Core Laboratories Inc (CLB) 2009 Q4 法說會逐字稿

Good morning. I would like to welcome everyone to the Core Labs fourth quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions). I would now like to turn the call over to Mr. Demshur.

Thanks, Kaliea and greetings to all. Good morning 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 fourth quarter 2009 earnings conference call. This morning I am joined by Dick Bergmark,Cores' Executive Vice President and CFO. Also this morning we are joined by Core's COO, Monty Davis, who will present the detailed operational review. The call will be divided into five segments. Dick will start by making remarks regarding forward-looking statements, then we'll come back and give a brief investor update and highlight the three financial tenets by which Core's executive management executes the Company's growth strategies. We believe these three tenets have produced industry leading shareholder returns and returns on invested capital. We will also discuss Core's long-held philosophy of returning excess capital back to our shareholders. Then Dick will follow with a detailed financial overview and additional comments regarding our first quarter 2010 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, then highlighting Core's operations and major projects. Then we will open the phones to Q and A. I will 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 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 one of the 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 10-K for the fiscal year ended December 31, 2008, as well as other reports and registration statements failed by with us the SEC. Now with that said, I will pass the discussion back to Dave.

Thanks, Dick. We'd like to give a quick investor update. The fourth quarter of 2009 marks our 57th quarter of being a publicly traded company, during which time Core Lab shares have advanced over 20 fold from about $5.85 per share on our IPO to over $120 per share today. Our growth strategies and the execution by our operating units have served our clients, our employees, and especially our shareholders well. Core's continued focus on international crude oil related developments over North American natural gas markets and the continued internal developments of new technologies and services have led to continued growth and increased profitability. Over the last decade, Core's 10 year, five year, three year, and one year total shareholder return and performance have outpaced all major oil field service companies as recently listed by Bloomberg financial.

Core has followed and will continue to follow three key investment tenets that have led to these industry leading returns. These three tenets are, number one, maximize free cash flow through fiscal discipline. Core follows a strict discipline for allocating capital for investment in growing our business. Unless certain return on invested capital standards and hurdles are met or exceeded, the capital expenditure or investment is disallowed. On average, over the past 30 years, the Company has determined that an appropriate capital allocation generally equals the amount of annual depreciation currently at $23 million to $24 million per year, or about $1 per diluted share of Core Lab stock. Potential acquisition opportunities must pass the same high standards and hurdle rates. This discipline has produced free cash flow of $7.06 per share of common stock in 2009, a record for the Company, and one of the highest for all oil field service companies. Core will continue to demonstrate strict financial discipline in 2010 and beyond.

Number two, maximize our return on invested capital. Core's Board has initiated an incentive compensation program for the executive and senior management teams of the Company based on producing a return on invested capital in the top decile for all oil field service industry. Core's Board believes that stock performance over time is directly related to return on invested capital. Core's third quarter 2009 industry leading return on invested capital of 28% is more than three times the industry average. Investors should also note that some oil field service companies have returns below their weighted average cost of capital, a product of over investment in their company or overpayment for perceived growth via acquisition. Core strives to have an industry leading return on invested capital through continued execution of our growth strategies, coupled with capital discipline. We believe that our commitment to both in 2010 will result in continued superior share price performance for Core and its shareholders.

We also have a philosophy of returning excess capital to our shareholders. Since October of 2002, Core has returned excess capital to our shareholders in the form of share repurchases, dividends, and special dividends. Since 2002, Core has returned over $760 million or over $30 per share to our owners. During the fiscal turbulence of 2008 and 2009, Core was very conservative and built record levels of cash on our balance sheet. At year end, these cash totals exceeded $180 million, or $7.65 per share. As the financial markets continue to mend in 2010, the Company plans to continue to return this excess capital to our shareholders via dividends as well as share repurchases and possible special dividends. We will continue to follow these key investment tenets in 2010, which should enable core to continue to produce industry leading returns for all of our shareholders. So now I will turn it back over to Dick for a detailed financial review.

Thanks, David. I'd like to start by mentioning certain items that occurred in the quarter that had an impact on our financial reports. As we go through the financial review, you will see these three items impacting a variety of accounts. First, the de-valuation of the Venezuelan currency. We use the parallel market rate of VEB5 to $1, which was the free market rate at December 31st, 2009. We use this free market rate of five to one, as for us that was the only rate at which B's could actually be converted to US dollars on that day. In addition, the devaluation losses associated with the currency we also wrote down the value of certain assets deemed to be unrecoverable. The devaluation and write-off losses are without tax benefit. The impact to Core Lab upon recognizing the new exchange rate was a reduction of $1.3 million in our net monetary assets along with write-offs, which reduced receivables by $900,000 and reduced PP&E by $500,000. This impacted earnings $0.12 per share in the quarter.

