Core Laboratories Inc (CLB) 2009 Q3 法說會逐字稿

Good morning. I would like to welcome everyone to the Core Lab Quarter Three Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. (Operator Instructions) Thank you. Mr. Demshur, you may begin your conference.

Thanks, [Kalaya]. Good morning to everybody in North America, good afternoon in Europe, and good evening in Asia-Pacific. We'd like to welcome all of our shareholders, analysts, and most importantly, our employees to Core Laboratories' Third Quarter 2009 Earnings Conference Call. This morning, I am joined by Dick Bergmark, Core's Executive Vice President and CFO. Also this morning we are again joined by Core' COO, Monty Davis, who will present a detailed operational review.

The call will be divided into five segments. Dick will start by making remarks regarding forward-looking statements. Then we will come back and give a brief, consolidated Company overview, touching on some financial and operational highlights. And then we will have a couple of comments regarding Core's strategic operational and technological positioning for the first quarter of 2009 and into 2010. Dick will then follow with a detailed financial overview with additional comments regarding our first quarter 2009 revenue and earnings guidance. Then Monty will go over Core's three operating segments, detailing our progress and discussing the continued successful introduction of new Core Lab technologies and services and then highlighting some of Core's operations and major projects. Then we will open the phones for questions and answers.

I'll turn it back over to Dick for remarks regarding forward-looking statements. Dick?

Thanks, David. Before we start the conference this morning, 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 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 1A, Risk Factors, in our annual report on Form 10K for the fiscal year ended December 31, 2008 as well as the other reports and registration statements filed by us with the SEC.

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

Thanks, Dick. This quarter marks our 14th year as a publicly traded Company and our 56th earnings conference call. During this time Core Lab shares have advanced over 18 fold which provides a nice lofty goal for our next 14 years.

Now, for this quarter, Core's operations once again outperformed the global marketplace as we maintain industry leading operating margins and returns while continuing to generate high levels of free cash flow. All in all, it was a good quarter. We congratulate our operations team and all of our hardworking employees. The remainder of 2009 will still present a challenge, but Core operations are well positioned and technologically focused for this difficult but improving operational environment.

Remember that Core's long-term operational and technological focus has been outside North America as 70% of the Company's originate from petroleum reservoirs located outside of the United States. 70% of the Company's revenue originates from crude oil related projects and over 85% of the Company's revenue originates from development and production related operations. For the past 14 years, Core has believed that exploration related activities are just too volatile, risky, and cyclical to base any long-term growth strategies on.

Moreover, the Company also does not participate directly in integrated management projects as we see these as also being risk inherent and very often produce low margin results. The Company's top six clients -- Exxon Mobil, BP, Shell, Conoco Philips, Chevron, and Total -- will continue in 2009 and into 2010 with large internationally based crude oil developments that should provide a stable basis for our international operations.

Also of note internationally, Core has made a decision to focus operations on areas with the highest growth potential. These would include the deepwater developments offshore West Africa and Brazil, the Middle East, and Asia-Pacific areas. We continue to downsize our operations in Nigeria and in Venezuela.

In North America, Core's primary operational focus has been our deepwater crude oil developments in the Gulf of Mexico and our technological focus has been on the big five unconventional natural gas developments. In the deepwater Gulf of Mexico, Core's worked on or is currently working on projects relating to nearly every deepwater development including the emerging and exciting Lower Tertiary Play in the ultra-deepwater offshore Texas and Louisiana.

Also in North America, Core' technological focus has been on the big five unconventional natural gas plays, those being the Barnett, Fayetteville, Haynesville, Marcellus, and Muskwa in Canada. Core believes these shale plays can be economically developed at current natural gas prices and that with recent decreased drilling and completion costs over the next several quarters will boost future returns. Core's proprietary and patented completion and stimulation related technologies have continued to gain market acceptance and market share which is helping mitigate the severe downturn in North American drilling.

On the corporate side, Core's low capital expenditure requirements provide the Company with additional flexibility during industry downturns. In 2009, Core's CapEx needs will be less than 3% of the Company's revenues against long-term industry averages of more than 10% of revenues. Our $15 million to $17 million CapEx now planned for 2009, down from our prior guidance of $20 million, will fully fund maintenance to our existing capital base and fund projects that have the best growth prospects over the next couple of years. Almost all this capital is focused on operations that do not rely on North America sourced work. Moreover, our $15 million to $17 million in CapEx will be $6 million to $8 million below our anticipated depreciation costs for the year, adding to our free cash generation.

