Core Laboratories Inc (CLB) 2010 Q3 法說會逐字稿

Good morning. My name is Stephanie, and I will be your conference operator today. At this time I would like to welcome everyone to the Core Laboratory Q3 2010 earnings. 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. I will now turn today's call over to David Demshur. Please go ahead.

Thanks, Stephanie. I would like to say good morning in North America, good afternoon in Europe, and good evening in Asia Pacific. We would like to welcome all of our shareholders, analysts, and most importantly, our employees to Core Laboratories third quarter 2010 earnings conference call. This morning I am joined by Dick Bergmark, Core's Executive Vice President and CFO, and once again, 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 will come back and give a brief investor update, and highlight the three financial tenets, by which Core's executive management execute 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-term held philosophy of returning excess capital back to our shareholders, and then Dick will follow with a detailed financial overview, and additional comments regarding building shareholder value, and on our fourth quarter 2010 revenue and earnings guidance. And then Monty will go over Core's three operating segments, detailing out 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 call for Q&A.

I will turn it back to Dick now for remarks regarding forward-looking statements. Dick?

Thanks David. Before we start the conference this morning, I will mention that some of the statements that we make during this call may include projections, estimates and other forward-looking information. This would include any discussion of the Company's business outlook. These types of forward-looking statements are subject to a number 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 and 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 on some of the foregoing risks and uncertainties see item 1-A Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, as well as the other reports and registration statements filed by us with the SEC.

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

Thanks Dick. I would like to give a brief investor update. The third quarter of 2010 marks our 15th year of being a publicly traded company, and our operations posted the Company's most profitable quarter ever. Our growth strategies and execution by our operating units have served our clients, our employees and our shareholders well. Core's continued focus on international crude oil related developments over North American natural gas markets, and the continued internal development of new technologies and services have led to sustained growth and increased profitability.

However, this continued international and oil focus may have resulted in some short-term shortfalls in North American revenues for our Production Enhancement segment, as we decided against adding North American capacity into a sub-$4 natural gas market. Moreover we continue to introduce Production Enhancement services into more and more international and oil-focused markets, as this strategy has served Core Lab and our shareholders well, and we will not change our stripes as over the past 15 years, Core's 15, 10, 5 and 3-year annualized total shareholder returns have outpaced all major oil field service companies as recently listed by Bloomberg Financial.

In addition Core has followed and will continue to follow three key investment tenets that have led to long-term industry leading returns. These three tenets are, number one, maximizing free cash flow through fiscal discipline. Core follows a strict discipline for allocating capital for investment in our growing business. Unless certain return on investment capital standards are met or exceeded, the capital expenditure is disallowed. Over the past 30 or so years, the Company has determined that the appropriate capital allocation generally equals the amount of annual depreciation, which is currently approximately $23 million to $24 million per year, or less than $0.50 per diluted share. Potential acquisition opportunities must also pass these same high standards.

This discipline produced a record high free cash flow of $3.12 per diluted share during the first nine months of 2010, which is one of the highest if not the highest for oil/oil field service companies. Core will continue to demonstrate strict financial discipline in 2010 and beyond. Number two, we will maximize return on invested capital. Core's Board has initiated an incentive compensation program for Core's executive and senior management teams based on the Company producing a return on invested capital in the top decile for all oil field service companies. Core believes that stock price performance over time is directly related to its return on invested capital.

Based on the most recent calculations available from Bloomberg Financial, Core's return on invested capital of over 32% was more than 27 percentage points higher than the peer group average listed by Bloomberg Financial and was over 6 times the peer group 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 acquisitions. Core strives to have 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 our shareholders.

The third tenet is return excess capital to our shareholders. Since October of 2002, Core Laboratories has returned excess capital to our shareholders in the form of share repurchases, dividends and special dividends, and has returned over $800 million, or over $16 per diluted share, to our owners, including the dividend and the special dividend that we paid in the third quarter of this year. With year-over-year cash balances continuing to grow, Core's shareholders can expect more capital for return in 2010 via dividends and possibly more share repurchases. We will continue to follow these three investment tenets throughout 2010 and into 2011, which should enable Core to continue to produce industry-leading returns for all of our shareholders.

Now I will turn it back over to Dick for a detailed financial review. Dick?