Next, in December the note hedge that was put in place at the time we issued our exchangeable notes in 2006 was terminated with Lehman. Because this call option contract was terminated, it triggered certain accounting and tax events. Importantly, it does not affect our EPS or our effective tax rate. It does, however, impact our tax backs and balance sheet and we'll talk later about changes in deferred tax assets and deferred tax liabilities. These changes are a result of our losing the benefits of the tax integration that occurred when the notes and the note hedge were initially put in place.

And finally, in Mexico. They changed their laws on a retrospective basis relating to consolidation benefits. In other words, if you operate under multiple subsidiaries and you had previously offset income and subsidiaries with losses from other subsidiaries, as you were allowed to do, the government has now changed the rules in December to disallow those benefits. Further, you now have to repay those benefits over several years through a claw-back. We have had to recognize a claw-back of about $3 million that goes back to the year 2000, and this impacted earnings $0.12 per share in the quarter. Because some of the events impacted our effective tax rate in the quarter, the tax rate this fourth quarter is different from the rate given as part of our guidance last quarter. So, we will be providing GAAP numbers today as well as the guidance tax numbers so that you can look it is a our results on an operational basis for ease of comparability. Also, the prior year information has been updated for the new reporting requirement this year to separate out the exchangeable note into the debt and equity conversion elements. We have updated the prior year information to reflect that amortization as required.

So now looking at the income statement, revenues were $181.6 million in the fourth quarter versus $167.8 million in the prior quarter and $201.2 million in the fourth quarter of last year. Revenues were up sequentially by 8.2% but were down only 9.7% year-over-year. And for the full year revenues were $695.5 million, down $85.3 million, or 10.9% from the prior year of $780.8 million. Of these revenues, product sales for the quarter were $38 million, down 24.3% when compared to $50.2 million in last year's fourth quarter. For the full year product sales were $141.8 million compared to $183.1 million in the prior year, representing a 22.6% decrease, but this decrease in sales was a result of the soft North American market. Services for the quarter, $143.6 million, down 4.9% when compared to $151.0 million last year, a decrease of $7.4 million. For the full year in 2009 they were down 7.3% to $553.8 million, from $597.7 million in the prior year.

Moving on to cost of sales, in the fourth quarter our cost of sales improved by decreasing to 71.1% of revenues versus 77.6% in the prior quarter. And they were 74.6% for all of 2009. For cost of services for the quarter, 65.2% and for the full year, they were 63.6%, although they were an improvement over the full year 2008 at 64.8%. G&A for the quarter, $7.8 million, up from $6.6 million sequentially, but down from $9.3 million in last year's fourth quarter, and for 2009, G&A was $30.4 million, down 4% from the prior year. Our G&A costs represent about 4.4% of revenues. And for 2010, we expect G&A to come in around $32 million. Depreciation and amortization for the quarter, $6.2 million, up from $5.7 million incurred last year in the fourth quarter, which reflects our ongoing capital expenditure program. For the full year 2009, depreciation and amortization expense was $23.8 million, and we expect depreciation in 2010 to total approximately $24 million. Other expenses, $2.8 million primarily due to the devaluation of our net assets in Venezuela. For the year, other was $3.2 million of income, compared to $5.6 million of expense in the prior year and in the prior year the "other" expense was primarily related to foreign exchange losses.

EBIT for the quarter was $44.3 million, or an adjusted EBIT of $47.2 million when excluding the devaluation related to Venezuela and the other foreign exchange losses. So EBIT was up $3.9 million, or 9% sequentially, over the third quarter. Our fourth quarter adjusted EBIT represents EBIT margins of 26%, slightly better than last quarter's margins. These fourth quarter adjusted earnings are down $9.9 million compared to $57.1 million earned in the fourth quarter of last year with margins only slightly lower than last year's 28.4% fourth quarter margins. Interest expense was $4 million for the quarter, compared to $4.2 million in last year's fourth quarter. And remember that only $150,000 in cash interest is actually due the note holders for the quarter, while $3.8 million, or $0.10 per share, is noncash interest expense being paid to no one. Full-year 2009 GAAP interest expense was $15.5 million. For the full-year 2010 GAAP reported interest expense maybe $16.2 million, while the cash interest paid will only be about $600,000, representing approximately $0.42 per share in noncash expense.

Income tax expense in the quarter was $16.5 million at an effective tax rate of 41% due primarily to a change in tax law in Mexico, and our actions taken in Venezuela. Using an effective tax rate of 31% in line with previous guidance income tax expense for the quarter would have been $13.4 million. Our full year annual effective tax rate was 33.4%. And for the full year income tax expense was $57.2 million, similar to the prior year. We expect our effective tax rate in 2010 to be in the 31% to 32% range. Net income for the quarter, excluding the items mentioned and using our guidance effective tax rate of 31%, was $29.7 million compared to $26.7 million in the last quarter and $36.5 million in last year's fourth quarter on a comparable basis. And on that basis, net income for the fourth quarter increased 11% sequentially, but was down about 19% year-over-year. GAAP net income for the full year 2009 was down about 13.4%. Earnings per share for the quarter on that same adjusted basis was $1.25 compared to $1.21 record as main street estimate. Sequentially, EPS is up $0.10 or almost 9%. GAAP EPS in the fourth quarter was $1 and for the full year adjusted EPS was $4.95, while GAAP EPS was $4.87.