The Company will continue to stress free cash flow generation and returns, as we recognize these attributes are the most sought after by Core's current shareholder base. To this end, Core has generated a record $135 million of free cash flow in the first nine months of 2009, the highest total ever recorded by the Company. This compares with $124 million of free cash flow for all of 2008. On returns, the Company has established a goal to be in the top decile of returns on invested capital for a 35 company peer group defined by Bloomberg Financial for the oilfield services industry. Last quarter, Core was at the top of that list with a return exceeding 31% according to Bloomberg and we strive to stay at the top of that list for future quarters. More on free cash flow and returns from Dick Bergmark will follow.

Looking ahead for the fourth quarter of 2009, Core's operations see activity levels and workflows outside of North America to remain constant to slightly up from Q3. North America markets will remain under pressure from lower but moderating natural gas prices. Recent production data indicates that North American natural gas supply is decreasing and will continue to decrease over the next several quarters. Operating income margins for the Company are projected to remain in the 26% range, indicating that our global pricing structure remains essentially constant.

So, now I'll turn it back over to Dick for a detailed financial review. Dick?

Thanks, David. Revenues were $167.8 million in the third quarter versus $202.5 million in the third quarter of last year. So, our revenues are down 17% year over year although those results are indeed quite favorable when compared to the dramatic decrease in industry activity levels. On a positive note, sequentially, our revenues were up slightly from $167.3 million last quarter.

Of these revenues, services for the quarter, $133.8 million, similar levels on a sequential basis but down year over year when compared to $154.3 million in last year's third quarter. Product sales for the quarter were $34 million up sequentially by 4% but down when compared to $48.2 million in last year's third quarter. Remember that our product sales have the greatest exposure to the North American market, a market where the third quarter average rig count was down over 50% from last year's peak activity. You can see that our sales focused on areas with greater activity and have held up very well in this declining market.

Moving on to cost of services, for the quarter improved to 64% from 65% year over year and 64.8% for all of 2008. The improvements were primarily driven by a focus on reducing our cost structure to maintain margins on slightly lower revenues.

End cost of product sales in the third quarter, they were 77.6% of revenues versus 70.4% in last year's third quarter and 69.7% for all of 2008. This increase in cost of sales is reflective of lower product sales being run through our manufacturing cost structure.

G&A at $6.6 million is down more than 3% from last year's third quarter of $6.9 million primarily due to a focus on our cost structure. From 2009 for the full year, expect G&A to come in around $31 million or $32 million.

Depreciation and amortization for the quarter was $6 million, up from $5.6 million incurred last year in the third quarter which reflects increased levels of capital expenditures during 2008. We expect depreciation in all of 2009 to total approximately $23 million to $24 million.

Other income this quarter is in the amount of $1.2 million which includes FX gains of $900,000. We have remained that FX gain from our adjusted earnings for comparability discussion purposes as our guidance given last quarter excluded any gains or losses from FX movements or other one-off events.

EBIT for the quarter, after excluding the FX gain was $43.3 million which was slightly better than our guidance for the quarter. Including the FX gain, our GAAP EBIT for the quarter was $44.2 million, down 19.9% compared to our third quarter 2008 EBIT of $55.2 million.

Now, let's talk about margins. Our third quarter adjusted EBIT represents operating margins of 26%, the same as last quarter, but down from adjusted margins of 27.7% in last year's third quarter. That being said, the industry group, however, has reported on average margins that have significantly contracted and are well below these levels.

Interest expense was $3.9 million for the quarter. Keep in mind that $3.7 million of that $3.9 million is non-cash, or about $0.10 a share. Last year's third quarter interest expense was $4.6 million as reported on that same APB 14-1 basis, $4.3 million is non-cash. We expect interest expense in 2009 to be approximately $15.2 million with $14.6 million or about $0.40 on EPS of that being non-cash.

Income tax expense was $9.2 million which is a decrease over the prior year's third quarter expense of $13.6 million due to lower earnings and a lower effective tax rate. The rate last year in the third quarter was 27.8% while this quarter it was approximately 23%. This lower rate was due to the revaluation of certain differed tax balances in light of the changing value of the US dollar. We expect our effective tax rate for the fourth quarter to be in the 31% to 32% range.

Net income for the quarter, as adjusted to remove the FX gain and the benefit derived from the lower effective tax rate as compared to our guidance tax rate of approximately 32%, was $26.7 million which was below last year's third quarter adjusted income of $36 million. Net income on a GAAP basis was $31 million.

