will make adjustments at that time. We will be quick to make adjustments, but you can't lay off people that are doing work today.

We have seen over time, and Dave mentioned earlier, we have made restructuring significantly in Nigeria, in Venezuela, in Mexico, areas where we weren't getting the returns that we wanted. We would continue with that philosophy on a global basis. We look at all of our operations continually, and match our structure to the business that has been generated for our Company, not necessarily the market. If we have a better position than a market, our structure might be a little different than other people.

All right. Thank you. That's all I had gentlemen.

Okay, Karen, thank you. In in summary, Core's operations posted our highest quarterly EPS total in the Company's 73 year history. We have never been better operationally or 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 all of oil field services company. This positions Core well for the challenges that await in 2009.

In closing, we would like to thank all of our shareholders, the analysts that follow Core, our investors and especially all of our hard-working employees for spending their morning with us and we look forward to talking with you at the end of next quarter. Thanks and good-bye.

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