Now if we go over to the balance sheet, as David mentioned cash was up, up by $144.9 million to $181 million compared to the prior year-end balance of $36.1 million. Cash increased primarily as a result of our operations continued generation of strong free cash flow and by making conservative decisions as we had discussed throughout the past year on each of our calls. Receivables stood at $133.8 million, down from $144.3 million at the prior year end due to our improved DSOs which finished the year at 66 days, which is an improvement from the 67 days in the prior year. Inventory down year over year to $32.2 million due to our focus on maintaining strong inventory controls as the industry was experiencing the downturn. Other current assets were $43.6 million, up from $20.4 million at last year end, primarily due to an increase in income tax receivables of $23.2 million, approximately $14 million from the call termination, and $11 million from the favorable settlement of various income tax audits. We had a $4.7 million decrease in PP&E due to normal course depreciation and a $500,000 write-down of assets in Venezuela. Intangibles, goodwill, and other long-term assets you are down $13.6 million from last year end, primarily due to writing off a deferred tax asset relating to the termination of the note hedge with Lehman that was previously integrated with our convertible notes.

Now over to the liability side of the balance sheet, our accounts payable were $33 million, down $8.6 million when compared to the prior year-end balance of $41.6 million as the balance was reducing throughout the year in trend with business activity. Other current liabilities of $73.4 million are up $19.3 million from prior year-end balance of $54.1 million due in part to an increase in unearned revenues of $8.6 million for certain consortium studies, $2.6 million relating to an increase in income tax payable as a result of the tax law changes in Mexico, and other income taxes accrued but not yet fully paid in various jurisdictions. While our indebtedness remains unchanged at $238.7 million at this year end, due to the new accounting treatment for exchangeables, our long-term debt as recorded on the balance sheet is now $209.1 million compared to $194.6 million at the prior year end. Also, as a reminder, the notes do not mature until November 2011, so almost two years from now. Other long-term liabilities ended the year at $60.9 million up $17.9 million from the prior year end as we established a new tax basis on our exchangeable notes given the termination of the note hedge. Shareholders equity ended the year at $281.8 million up from the prior year-end balance of $188.3 million primarily due to additions from earnings offset by share repurchases and dividends. Using annualized net income for the fourth quarter, our return on equity for the year was approximately 42%. And this is certainly one of the highest returns earned in the industry, as David had mentioned. Capital expenditures for the quarter were $7.3 million, and for the full year were $17.3 million, down from $31 million in the prior year, reflecting the industry slowdown. We expect our capex program in 2010 to be approximately $20 million to $24 million as a result of an expected improvement in industry activity.

Now looking at cash flow, cash flow from operating activities in the quarter was $37 million, and after paying for our $7.3 million in capex, our free cash flow was $29.7 million. For the full year, cash flow from operating activities was $181.9 million, while free cash flow, after paying for our capex program, was about $165 million, up 32% from the $124.2 million in free cash in the prior year. Our free cash flow in 2009 equaled $7.06 per share, up from $5.19 per share in 2008, so more than a 36% increase in free cash flow per share. For the full year 2009, we used our free cash flow to pay $9.2 million in quarterly dividends, $17.2 million in special dividends, and to repurchase 9.4 million in shares. And the remainder stayed on our balance sheet within invested cash. So certainly there's no mystery how our cash was generated or where we spent it. It was all designed to enhance shareholder value. So free cash generation such as this gives companies like Core Lab significant opportunities in the market environment that we have been experiencing today.

Now let's touch on our targets for the first quarter. In general, we believe that activities, work flows, and operating margins outside North America will increase 5% to 10% in 2010, and that North American activity levels will increase in response to moderately increasing natural gas prices. Further, the North American rig count has been increasing. We believe that means for the first quarter of 2010 that we should expect revenue of approximately $180 million and EPS between $1.20 and $1.25. The midpoint of this guidance would result in operating margins of approximately 26%. Keep in mind, the typical sequential seasonal pattern of the first quarter of the year oftentimes is weaker than the prior fourth quarter. So our target are being established in spite of that typical weakness going into the first quarter as being somewhat flat sequentially, which is more robust than the normal historical pattern.

This first quarter 2010 guidance excludes any gains or losses that may originate from the repurchase of outstanding debt, any effects of foreign currency translation, and assumes an effective tax rate of approximately 31% or 32%. In addition, the first quarter 2010 guidance does not consider shares that may be repurchased by the Company or shares that may be added to the share count relating to our senior exchangeable notes. We are unable at this time to provide 2010 full-year guidance with a high degree of confidence. And now with that I will turn the call over to Monty for a more in-depth operational review.