Earnings per share, also adjusted to remove the FX gain and the benefit derived from the lower effective tax rate was $1.15 per share, at the top end of our previous guidance and a few cents more than consensus. I will point out that we do have a complete reconciliation in our earnings release of this number to the GAAP basis EPS of $1.33 per diluted share.

Now, if we go over to the balance sheet, cash was $137.2 million, up by $101.1 million compared to our yearend balance of $36.1 million. This is after paying $20 million in dividends during the third quarter, including our $0.75 per share special dividend in August. As we continue to exercise a bit more caution during these current economic times, you will probably see us accumulate cash in anticipation of the final maturity of our exchangeable notes, although they are not due until November 2011. Until then, should financial markets improve, we do plan to use our cash for continuing the stock repurchase program, paying cash dividends to our shareholders, and perhaps, if possible, repaying some of our indebtedness.

Receivables stood at $118.0 million, down from $144.3 million at the prior yearend, primarily due to strong collections along with lower revenues this quarter as compared to the fourth quarter of 2008. DSOs in the quarter were solid at 63 days compared to 67 days for the full year 2008. This improvement is reflected throughout the more than 50 countries where we operate, with particular year to date improvement in such regions as the Middle East, South America, and even the former Soviet Union.

Inventory has decreased $500,000 from our yearend balance of $34.8 million. Inventory turns were at 3.7 times for the first nine months of 2009 and it was the same that we experienced last year even in the face of the weakening of the North American market. The value of a fully integrated global ERP system like we have had in place for several years does show its worth to a Company during cyclical downturns as companies strive to maximize the value of their working capital as we have this year.

Other current assets were at $18.8 million which is down about $1.6 million from $20.4 million at year end. The decrease is associated with the recognition of differed tax assets during the year. Now PP&E and intangibles, goodwill, and other long-term assets are down just slightly from the yearend balances.

Now, if we look at the liability side of the balance sheet, our accounts payables were $28 million, up slightly from last quarter, but down from the prior yearend balance of $41.6 million and again that's primarily due to the capital items and slightly lower business activity levels.

Other current liabilities at $57.6 million are up from the yearend balance of $54.1 million. That's due to an increase in taxes payable, offset by a decrease in accrued payroll. Long-term debt changed only due to the APB 14-1 accounting treatment of our debt. Indebtedness now stands at $205.4 million up from $194.6 million, although the face value, the amount we actually owe the note holders is unchanged from last quarter at $238.7 million, the difference just being the new accounting treatment. Net debt to total cap now stands at 16.2%.

Other long-term liabilities ended at $49.7 million, down from the last quarter, but up from $43 million at the prior yearend, primarily due to an increase in our differed comp plan of $3.3 million and $2.4 million from unearned revenue on billing for our reservoir management studies. Equity ended the quarter at $250.1 million, up from the yearend balance of $188.3 million. The increase comes, for the most part, from net income generated during the first nine months of the year, offset partially by our share repurchase program and dividend payments.

Capital expenditures for the quarter were $4.7 million, down from $7.9 million in last year's third quarter. We expect CapEx in 2009, as David said, to be approximately $15 million to $17 million, reflecting the decrease in industry activity. This is down from our prior guidance of $20 million and compares to the $31 million that we did spend last year.

Looking at cash flow, cash flow from operating activities in the quarter was $58.6 million, and after paying for our $4.7 million in CapEx, our free cash flow was $53.9 million in the third quarter. It was also $134.9 million for the first nine months. On a per share basis, our free cash flow for the first nine months equaled $5.81 per diluted share. That is up from $3.66 in the first nine months of 2008, so more than a 58% increase in free cash per share, year over year. If you think of it as a yield, the annualized per share yield at quarter end on this nine months cash flow was 7.5%.

And now, footing our cash, during the first nine months, we used our $134.9 million in free cash flow to pay $6.9 million in quarterly dividends, $17.2 million in special dividends to our shareholders, and we repurchased $9.1 million of our shares. The remaining $101 million went to increase our cash on hand.

Beginning in this quarter, as David mentioned, we have developed internal targets regarding returns on invested capital or ROIC. Our goal is to obtain an ROIC each quarter in the top decile of the 35 Bloomberg peer companies listed for Core Lab. These peer companies are the well known and respected oilfield service names such as Schlumberger, Halliburton, Baker Hughes, Weatherford, FTI, and Cameron, among others. We believe this metric is quite important as it becomes our guide when determining the proper level of investment within our own Company.