Thanks, David. If we look at our financials that we included with our earnings report, you will see that our revenues were $199.2 million in the third quarter, versus $167.8 million in last year's third quarter, and $198.9 million last quarter. So revenues were up 19% year-over-year, and up slightly sequentially.

Looking behind the numbers, you will see that our year-over-year US revenues grew by 28% while our international operations grew by almost 10%. So our growth continues to come from our new products and services and the expansion of these offerings internationally, as we enter new fields primarily outside the US. Of these revenues services for the quarter were $151.7 million, up year-over-year when compared to $133.8 million in last year's third quarter, or an increase of $17.9 million or 13.4%. Product sales in the quarter were $47.6 million, up 40% when compared to $34 million in last year's third quarter. Improving activity levels in the US along with the strong international sales created the majority of this positive variance.

Moving on to cost of services for the quarter. 61.3%, an improvement sequentially from 63% and from 64.1% in last year's third quarter, and 63.6% for all of 2009. For cost of sales in the third quarter, cost of sales were 69.1% of revenues, an improvement of 77.6% in the last year's third quarter, and 74.6% for all of 2009. This improvement is reflective of higher product sales being run through our manufacturing cost structure.

G&A at $8.4 million was down from $9.2 million in the prior quarter, and is on track with our prior guidance of $32 million for the full year 2010. Depreciation and amortization for the quarter was $5.8 million, virtually unchanged from $6 million in last year's third quarter. We expect depreciation in 2010 to total approximately $23 million. Other income this quarter was $1 million which compares to a loss of $1.2 million last quarter, a majority of the difference relating to foreign currency translation. EBIT for the quarter was $60.2 million which was $2.8 million higher than our initial guidance for the quarter, and better than our third quarter earnings in 2009 of $44.2 million.

Now let's talk about margins. Our third quarter EBIT represents operating margins of 30%, setting a new Company record for our highest-ever reported operating margins. We did incur a loss on the exchange of $24.4 million of our senior exchangeable notes, and that loss was in the amount of $675,000. Circle this number as we are going to come back to it in a moment. Interest expense was $4 million for the quarter with $3.8 million of that being noncash. We expect interest expense in 2010 to be approximately $16 million, with $15.1 million or $0.31 per share of that being noncash.

Income tax expense was $16.8 million, an increase over last quarter's expense of $15.2 million, and that is due to higher earnings this quarter. Our tax rate in the quarter was just over 30%. We expect our effective tax rate for the remainder of 2010 to be in the 30% to 31% range. Net income for the quarter was $38.6 million, 24.4% ahead of last year's third quarter income of $31 million, and compared to last quarter when our net income was $34.2 million. This quarter's net income is up almost 13% on revenues that were just slightly up. A much better performance this quarter. If you excluded the loss on the exchange of the notes, our net income would be up over 14%.

Earnings per share were $0.79, compared to the $0.67 earned in the third quarter last year, and $0.71 earned in the prior quarter. This EPS performance was also based on our having 1 million additional shares in our diluted share count this quarter as compared to last quarter. Had we reported our third quarter EPS on a pro forma basis to be consistent with the basis that we gave our prior guidance of $0.76 to $0.78 our EPS would have been $0.815 per share instead of $0.79 to reflect the penny lost on the exchange of the notes, and a penny or two due to the higher share count, neither of which item we control.

Now if we go over to the balance sheet, year-over-year third quarter cash balances increased by $30.7 million to $168 million. Compared to the prior year end balance, cash was down $13.1 million as we used $162.6 million of our cash year-to-date for continuing our stock repurchase program, paying cash dividends to our shareholders, repurchasing exchangeable notes, and acquiring a small technology business. Receivables stood at $141.1 million, up from $133.8 million at the prior year end, primarily due to improving revenues. DSOs in the quarter improved to 64 days as compared to 66 days for the fourth quarter of 2009.

Inventory despite the significant increase in product sales, inventory levels are down to $30.5 million from our year end balance of $32.2 million. Inventory turns have improved more than 29% now at 4.4 turns versus 3.4 in the fourth quarter of last year. Other current assets decreased from year end balances by $19.5 million primarily due to the realization of income tax receivables, and the amortization of prepaid insurance offset by an increase in the current deferred tax asset.

And there are no material changes in PP&E. Intangibles, goodwill and other long-term assets are unchanged from last quarter but up $10.6 million from the year, primarily as a result of a small acquisition we made earlier in the year in the Production Enhancement segment.