Thank you, Dick. 2009 presented with us a difficult market, and our employees responded with outstanding products and services for our customers while controlling expenses. I thank all of our employees for providing the customer service and great products to make the most of the year when the market turned down significantly. Q4 revenues grew 9% over Q3 and margins remained at 26% excluding the effects of the Venezuelan bolivar devaluation. Our reservoir description revenues of $107 million, were up 6% from Q3 this year and only down 1% below Q4 of 2008. Operating earnings, excluding the Venezuelan devaluation were $26 million yielding a 24% margin, which is slightly lower than Q4 2008. This segment, which had approximately 90% of our exposure to the Venezuelan devaluation.

Asia Pacific, the Middle East and deep water plays in the South Atlantic and Gulf of Mexico continue to be our most active areas. Australian activity on natural gas production for LNG, oil development in India, oil development in Kuwait, and EOR studies in Abu Dhabi lead the way with increasing activity in all of these areas. These studies are all critical to maximizing resource recovery from these existing reservoirs. Core Laboratories has been closely involved in the evaluation of emerging oil play offshore West Africa. Our laboratories had responsibility for evaluation of the very first rock samples recovered in the exploration wells, including drill cuttings and side wall cores. These initial studies confirmed the presence of hydrocarbons and validated the reservoir potential of these seams. Following the initial discovery, we worked close well the operating company to design a coring program to more fully evaluate these reservoir seams. The initial course recovered several hundred feet of rock through the primary reservoir target. Our proprietary pull out a hole methodology was provided to minimize damage to the core during the retrieval process. Our well side engineers took possession of the course on the rig floor, employed patented and proprietary methods to stabilize these unconsolidated and weakly consolidated sands at location, then segmented the course and properly configured them for transportation to the laboratory. Initial testing focused on documenting core quality and recovery using our proprietary CT scan technology.

Shortly after, samples of core were obtained for routine and advanced rock properties testing. The early test focused on determining basic rock properties and measuring reservoir fluid saturations in the core. The rocks were determined to have variable quality with a wide range in both porosity and permeability. The results of these tests were used to calibrate the down hole wireline logs so they would match the actual physical properties of the rocks. At the same time geological studies were conducted to help the operator better understand porous system properties, geological controls on reservoir quality and diagenetic properties that could impact wireline log response. Detailed core descriptions were created to show how changes in lithology influenced wireline log response and to provide insight into sand body geography. These observations and interpretations were used to project the lateral and vertical continuity of the reservoir zones.

As the operator moved to delineate wells, subsequent cores were cut and analyzed with protocols similar to the initial program. At the same time, Core Laboratories worked with the operator to develop an advanced rock testing program. These laboratory tests were used to fully define log calibration models for down hole resistivity, porosity and NMR logs. In addition, rock strength characteristics were determined in our rock mechanics laboratory to predict bore hole stability particularly in the higher quality unconsolidated intervals. Detailed flow studies were designed the provide inputs into reservoir temperature and pressure conditions. Currently, formation test damage -- formation damage assessment tests are being conducted. These lab tests will determine the optimum drilling and completion fluids to minimize formation damage in the near well bore area. This information will be used to identify the most cost-effective methods of drilling and completing all of the subsequent penetrations in the field. Lastly, tests are being conducted to determine if ultimate reservoir performance will be adversely impacted by high production rates.

Production enhancement revenues grew 12% sequentially to $61 million over Q3. This is the second consecutive quarter of growth in this segment which is more affected by the North American market. Earnings rose in Q4 to $18 million yielding operating margins of 29%, which is a 300-point improvement over the third quarter. Our family of high efficiency reservoir optimization charges is leading the way to our increasing market share in the North American market. These premium perforating charges were 60% of the systems that we sold in 2009. 13% of all charges are the SuperHero and SuperHero plus charges, our deepest penetrating ultra low debris perforating systems. Several oil and gas companies have run side by side tests perforating wells in gas shale reservoirs and found our hero charges to be superior to other companies' best premium charges. These charges yield better completions which opens the formation for better stimulations through fracturing at lower pressures, yielding improved production and lower cost to the oil or gas company.

Reservoir management revenues were $13 million, 9% sequential growth. Operating profits of $4 million were the highest of any quarter in 2009, yielding margins of 34%. Also the highest mark for 2009. Our gas shale studies continue to grow with eight new members joining our Eagle Ford shale project, six new members joining our Marcellus shale study, and two new members joining our global gas shale studies. Pre soft studies in the south Atlantic margins are progressing with 26 new consortium members bringing the total to over 100 members, studying the various complex reservoirs on both sides of the south Atlantic. We are studying reservoirs up and down the coast of Africa and have five studies offshore Brazil. We have just started a Gulf of Guanay study with six initial members in the first quarter of 2010. These studies are all of the actual reservoir geology of these spaces. We will now open the call for questions.