Our view is that just because you may generate a high level of free cash flow, you don't necessarily have the moral obligation to spend it to ever increase your capacity. We want to ensure that we do not over invest, causing capital to be squandered. Our view is that you should invest your capital in order to grow your business so that you can generate the highest possible returns for your shareholders. Once we make that proper level of investment for growth, we need to give our excess capital back to our owners through share buybacks or dividends. Further, our view is that ROIC is one of the leading performance metrics used by shareholders in determining the relative valuation of publicly traded companies.

Our belief also is that our shareholders will benefit if we consistently perform at the highest ROIC levels among our Bloomberg peers. According to Bloomberg, we generated a 31.1% ROIC for the second quarter of 2009. We had a weighted average cost of capital of just under 9%. And consequently, we generated an excess return of 22% above our weighted average cost of capital.

So the 31% ROIC and 22% excess return above our weighted average cost of capital were indeed the highest of any of the 35 peer oilfield service companies listed by Bloomberg. Moreover, Core's 31% ROIC was more than three times the oilfield service industry peer group average of 10% as presented by Bloomberg. Additionally, none of these peer companies had a ROIC that exceeded their weighted average cost of capital by even 7%, according to Bloomberg. So, we plan to compare oilfield service sector returns for the third quarter with you on our next earnings call.

Now, I'll pass the call over to Monty for our operational review.

Thanks, Dave. Our third quarter results once again reflect the outstanding performance of our employees to deliver increased value to our customers with the best technology products and customer service in the industry.

Early in 2009 we took actions to retain as many employees as we could while delivering results for our shareholders. We developed a plan for unpaid furloughs with the help of our outstanding human resources department. We delayed salary increases scheduled for April 1 and we encouraged taking of accrued vacation. All of these helped keep our staff reductions to only those required in specific markets. We have reinstituted those delayed salary merit increases, effective October 1 and we have retained our 401K match for employees throughout the year. These are considerations that our employees have earned through their performance.

In the third quarter, revenue of $167.8 million generated operational earnings of $44.2 million and operating margin at 26%. Our reservoir description revenues of $101.5 million were down 9% from the same period last year and 2% from quarter two this year. Operating earnings of $26.8 million yielded margins of 26%.

Activity continues to be good in international areas, deepwater reservoirs in the Atlantic and Gulf of Mexico, and gas shale activity in North America. The Middle East and Asia-Pacific remain our more active areas for reservoir rock analysis. In Q3, we were awarded a $25 million multiyear contract for advanced rock property analysis by Qatar Petroleum.

We also continue to be awarded several enhanced oil recovery studies in the UAE during the third quarter. Asia-Pacific activity remains strong in Australia as companies prepare for LNG development projects. We've been awarded more advanced rock properties analysis in India. Comprehensive studies and deepwater bores continue very strong in the Gulf of Mexico and the South Atlantic markets.

Our recognized position as the leader in gas shale analysis has served us well as this is an active part of the North American market and our workload in gas shale remains very strong. Our crude oil and products testing the measurement business has continued to turn in a very good performance in Europe and the US. Our fast, to the point service is giving our customers the service and value that they need. This, coupled with a close eye on expenses has led to improved margins for 2009 in the reservoir description business segment.

Our production enhancement operations are more exposed to the North American market and revenues of $54.4 million were down 31% from Q1 2008 but encouragingly were up 5% from the prior quarter. This is a much lower decline than the overall North American market which saw a 50% decrease in active drilling rigs in the North American market. Operating earnings of $14.6 million yielded an operating margin of 27%.

Our recently introduced SpectraChemPlus+ is helping customers identify production issues. It gives us the ability to look at various ions in the flow back fluids and detect formation water being produced. Our traditional SpectraChemservice puts a chemical frac fluid and monitors the flow back of that chemical. SpectraChem has proven very useful in helping our clients better understand how their long, multistage, horizontal wells are cleaning up after stimulation. We add a different chemical to each of the stages in a horizontal well and analyze the flow back for each chemical tracer. The data helps to better understand which stages are cleaning up.

With SpectraChemPlus+, in addition to the chemical tracer analysis, the flow back samples are also analyzed for various ion concentrations. We look specifically at potassium, sodium, magnesium, and calcium ions. As the well begins cleaning up, potassium is high. After the well has been flowing, the sodium ions begin to increase. At the same time, the potassium is going down. This is indicating that formation water is now flowing and being produced. A typical expectation is for potassium and sodium to mirror each other. It is when they do not behave as expected that the data can reveal that formation waters are being produced. These results can also be used to fingerprint which zone the formation water is coming from.