Now if we look at the liability side of the balance sheet, our Accounts Payables were $38.5 million up from the prior year balance of $33 million, primarily due to the increase in business activity. Other current liabilities increased $13.3 million to $86.7 million primarily to an increase in income tax payable.

Our senior notes at $198.2 million continue to be classified as current, and are available for early exchange in the fourth quarter. This early exchange option and the current classification occur in any quarter when our share price exceeds the conversion premium by 30% over 20 of the last 30 trading days of the prior quarter. This reclassification does not impact any of our banking covenants. This means that the notes continue to be exchangeable. So if note holders choose, they can send their notes to the trustee and we will exchange their notes. We received ten requests during the second and third quarters to exchange 24,366 notes, which were settled during the third quarter. We received three requests during the third quarter to exchange 5,564 notes which will settle during the fourth quarter.

Long-term debt continues to be zero as a result of our senior notes being classified as current. Other long-term liabilities ended at $57.6 million which is similar to our year end balance. The equity component of senior exchangeable notes stands at $16.1 million, down from last quarter's $21.9 million, due in part to the repurchased notes and from this balance continuing to amortize into the indebtedness balance shown in short-term debt.

Remember that this balance plus the short-term debt balance equals the $214.3 million in outstanding face value of the notes. This classification is required while the early conversion condition of the notes is in effect. When the three outstanding exchanges for 5,564 notes are exchanged in the fourth quarter, the short-term debt/principal balance will drop to $208.7 million.

Shareholders equity ended the quarter at $248 million down from the prior year end balance of $281.8 million. The decrease is a result of share repurchases, cash dividends paid, and the reclassification of the equity component of our senior exchangeable notes, which was partially offset by net income generated year-to-date. Using annualized year-to-date net income, our return on equity is approximately 57% and this is certainly one of the highest returns earned in the industry, and this compares to 46% for the same time period of 2009, and 41% for the full year 2009. Capital expenditures for the quarter were $7 million up from $5 million in the prior year's third quarter, reflecting the increase in industry activity. We expect CapEx in 2010 to be approximately $24 million.

Looking at free cash flow we use a very simple method for determining free cash flow. We pull two numbers straight from our Qs and Ks. We start with our reported cash from operations, and then we subtract our capital expenditures. Cash flow from operating activities in the quarter was $57.8 million, and after paying for $7 million in CapEx our free cash flow was $50.8 million. On a per share basis our free cash flow in the quarter was $1.04 per share, which equates to an annualized per share yield of 4.7%.

Year-to-date our free cash flow was $149.5 million, up compared to $134.9 million last year. We used our year-to-date free cash flow to acquire a technology business for $9 million, paid $37.1 million in dividends to our shareholders to repurchase 92.1 million of our shares, and to repay $24.4 million for the exchange of our notes.

Now let's touch on our targets. We believe that the fourth quarter of 2010 we should expect revenues of approximately $205 million, with EPS between $0.80 and $0.82, up approximately 29% over year earlier quarterly totals, while net income is expected to be 33% higher. The midpoint of this guidance would result in operating margins of approximately 30%, which would be the highest ever reported by Core with year-over-year quarterly incremental margins greater than 40%.

To be clear on the basis that this guidance is given it is not merely in the midpoint of the Street estimates as the Street estimates were developed based on the second quarter's diluted share count. Consequently our guidance exceeds the range on the Street if we use the same share count. This fourth 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 30%.

In addition, fourth quarter 2010 EPS 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 and the warrants. We are unable at this time to provide 2011 full year guidance with a high degree of confidence. With that I will turn the call over to Monty Davis who will go into further detail on our strong operational results.

Thank you, Dick. In the third quarter of 2010 revenue grew 19% over Q3 2009. Operating margins improved 390 basis points to 30%. Core Lab employees around the world have done a great job providing our customers with the best products and services in the industry, and we thank them for making Core Lab a great company. Our Reservoir Description revenues grew 5% over Q3 2009 compared to the MI-Swaco international rig count up only 1%. Operating earnings of $28 million generated a 26% operating profit, operating margin which equaled that of Q3 2009 and the highest ever reported by Reservoir Description. Activities continue to be strong in Asia Pacific, the Middle East and West Africa, as well as the gas and oil shale plays in North America.