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

Good morning, guys.

Good morning, James.

David or Dick, just looking at your first quarter guidance, we can I think assume that the production enhancement business should be up nicely sequentially given the rig count increase the US has seen. My real question, reservoir description, seasonally light what kind of dip should we expect?

Well, I think the dip will you see, James will be off set by production enhancement, and if you look historically, Q1 does show a dip from Q4. So right along the lines of what we have seen historically, so you might see revenue flat to downish a bit and maybe some detrimental margins coming into play.

Okay. Then in the reservoir description business, the fourth quarter margins were a little bit light versus our numbers, and versus the third quarter. Is that a mix issue? Perhaps it maybe repeats in the first quarter, but is there the ability to get back to that 26%, 27% type margins?

Yes, definitely a mix issue. If you look at Q3 to Q4 historically with the Company, we do after dip in Q4, and there's no reason to believe that we can't get those margins back up to their peak ranges of mid to high 20s.

Okay. And then David, just a quick question, the last question from me on Iraq. Could you give us an update on what you're seeing in that market?

Yes. Still, James, the strong number of projects running multiple projects in the south, these tend to be all related to bids that have been submitted or evaluations for bids that will be submitted on some of the major and giant and potentially super giant oil fields tin south, mainly large stack carbonate reservoirs. We think we have as many now as six projects that we continue to work on there. These reservoirs are very complex. We are seeing a lot of damage that has taken place in these reservoirs. Our belief is that it will be quarters and maybe extend into next year before any large scale remedial action or development action can be taken in these fields. These reservoirs will be difficult to understand to set programs going forward on the best way to exploit these resources. So from our standpoint, very, very busy right now and probably will get busier in trying to evaluate these reservoirs so these companies, the BPs, the people that have won these bids, can determine what course of remedial action needs to be taken. To the north, a little bit different. More of an exploration tone there. A smaller companies, a lot of work being done up in our Aberdeen facility there. The work tends to be a little bit more stop-and-go there, depending upon some of the petroleum laws relating to Kurdistan and with the general government of Iraq, but still we look forward to additional work loads coming from the north being that we bifurcate the country, because the objectives in the north certainly are 180 degrees different from the objectives of the south, and the projects that we are running.

Okay, that's very helpful.

Your next question comes from the line Stephen Gengaro of Jefferies and Company.

Hi, good morning gentlemen. A couple of things, but first to follow up on your answer to the question on reservoir description, you said back to the mid to high 20s. Is that at 2010 event, or are there any kind of mix issues we need to worry about short term on the margin front?

No, should be a 2010 event.

Okay. And then when we look at the production enhancement division, the margins there are obviously very healthy. Is that a price issue, or is that driven by volumes, and my sense is at least near term, with what's going on in North America, they're sustainable around those levels. Is that fair?

That's a fair assessment. Volume drives the efficiencies in our manufacturing process, and also in our capacity utilization in the fracture stimulation tracing business that we have. So both those businesses are benefiting from improved volume, more rigs drilling, and we expect to see that continue.

And then are there certain shales where they're having better penetration, or is it generally similar across the board?

Steven, our focus has always been on the big five, and it continues to be where we look at the Barnett, the Fayettevile, the Haynesville, the Marcellus, and of course the Horn River Basin shales up in Canada. And also a caveat to that probably adding the Eagleford in there as of late. We are and have designed different types of charges for each specific reservoir. That is an ongoing purpose. The SuperHero plus charge we had found that by tweaking the explosive and some of the engineering dynamics of that charge we were able to increase the penetration rate by as much as 20% in some of the shales. That will be ongoing. So nothing specifically for penetration rates and efficiencies for each individual shale at this time, but that's an ongoing development within Core Lab.

Thank you. One final quick one. When you looked at the dividend increase, did you consider going higher than that on a quarterly basis? You generate a ton of cash. Or do you just sort of feel comfortable doing something in the third quarter with excess cash on a special dividend basis?

Stephen, our view is on dividends they are pretty sacrosanct. You want to make sure over a period of time we can increase them. So we don't want to bite off more than we can chew at any one point. We thought a 20% increase sent a very strong signal to the market that we're very comfortable with our free cash generation going forward.

It is a big increase. I was just curious as how you assessed and got to that level. Thank you.

Okay, Stephen.

Your next question comes from the line of Neal Dingmann of Wunderlich Securities.

Morning guys. Great quarter. A couple of things. Maybe first for Dave, on the consortium studies, sounds like they're continuing to take off, both here domestically with some of these shale studies and you mentioned Gulf of Guinea and others. If you could give us an idea how much more up side you see with those. Do you tend to see more different studies continue to come on as well as continue to grow existing studies, and then if you could give us an idea of maybe margins around these type of studies versus just individual proprietary studies.