Reservoir management revenue of $11.9 million is slightly higher than both Q3 2008 and Q2 2009. Operating earnings of $3.5 million are better than the prior year and prior quarter, yielding operating margins of 29%. Several operators in our Haynesville gas shale consortium study are modifying their fracture designs based on the results of our study. Early indications are an improvement in production and decline curve. This is the type of value that our scientific consortium studies bring to our E&P clients.

Our global gas shale consortium study has begun with nine members, including Exxon Mobil, Conoco Philips, Total, British Gas, and Hess. We're in the process of sampling cores and drill cuttings from European basins extending from Ireland to the Ukraine. Our initial assessment will be completed in the end of quarter one, 2010. Developing these European shale gas reserves to maximize production and ultimate recovery is critical to European energy security. Our other target areas we've begun researching are onshore Turkey and South America.

With that, we will now open the call for questions.

(Operator Instructions) Your first question comes from the line of James West.

Good morning, guys.

Good morning, James.

David, do you think at this point, given the rebound that's underway or should be underway here shortly in most of your markets, that your margins have bottomed?

That probably is a correct statement and assumption.

Is it fair to say or fair for us to think that as we come off the bottom here that the incremental margins that you've produced historically somewhere in that 40% to 50% range are achievable again?

Yes. If history is evidence of that, we would suggest more in the somewhere between 30% and 40%, we'd be more comfortable because historically, dating back over the 14 years, they kind of resided in that range.

Okay. Then I had a question about Iraq. You didn't talk about it in your commentary a lot, but you did mention the press release. In the release you talked about some of the complexity or the complex reservoirs. I wonder, I guess, from your perspective, what does that mean for your business in Iraq? And then secondarily, what does that mean for how this market will unfold going forward? Is it going to be delayed? Is it as big as we thought? Those kinds of questions.

Yes, James. We've got as many as ten projects right now where people are working in Iraq, a number of those being in the South, a number of those being in the North, up in the Kirgizstan area. We are finding, especially down in some of the larger reservoirs in the South, very complex carbonate platform reservoirs, very complex in their compartmentalization. There has been a lot of damage to these reservoirs over the last decade. These reservoirs are difficult to understand and will take time before any exploitation plans can be development. So, I would think that over the next one to two to three years, the development of exploitation services in Iraq, especially in the South, will go a lot slower than maybe some other oilfield companies have projected. That being said, for Core Laboratories over the next couple to three years, this is a target rich environment for us because quite often, we are the first ones in to evaluate the potential of the reservoirs, some of their complexities, and what's the best way to achieve ultimate production. When we look at just some of the large fields there, you look at some of the projected recover factors now, they are in the low 20s to high 20s percentage. And we know worldwide that that average is somewhere around 40%. So, a lot of the work that we're doing right now is trying to determine how we can increase the yield from those reservoirs. Based on our experience there, this will take a number of years before we can be comfortable and our clients can be comfortable on what is the exploitation path to take.

Okay. That's very helpful. Thank you, Dave.

Your next question comes from the line of Stephen Gengaro.

Thank you. Good morning, gentlemen. Two questions, if you don't mind. The first, on the HERO charges, who's making the buying decision on them? How has the pricing sort of looked over the last, say, one to two quarters?

Yes. On the buying decision, I'll let Monty talk about the pricing issues, on the buying decision, our end sales point there is always the operating company. So, the EOGs, the Devon, the Range Resources of the world. The BPs. Those are our end sales point and our clients in all of those cases. With respect to when that charge goes international, again, we've shot a number of charges down in Southern Iraq and it's the Southern Iraqi Oil Company that we're targeting there for applying the technology for the reservoirs. On the pricing points, I'll turn that to Monty.

This is our highest priced charge. It's our highest technology charge. It's still the best value to our clients. The performance of those charges versus the cost in the overall AFE for a well is just a tremendous boost to the client's production. We haven't increased our prices. We haven't been able to increase our prices. We have - the HERO and SuperHERO family of charges has taken the lion's share of our overall charge production and the pricing on that is relatively flat.

Thank you. And actually two others. One, when you think about your CapEx and your cash flow looking ahead to next year, how do you approach the decision on the special dividend? Is it a percentage of free cash? Is it a percentage of cash after - ? How are you looking at that going

The first thing we're going to look at, Stephen, as you mentioned, are internal investments. That's certainly the important part to fuel the growth that we have. Certainly we're going to go through our budget cycle as we begin to look at 2010 and where the best opportunities are for us to spend our capital. As you know, over time we try to match CapEx with depreciation. If it's a growth part of a cycle, you've seen us spend a little bit more than that. If it's a slow part of the cycle, like recently we've experienced, we spend less than depreciation. If things hold out and, as James West suggested, things begin to improve in 2010, I think you may well see that CapEx number creep up with growth opportunities from our operating guys. So, beyond that, we're going to look at ways to return that to our owners, the excess capital. That could be a combination of dividends, share buybacks, or if we're fortunate enough, we could pay down some of our debt. But, as you know, that's probably difficult at these share prices.