Our new NanoPerm technology has made flow characterization in both gas and oil shale reservoirs at unprecedented low levels of permeability feasible. This measurement breakthrough now makes stress sensitivity measurements possible, which results in two reservoir and engineering applications. One application is to accurately simulate reservoir performance. Nanopermeability measurements create a better understanding of initial productivity and productivity reductions associated with declining core pressure caused by gas/oil production. These data are used for economic projections over the life of a well or reservoir.

The second and perhaps most exciting application of NanoPerm technology is related to near wellbore permeability reduction, caused by an excessive drawdown condition. We recently had a client complete a gas shale well. The well was put on production at maximum drawdown to maximize the initial production rate. This production rate was not sustained, and did not match even short-term economic expectations. The initial rates could not be re-established.

On subsequent wells, Nanoperm measurements provided a basis for selection of a drawdown condition to maximize both the initial and long-term production without creating permanent reservoir damage. The production strategy on subsequent wells was based on the Nanoperm versus near wellbore stress relationship. Although initial rates of production were lower sustained rates represented a dramatic improvement in the well's economics and ultimate recoverable reserves.

In Q3, we provided proprietary Core Lab equipment to a North African national oil company to upgrade their lab to current industry standard. We provided them with the latest version of Klinkenberg's Permeameter, electrical [relativity] measurements for cores, and a linear x-ray core scanner with flow system, along with other instrumentation. We believe that this was the best way to participate in this particular market. Production Enhancement revenues grew 45% over the third quarter of 2009 to $79 million. Operating earnings grew $26 million, yielding operating margins of 33%, a 630 basis point improvement over the third quarter of 2009.

Stimulation monitoring in the gas and oil shale plays of North America remained very robust through the third quarter. We also used our frac tracers to evaluate frac jobs in New Zealand, Australia, China, and Oman. In Indonesia we started a new project with our frac and chemical tracers in coal bed methane to evaluate fracturing of coal bed methane reservoirs.

Our patented HTD Blast technology continues to gain acceptance in the gas shales of North America. The shales that are oil producing are gaining even greater traction for this patent-pending technology, as these wells often contained higher pressures at the time of perforating. The deployment of HTD Blasts on coiled tubing provides operators with safer more-efficient pressure control resulting in better HERO style completions at lower operating costs. We have successfully run HTD Blast in all of the major gas or oil shales of the US and Canada. Considerable activity prevails in Haynesville, Barnett, Eagle Ford, Marcellus, and Montney shales. Our sales for this patent-pending technology have increased each quarter this year, and are expected to double this year over last.

Reservoir Management revenue grew 15% over Q3 2009. Operating profits grew to $5.5 million, yielding operating margins of 40%, an improvement of 1,100 basis points over the third quarter of 2009. We installed permanent pressure and temperature monitoring sensors in a field in California to monitor a steam flood for travel times and breakthroughs. Our sensors have recorded temperatures as high as 565 degrees F, and the data is helping our clients better design their steam injection, resulting in improved production.

Our gas and oil shale studies continue to grow globally. These studies are a must for participants in the gas and oil shale study plays in North America and globally. These studies determine and share all of the latest techniques to evaluate gas and oil shale reservoirs; the best completion techniques, the best production methods for each of the various shale gas and oil plays.

We will now open the call for questions.

Stephanie, we can go ahead and take questions now.

(Operator Instructions). Your first question is from the line of Doug Becker with Bank of America Merrill Lynch.

Thanks. Incremental margins were very strong in the quarter over 50%, you are talking about 40% into the fourth quarter. You mentioned technology is a part of that. Are you seeing any pricing improvements, or is this really more driven by the new technology that you are introducing?

It is a combination of new technologies and also volume through that fixed cost structure, and we think that is going drive our incrementals to be in excess of 40%.

And fair enough on the excess. Is the mix pretty even between the pricing and the cost absorption, or is it skewed one way or another?

It is cost absorption, it's not pricing, so it is the introduction of new services that are priced better, but it is not based on price increases on existing services.

And you mentioned still not comfortable with the outlook with a high degree of confidence for 2011 versus 2007 what has changed in your businesses that doesn't give you that comfort that you had in the past?

Yes, Doug, when we look at the sustainability of the rig count in North America related to sub-$4 gas, and we might have been pinched a little bit in this quarter because we decided not to put on another shift at our charge perforating plant because of that, we just do not believe that sub-$4 gas can sustain this level of natural gas drilling in North America, and hence our caution of adding capacity to that in which we feel will be a short-term phenomena.