Yes, Neal, good morning. I'll make a comment, then turn it over to Monty. Basically, most of these studies that -- these consortium studies we put together are at the request of groups of clients. For instance, in the Gulf of Guinea is a good example of that. So areas that are of significant interest where they like to see gained data sets that are only available when you have cooperation of, in some in stances, dozens of companies. We see the opportunities globally for these worldwide to continue. We've been putting consortia studies together for almost 30 years. It's interesting to note the interest that is now reemerging in the granite wash where we've had several sales of a granite wash study that was initiated years ago but now we are updating because of the horizontal well potential there, as you guys have seen over the last several months we've had enormous wells that have been put in by Forest and Newfield, so you have a renewed interest. So the opportunity set there worldwide we feel is unlimited. I will turn it over to Monty with respect to margin expectation from these studies.

First off, let me say on the Gulf of Guinea study, that started around the year end. I mentioned that at this call rather than waiting until the first quarter call. We will be having another study at least one more at that time first quarter call which is starting -- started here at the end of January. So that's the way we normally mention these. So we are ever expanding this. The margins on these run in the range of about a 30% margin. It's a value driven pricing, gaining our services -- we have a set of customers that join the vast majority, not everyone -- nobody's in every play -- but we have certain customers that want to be in virtually all of our studies, because of the value they've received over time. So these are very popular. We expect to be moving with some more -- we have additionally proprietary studies.

The study I described in the reservoir description area, that's a proprietary study for a customer which obviously I didn't name the place or the customer or anything. I was just describing what it is we do, so you would have a feel for that. Those studies run in the mid to 20 range. Maybe a little higher on some. Just depends on the services that they select to run on the study. So that's the way the studies work. We have a pretty robust group of shale studies. You're right. The south Atlantic margin studies are robust. We have some others that will be coming along with announcements in the future. I was fortunate enough to sit with Executive VP of a mid-size integrated oil company on the airplane the other day, a guy I've known for quite some time. We were talking. He's saying, okay what studies do you have that we're not in. So that's the kind of thing we see from our customers. What can we do for them. He had a couple of suggestions of areas they're interested in that he would like to see us start a study in. So they work very well, and we're extremely pleased with our people throughout the Company that contribute to those studies and the group that initiates and manages them.

Great response. Next, on the reservoir management, in the press release, you mentioned here about adding more regional studies on the south Atlantic margins, just in response to the increase in oil company requests, Dave. Just wondering how big or how quick could we see something grow in response to that.

Certainly the Gulf of Guinea would certainly be one of those. You can expect over next several years, Neal, that we'll be rolling those out. Again, nothing revolutionary. Always incremental gains to this reservoir management group. So look for more of the same over the next several years. These will be decatyl developments in these areas, certainly from interest in core we think the two most exciting areas right now are pre-sale, Brazil, post-salt, West Africa. We expect pre-salt West Africa over next couple years will again be of strong interest. We've had talk of Totale, now looking to penetrate the entire post-salt sequence into the pre-salt sequence off of Angola. This is pretty exciting to us. The annual report that will be coming out for 2009, the theme section reviews the petroleum geology and development of some 40 some projects off of Brazil and 25 projects off West Africa. So that should be out over the next several weeks.

Okay. Then lastly -- go ahead.

Few let me tell you one thing, so everybody knows that we recognize the revenue. When we start these studies, and I will use -- I mentioned we had six new people join our Marcellus study. That brings the total 39 in that one study. Those people, those gas companies have all paid up-front a certain amount of money, and let's say it's around half a million dollars each. That money is not recognized at revenue as revenue when they join. It's recognized as revenue as we deliver the study information and as we go through the study. And as Dave says, these studies can go for a number of years, and I expect they will. So these plays will go for a number of years. We keep adding people and data, and the information on best completions, best stimulations, that sort of information. That's when we recognize the revenue as we release the work that we're doing to the consortium members. So no matter how many joined the first day, that's not revenue to us the first day.

What kind of timing are we talking there when you mention 'as far as when you finally provide that service? Are we talking weeks, quarters, years, or what generally is an average?

All of that. We provide data on at least a quarterly basis, but it's more frequent than that. The web is a wonderful thing here, and we have, on our servers, the ability to allow them access, so we're posting data on a regular basis that they're able to access and use. We have quarterly meetings, consortium meetings we're given a presentation and a discussion of our clients of what we've learned, what they can use, how they can use it, and you will see different people trying different technologies, different methodologies, particular in the shale plays you see a lot of publicity on that. PetroHawk went in some new methodologies they're using. We worked with those in the our study. So that's the way it happens. But does it roll out over time.

Got you. Last question, if I could, just under the production enhancement, obviously you're having great traction with the hero, and even with SpectraChem wondering, you obviously have a number of other patents out. Just wondering if could you give us a sense of do we see -- let's call in the year, next year, a number of other product rolling out that have this type of capable.