Thank you. And then just as a final, I know you're sort of at least supportive of the question on the margin front. How does your visibility look now for the next year versus, say, 12 months ago? And what are you hearing from customers? Are you getting a better sense just from the customer side?

Certainly the guidance we've given, we've always said that at Core, the average job length is about six weeks. When we do these conference calls, we speak with a pretty good confidence in looking at Q4. We've not offered any guidance for next year. But I think reasonably we can look at international activities, especially with crude oil prices here in the high 70s, low 80s, our expectations would be, if history held true, that we would see an increase in international activity. We suspect that natural gas production in the United States will continue to fall, maybe for the next fourth quarter, first quarter, second quarter, and third quarter of next year, leading to higher rates there. So, we would expect international growth rates to be up and North American growth rates to be up. So, net-net, Stephen, we're probably looking at greater visibility where we sit as opposed to 12 months ago, just because of the stabilization of the economy and commodity prices. Any more definitive on that, we wouldn't want to venture at this time. We will be having our global operations meeting here within several weeks and at that time we'll be getting a good feel from our operating managers worldwide on what their clients are thinking specifically about their expenditures for next year. But again, we would not be surprised if we saw both international and domestic activity up.

Very good. Thank you.

Your next question comes from the line of Rob MacKenzie.

Good morning, guys.

Good morning, Rob.

I guess my first question is for Monty or David and it comes back to the Central or Eastern European shale plays. Recently we saw SO or Exxon pull out of Hungary but also up their stake in Poland. First, can you guys give us a view of how material that is for you guys now and how you see that growing? And secondly, how is the prospectivity in terms of what you're seeing right now, given the recent move by Exxon?

Yes. We've mentioned before in the past, Rob, gas shale plays in North America equal about 10% of our revenue. The amount of revenue that we're generating right now out of the gas shale projects in Central Europe is pretty diminuous. We've just gotten the first set of rocks in. If we look at the prospects, let's say, through Germany, Hungary, and some of the other adjacent basins there, it's too early to tell. We've gotten the first couple or three cores in house. I would not judge SO's action in Hungary as condemning that play. There were some zones that were saturated with water. That could mean they were in wrong places on the structure. I did recently read that they were considering going back in and restimulating some additional zones in that well. So, I think too early days to make a judgment on the SO Hungarian play. All in all, early days for those. And I think we'll be able to give you a little bit better color in our Q4 conference call.

Okay. Thanks. And then would you guys mind just giving us a feel for, if you will, region by region, Mid East, Far East, West Africa, what the visibility you see looks like, which is likely to be the strongest, if you will, the next three to six months, particularly in the context of several recent ports, if you will, out of both Russia in terms of increased spending by Russneft and in the Middle East, in terms of increased spending from a number of countries including in Abu Dhabi, the Zakum field?

Yes. If we had to rank those, Rob, we would put West Africa certainly at the top of the class. With the amount of work we're doing in Angola blocks one, ten, 14, 15, 18, 31 -- these are world-class developments, as well as some of these recent high profile discoveries offshore Sierra Leone, Ghana. These are large projects for us. That's why we would put certainly West Africa deepwater number one.

Looking at probably second place would be Asia-Pacific just because of the high level of activity there. We've been involved in a lot of the large scale oil developments there and are active in some of the LNG developments offshore Australia, followed closely by the Middle East.

I think you make a very good point on the Upper Zakum field that has seen a lot of activity and plans to try to increase production in that field from about 500,000 barrels a day right not to 750,000 barrels a day. This is a super giant field. We feel that it's very susceptible for very sophisticated field floods. We've talked about some of these miscible floods in our presentation over the past couple of years where we looked at super giant carbonate platform fields offshore and looked at miscible gas floods that even included if we had significant sources of Co2 for some additional significant recovery from these fields. So, as the Middle East now turns to looking at more and more EOR projects, these really get into the main fairway for Core Laboratories.

Okay. Thanks. I guess my final question comes back around to the question about uses of cash. My impression is that shareholders, particularly in this market, are less desiring, if you will, special dividends, less than they have in the past and might be more inclined to look favorably toward share repurchases, yet Core really doesn't trade a whole lot right now on a daily basis. How do you view the balance there? Where do you think it lead you guys?