That really is the outstanding feature there and our gas would have been, we would have seen a significant number of gas rigs already starting to come off, and certainly that has not been the case. So that would be really the place that or the area that we still are cautious on trying to determine what level of activities will be in North America. Moreover, although we are confident that internationally we will see upticks in activity levels, during the third quarter we continue to be a little bit disappointed when we saw sequentially the number of international rigs added was about 1%. So those are the areas while we throw a little bit of caution into the guidance just for next year, and then why we only gave guidance for the fourth quarter.

Sure, makes sense. Then just quickly what is your revenues capacity? I know you do that study periodically, but the revenue capacity of your business as it stands?

Right now we do that each summer in part of our budget review process, but it is over $1 billion, perhaps $1.2 billion, and then you did notice on the earnings release we talk about additional facilities that have been completed. Two of them for the North Sea market in our Aberdeen location, and then one here outside of Houston. All of these are for fluid applications. The one in Houston maybe some revenue growth, but clearly some cost savings the big driver for that one, but the facilities in Aberdeen definitely revenue growth opportunities for us.

That is exactly where I was going. Any quantification or just rough order of magnitude of the revenue potential?

Again, Doug as within Core Laboratories, just incremental adds to revenues, and then adding to incremental margins which drive our margins which this quarter were the highest we have reported, so more of the same of that.

Okay, thank you.

Your next question is from the line of James West with Barclays Capital.

Hi, good morning, guys.

Good morning, James.

David, I wanted to dig into Production Enhancement a little bit more. I know you mentioned they didn't want to add capacity to that business. I guess my first question is, if you were to add an additional shift, what kind of revenue capacity would that create? And at this point given the shift towards oil and liquids rich shales, and I think an emerging belief that the rig count may just go sideways from here rather than down overall, how do you think about that business going forward and kind of ramping up your capacity?

Yes, in looking at adding an additional shift, unfortunately you can't add a quarter of a shift, or a half of a shift. You have to order, -- you have to put on an entire shift and therefore our caution. When we look at the rig count as it moving sideways into these oil shale plays, we just don't see enough activity to be able to absorb all rigs that would come from natural gas markets, and there has to be we feel a net/net decline in the number of rigs turning to the right, even if you get a number of them shifted into the oil plays. The Bakken, Eagle Ford and Niobrara, Bone Springs, Granite Wash, we just don't think those are going to be sufficient enough to absorb rigs that we feel need to come off in a sub-$4 gas market.

With respect to the additional capacity of revenue generation on another shift, I will turn that question to Monty.

We could substantially increase our revenues maybe as much as 10% to 15%, but we also are jealously protecting our margins. We are not in a price situation where we hammer our clients when things get a little tight, and we price on value, and then we have said that substantially that is our model. That is our theory. We want to price our products on value. So we are not looking to rush head long into some lower margin sales. We want to take the high margin, the high technology value end of the market, and that is where our continued focus is.

And certainly, James, during the quarter in talking with our operations up in the perforating and Production Enhancement we did pass up low margin sales. We recognized that early in the quarter, and decided that that is the way we were going to continue, because again, we just don't believe that the rig count in the sub-$4 natural gas market is sustainable.

Okay, fair enough. But I guess under that scenario should we expect Production Enhancement kind of revenue to just remain at these levels until the rig count does break to the downside?

Not necessarily because we have put more and more emphasis internationally and Monty mentioned four international locations that Production Enhancement started to deliver new services. And again, it is more to our philosophy of being peak oil guys and following that philosophy, that long-term the company will be better served with addressing crude oil markets internationally than the North American natural gas market. That being said, we certainly believe we will have enough capacity to address the North American oil shale market.

How much capacity I guess do you have internationally to service those markets, or is it all coming from your facilities in the US?

Oh no, we have Production Enhancement locations in with our Reservoir Description locations internationally around the globe. So we are just adding more and more of those. Certainly a good footprint in Asia Pacific, the Middle East, and up into Europe, so we will continue to grow upon that.

So the shift issue that we just talked about is just purely on the North American side?

That is correct. Although we may have gotten nicked short-term here on revenues within Production Enhancement, we believe long-term that this strategy has served us well, and will continue to serve us well.