Yes, Neal, we continue, one of our biggest success strategies has been to continue rolling out internally developed new technologies and services, and expect more of the same over the next several years. We do found that we get the highest return for internally developed technologies as opposed to going out and trying to acquire these technologies. So as part of the corporate strategy for high returns, we put a very high emphasis on the continued internal development of new technologies and services, and certainly that will continue into the future.

Thanks, guys.

Your next question comes from the line of Veny Aleksandrov of Pritchard Capital.

Good morning gentlemen. How are you? I have one question, related to the last year's Exxon deal. There are two major clients of yours and what do you think potential impact on your activity can be as the clients is becoming one huge client instead of two big clients? Can we see some pricing pressure going forward, or more we're expecting to see more demand coming out of them?

Veny, I think this is going to be really good thing for us. This brings Exxon's huge resources to XTO, and it also brings XTO's fields that they have into the Exxon portfolio. Exxon is certainly one of our major customers for all time, at all times. We do a lot of work with Exxon. We -- all of our customers, we work on value pricing. And I think undoubtedly Exxon would see that the studies that we do bring a huge value to them. So I think it's very additive to what we're doing, and in no way would be a negative for Core Lab.

Thank you so much.

Your next question comes from the line of Victor Marchon of RBC Capital Markets.

Thank you. Good morning, guys.

Good morning, Victor.

Just wanted to ask, first in North America, wanted to get a sense as to your confidence level, building backlog as you look out, possibly to the second half of the year. Do you guys have any strong sense on the sustainability of the trends we're seeing year to date, or is it still relatively short term on the visibility side some?

Yes, Victor, it's one of the robes why we didn't give further guidance. We still want to see another quarter roll out. We're sitting here with $5.30 natural gas this morning. We continue to add horizontal rigs into most of the shale plays, and we've already mentioned some of the success in the granite wash, which we think might have some of the best economics in the lower 48 for horizontal well development, even in consideration of the shale plays. So we're going to let that roll out for another quarter to get a read on that. Certainly the decline curves that we're seeing in the shales sooner or later will have to take hold. I know last couple of monthly production reports have showed sequential increases in gas production. We want to see more of those data sets, before we can with greater confidence, look to see how North America is going to roll out in a natural gas market. Remember, the shales are less than 10% of our business for the Company, and we are 70% oily and 70% work from international reservoirs. So North America is significant. It is important. But we tend to focus more concentration on the international developments and crude oil developments internationally.

Thank you for that. I also wanted to ask about oil sands up in Canada. Obviously things slowed down last year, and seeing some pickup here in 2010. I just wanted to see what you guys were seeing on the core side there, and if could you just remind us how big of a piece of the business is that.

We actually think that we're going to see sort of flattish 2010 to -- back to the 2009, and you've got to remember, that starts really a little before the end of the year, because it's a very seasonal play. This is not a big part of Core Lab's overall business. It's a great business and being the COO, I love all our customers and all our pieces of business. But it's not a huge percent of our business, although it's important to our Canadian business. We think it's kind of flattish for us, year-over-year, and we're fairly -- sitting in February, we're fairly far into the season for oil sands for our type of activity, and most activity in the oil sands expansions happens in this winter period. So we see it virtually the same. And last one, just as it relates to some commentary in the press release it is a relates to activity levels outside North America being up 5% to 10%, you mentioned operating margins in the same language, up 5% to 10%. How do I think about that? Is that from a margin from a margin to a margin? Is it an increase in praying income? How do I think about that up 5% to 10% as it relates to the operating margin side?

Yes, Victor, if you look at incremental margins sequentially for this quarter, they were mid-20s, which was a little bit below where we thought they would come in. We've talked on our past calls, we thought we could return to the mid-30s incremental sequential margins. We think those sequential incremental margins will indeed push Company margins back up. So by adding activity and putting additional work through our fixed cost base, yes, indeed, we can get those margins back up to those levels.

Fair enough. Thank you, guys.

Okay, Victor.

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

Good morning, guys.

Good morning, Rob.

Hey, David. Quick question for you. You mentioned the granite wash a couple times in your comments there. First off, how meaningful is that to Core Lab now? But I guess more importantly, we've seen obviously some great economics come out of there, some real hype coming out of the E&Ps. Can you give us some color as to how meaningful you think that could be over all to the E&P industry, particularly given, I guess, it's more oily than most of the shale plays and thus your comments on economics?

Yes, I think that's good question, Rob. When we look at the granite wash play, you have as many as eight stacked sands here, columns as great as 2,000 feet. These are tight gas sands. The exploitation by horizontal drilling and today's modern completion technologies have led to some very robust economics, especially when you look at the proportionally high amount of natural gas liquid in these shales. How important is it to Core Lab? If we think about all the shales in general, our 10% of our business, the granite wash will be incremental to that. As a play that we're interested in, absolutely. For reservoir management in our study, absolutely. Reservoir description and our production enhancement unit, incremental adds to our service base. Certainly it's a very young play with respect to the horizontal well exploitation of these these. We think economics will push more and more drilling into this. So we look for a net-net gain out of the granite wash throughout this year and into next year.