Rob, it's interesting. We do poll our owners from time to time because we're trying to be responsive to their desires. We actually had a group of investors in a month or so ago. We polled the group and the consensus was special dividends. It's interesting where we are in a particular point in the cycle as to their interests. Several years ago, the desires from our shareholders seemed to be share buyback only. A couple years ago, they began to talk about -- "Hey, do a special dividend." Now they seem to be saying a little bit more frequently, "Let's do stock repurchases." We do try to listen to our owners. We haven't see a formal consensus grow. So, what we've done during this interim period is try to do some of each. Certainly our overall goal at this point is to remain cautious with our use of cash because the credit markets for a Company our size are still not all that favorable. We want to make sure that we have liquidity in house and financing capabilities and then we'll decide as we get into next year.

Would it be fair to say that once, if you will, you reach your target liquidity goals, i.e. being able to repay the exchangeable note when it comes due, I assume that you would return net of any acquisitions, pretty much all the cash to shareholders.

That's probably a good assumption. Yes.

Okay. Thanks. I'll turn it back.

Sure.

Your next question comes from the line of Victor Marchon.

Thank you. Most of my questions have been answered. Just a couple, Dave. Could you just talk to what you guys are seeing and hearing from customers up in the oil sands and how you could see that play out with oil prices $70 plus into next year?

Yes. I'll turn that to Monty because he's just been back from Canada.

The oil sands activity is still a little bit uncertain at this time. Obviously there's still activity underway. But I think the customers there need to see a stable oil price more so than anything. If the oil price goes up and down a lot, that does not work on these big projects for the spending that's required. They need a stable platform. At $70 to $80 barrel oil, they're making money. That's a good thing. They just need to be a little bit more confident, I think, that that's going to remain at that price or a little higher, actually, as we consume oil as a world. We expect that activity this year will be somewhat flattish with last year which was not a great year. So, a little more stability and we might see that rise in future years.

Thank you. The second one, just in North America, the comments of activity increasing slightly in the fourth quarter. Can you just give us a sense as to the areas that you're seeing continuing to increase into the fourth quarter? Is it specific to those five areas that you highlight as in to focus points? Are you also seeing it in some other regions?

No, Victor. I would look at the gas shales, the five we've mentioned. Activity in the Bakken we think will be robust and then also deepwater offshore Gulf of Mexico, especially along some of the ultra-deepwater discovers in the Lower Tertiary. Those would be our target areas. We think on the natural gas front that the economics of the gas shales will lead almost to exclusion that that will be the natural gas developments outside of just world-class assets like the Pinedale anticline and some of the tight gas reservoirs in the Rocky Mountains. That's where basically in North America we are concentrating our efforts. That will be the ultra-deepwater Gulf of Mexico, the five nat gas shale plays, the Bakken, and as Monty said, with a little bit more stability in crude oil, getting back to oil sands in Canada, followed by some of the tight gas sands that might be able to compete with shale gas.

And just remember, shales, as David mentioned earlier, are probably 10% of our overall business. And then if you look at the shale studies, because a lot of people confuse the difference when we talk about actually analyzing the shales themselves. The studies that we have, the consortium studies for shales, they probably represent less than 2% of our business. I don't want to overemphasize some of these projects.

Well, thank you for that. That's all I had.

Okay. Victor.

Your next question comes from the line of Terese Fabian.

Thank you. I'd like to ask this question is a little bit different way. I think you've already answered it. But based on your experience with past markets, do you expect OICs are going to be increasing spending based on higher oil prices that we're seeing or are they going to wait for signs of increased demand?

No. I think that the OICs will increase their spending levels next year. And if I would go out on a limb, I would say that if you looked at our most important client, Exxon Mobil, we would project that to be up somewhere between 10% and 12% next year, a lot of that focused internationally.

Okay. Then back to the Canadian market. Can you talk about how much of the reservoir description segment sales were affected by that market? Was there a drop-off between -- sequentially from the third quarter?

There was a drop-off in the third quarter for reservoir description services in Canada mainly because of the ending in second quarter of the oil sands activity from the prior season there. It works on a seasonal basis. Activity starts around December and wraps up around June. That has to do with weather patterns and the freezing of the ground. The Canadian market is certainly far from a good market. As we see the shale plays grow, that's going to be a really good part of that market, but it damages the other parts of that market which have been your traditional plays for gas in Alberta. The Alberta market, we're seeing some real slow activity in BC and even over into Quebec where they have gas shale properties. That's going to be the robust part of the market.

Should we expect this to extend into the fourth quarter also in terms of the slowdown there?