Great, thanks. Follow-up on that. Some people putting this kind of behind the Marcellus in terms of ultimate -- estimated ultimate recovery. Would you care to comment on how much you think you can get out of this?

Oh, from a percentage of gas recovery? -- from a percentage of gas recovery from the Marcellus?

Yes.

When we plook at the percentage of total gas on shales, mid teens, when we look at the Marcellus, it is a little bit of different animal because of its highly fracture orientation, especially in one direction, where wells can be drilled perpendicular to this fracture orientation, or cleating, which would lead to higher recovery rates. With the number of wells drilled into the Marcellus you the date's very difficult to determine if we look at -- Rob, can you put your phone on mute?

Sorry, yes.

When we look at the total recover ability, we think on average it can run higher than average shales, but as we stand today, it's way too early.

Okay, thank you, David.

Your next question comes from the line of Neal McAtee of Reliant Investment.

Morning guys. Big picture question. Reservoir management. If memory serves me correct, it's been about $50 million plus or minus revenue annually for the last 10 years prior to 2000 I think it was a little bit higher than that. And I know it's gone from maybe a break-even to sort of the best margins in the Company. Given that's my premise, my question is this. Is there an opportunity to begin to grow that over time? Could it potentially double in three, five, seven years, or something like that, at these margins, or is there something inherent about the business that makes that a $50 million type run? Are all these studies really the precursors to some significant growth coming in that area?

When we look at that revenue stream, Neal, in 2005 the revenue was $27 million. 2006 it was $37 million. 2007, it was $50 million. And 2008, it was $53 million. You're right, we're getting to this $50 million level. We think that's more of the activity reflection in the downturn in late 2008 and 2009. There's no reason that this should not be a mid teens potential grower as we go forward.

Neal, you mentioned in the past that has been a break-even or losing business. Not what we're doing in reservoir management today. That has always been a business -- we're probably rung a little better margins than we used to. If you think back to reservoir management, we had a seismic processing business in that group, and we sold that off to --

Sold it in 2004.

to another company. That changed, refocused the group to the numbers that Dave mentioned, and we have grown since then. We think we've got a really good future in this.

Okay. And I guess inherently, when you start reselling the stuff, then the margins really can be better than the other two divisions over time.

Yes, and if you look at the margins in this business tend to be very lumpy, and they have been mid-20s, and they have been mid-30s. So that is indeed correct. When you have off the shale sales of some of these studies that have been completed, does it generate very high EBIT margins.

Okay, great, thanks, guys.

Okay, Neal.

(Operator Instructions). Your next question comes from the line of Stephen Gengaro of Jefferies.

One follow-up. The rate seems to be a lot of talk in North America about these oil shales. How does your business fit into that?

Good question, Stephen, because we do get a lot of questions about the oil shales. Our reflection on oil shales is early days, in total recoverability from these shales. Interstitial compositions of these hydrocarbons in poor spaces. We're probably looking at 2% to 3% recovery rates, much higher when we have highly fractured oil shales as you do in the Bakken. I think we can attribute some of the success in the Bakken to the highly fractured nature of that. The oil shales, we continue to do a lot of work on them. It is way early days for some of the other prospective oil shales that are out there. Certainly the Bakken leading the way. I think we're learning a lot from that. Again, incremental adds from Core Lab and an interesting resource base over next couple of decades that will be exploited within the lower 48 in the United States, Canada, and worldwide.

That's helpful. Then one follow-up. I know we've talked a little bit about a lot of these gas shales still being relatively early in their lives. Do you have a view you're willing to share on the production growth/depletion that we're seeing there and how you're looking at North American gas supplies over the next year, given the -- what we see in the rig count?

I think it's still too early days, Stephen. When we look at these decline curves, a lot of assumptions are being made on production data that was only several months old. So I think we need longer tails on these production data out of these shales, especially shales outside of the Barnett, because they're so new in their exploitation.

Great, thank you.

Okay, I think we're going wrap, because we have used our hour, and I would just like to say, in summary, Core's operations posted a solid quarter for the fourth quarter of 2009. We have never been better operationally or technologically positioned to help our clients expand their existing production base. We remain uniquely focused, one of the most technologically advanced reservoir optimization company in the oil field service sector. This positions Core well for challenges that await in 2010. The Company remains committed to industry leading levels of free cash generation and returns on invested capital with all excess capital being returned to our shareholders. So in closing, we thank all of our shareholders, the analysts that follow Core and especially all of our hard working employees for spending the morning with us. We look forward to our next update. Thank you and good bye.

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