Yes. I would say that fourth quarter, our projections are mainly flat from third quarter. Third quarter may have been down somewhere high single digits, low double digits sequentially. So, maybe 1% or 2% of the Company revenues. So, again, not an earth moving number or a needle mover.

Okay. Thank you.

Okay, Terese.

Your next question comes from the line of John Daniel.

Good morning, guys.

Good morning, John.

Just a quick question on 2010. I understand your desire not to give guidance yet. But does it give you heartburn if one were to think that your revenues would move inline with the worldwide rig count? Or at least outperform it?

We would be okay with that. The only caveat is we look at reservoir description not necessarily being as tightly correlated to rig count but more to CapEx spend by the oil companies.

Sure. I understand.

And production enhancements.

Fair enough. Last question. This is just housekeeping. Can you tell us the amount that was spent in Q3 for the share repurchase program?

I just have the year to date number. I apologize.

In the third quarter we did the special dividend. We did not repurchase any shares during third quarter.

Fair enough. Okay. Good quarter. Thanks, guys.

Okay, John.

(Operator Instructions) Your next question comes from the line of Thad Vayda.

Good morning.

Hello, Thad.

Quick question. Have you guys seen an increase in interest in your SpectraChemline of products because of all of this concern about regulation changing for hydraulic fracturing and so forth?

The SpectraChemline of products -- both the SpectraChemand the SpectraChemPlus+ give that sort of information to our customers. It's been a active part of our business and some might say it's been a little more active than the other parts that are involved in the overall fracturing and diagnostics part of the business. So, yes, it's working to that effect. The clients can use it to that effect. Particularly the SpectraChemPlus+ where they're analyzing for production of formation waters. That's critical to understanding where things are coming from, where water they might be producing is coming from when it's no longer frac fluid but natural formation waters. So, yes, that's been a nice new service that we're offering to our clients.

Especially, Thad, up in the Marcellus. A lot of these data sets are very useful there in looking at, as Monty said, the formation water flow back.

Great. Thank you. Second, unrelated question. I like the goal on return on invested capital. I guess a couple things come to mind. It's always been a great measure of management effectiveness. So, why are we imposing it now as opposed to, say, a year ago? Again, it's a great thing. And then second, could you tell us how it factors into management compensation to the extent that it does and if it replaces anything?

That's two good questions. On the first part, we have had slides in our presentation for a couple of years that highlight our higher returns. Part of it has to do with some shareholders who just look at some basic parameters such as PE multiples or EBITDA multiples and say, "Hey, perhaps you already trade at a premium to a group." And what we're trying to highlight is there are several metrics that can be used and oftentimes when you get into detailed discussions with investors, they'll agree that this is one of the better metrics for valuing companies. We're just trying to highlight that.

Now, the question about compensation tied to this is very interesting. Even our board of directors shares, if you look in the proxies, you'll see that their shares are based on returns, components. So, this is -- we're trying to push this throughout the organization.

Thank you.

Your next question comes from the line of [Diego Rosada].

Hello. Good morning. I wanted to just get your thoughts on any new development that you may be seeing in oil shales. Any new data as to recovering rate improvement or specifically in the US where activity in oil shales has increased?

Yes. The one we're most familiar with would be the Monterey Shale in California where we're doing significant amounts of work and we look at recovery rates from these shales from being in the mid-teens areas. That had, with some of the modern stimulation technologies that are being employed, those rates have increased from the low teens. So, outside of just concentrated efforts in the Monterey Shale and looking at the amount of recovery efforts, a lot of the oil shales in Colorado, we haven't done a lot of work on lately. Of course, the oil shale in the Bakken, we've done significant amounts of work there. I would say that recovery factors there in comparison to the Monterey will be higher from a relative basis. So, maybe mid to high teens for the recovery factors there. This is of great interest to our clients because any increase on a percentage basis of recovery factors from these shales do yield much greater returns. So, we do have a good bit of work in house right now working on both of those shales. Some of the oil shales concentrated in the Colorado and greater Utah area, we've not done as much work on those I would say in the past 20 years and don't anticipate any work on those in the near future because we know of no projects that are heading our way from those.

Thank you.

There are no future questions.

Okay. I think we're going to go ahead and wrap it up. In summary, Core's operations posted a good quarter. We have never been better operationally and 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 oilfield services sector. This positions Core well for the challenges that await for the fourth quarter of 2009 and into 2010. So, in closing, we would like to thank all of our shareholders, the analysts that follow Core, and especially all of our hardworking employees for spending their morning with us and we look forward to our next update. Thanks and goodbye.

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