One last question for me, just on this HTD Blast technology. I know Monty you mentioned that it has worked in almost all of the shale plays in the US so far. Could you give us a sense of how many wells, rough numbers have used this technology, and perhaps if you are willing to share who the coiled tubing operators are that have had this technology on the end of their coiled tubing strings?

James, we are not biased in who we are working with as the service companies. We have worked with all of the coiled tubing operators. This is actually technology that is in its early days. It is as I mentioned, it is patent pending so it is a fairly early technology.

We have worked in hundreds of wells, and the beauty of this system, the HTD Blast is the firing system, which allows our customers, the oil companies or gas companies, depending on which shale play you are working in, to better complete their horizontal wells in a safer more efficient more cost-effective manner. It doesn't matter to us which coiled tubing companies they are, that is not our customer, okay, our customer is the oil or gas company that we are working with. The beauty of the system is that is a firing system, and when they buy that firing system they are buying all of the HERO charges, all of the guns that they need to perforate that well, and the firing system is just the lead technology that is a unique and a new technology. That is why we highlighted that.

Okay, great. Thanks, guys.

Okay, James.

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

A couple of questions. First I think Monty was mentioning about the shared surveys. Just wondering in the potential, obviously you have seen great growth there over the years, just wondering either Monty or Dave, what you can project to see that going forward?

Neal, you are speaking about the joint industry projects in Reservoir Management?

Correct, correct.

Yes. Literally there are hundreds of these that are in our register to perform. It is just a question of where the leading demand are for these studies. And right now international global gas and oil shales are very hot, so that is the area that gets the most concentration on.

Will that evolve over time? Certainly it will. So when we look at the growth rates of that business, although it is very lumpy, it is going to be somewhere between mid-teens, high-teens, and low 20s. And I think historically when you look at that, that would be the case.

And are the costs for newer entries now of these newer international groups, Dave, similar to what they were back with Marcellus, and some of the other groups that you had?

These are all going to range from several hundred thousand dollars to $500,000, $600,000, $700,000, $800,000 depending on the scope of the study, the length of the study, and the size of the data set that we create.

Turning over to the SuperHERO plus, obviously you continue to see great track objection there. Wondering if you continue to roll out extended versions of that, and then in the past you have talked about potential other products, proprietary products like this. Are you looking at rolling out other things?

Yes. We continually develop and push these new technologies. After talking about the HERO for the last year or so I decided that we should talk about something different, so we talked about the HTD Blast this time. It is a newer technology. The HERO is growing. We continue to develop, and if you will stay tuned, we have more coming in the perforating charge in the future.

Yes, and again Neal, nothing revolutionary, always evolutionary, so we will see the SuperHERO plus continue to evolve as we go further down the road.

Got it. One last question for Dick maybe. You mentioned the inventory turns that continue to do quite well. I mean how much better obviously to meow are top of the class there, can that still continue Tim prove, Dick?

Neal, we mentioned on prior calls that we don't believe further improvements in working capital will happen yet they do continue to happen by small leaps and bounds. So I will repeat what we said in the past. We don't expect much further gains from working capital.

Great. Thanks. Great color, guys.

Okay, Neal.

Your next question is from the line of Robert MacKenzie with FBR Capital Markets.

Good morning, guys.

Good morning Rob.

Question for you, David, on Production Enhancement. You know we saw sequential revenue decline despite what in the industry continues to be a growth in intensity of fracture stimulation, and analysis of that work in the US land market. How do we reconcile those two? Is there a mix shift going on? Are we perforating as much in the Eagle Ford as in say the Haynesville? How do we think about that?

Yes Rob again this is tied to our decision early on in the quarter not to put a second shift on at the perforation and gun plant up in Godley, Texas. And we just felt that the sustainability of the rig count and the demand on the natural gas side would not be sustainable. And again, we can't order, put on a quarter of a shift or half of a shift for efficiency and safety purposes we have to put on an entire shift, and we decided to forego some lower tech sales that would have resulted. And did we drop maybe $5 million or $10 million worth of sales that would have made a very nice sequential gain for Production Enhancement, albeit at a lower margin, that is just a conscious decision that we made, and that is how I think we square that.

And at this point we have no, we right now are not considering putting on an additional shift, as we again still believe that the North American natural gas rig count at sub-$4 natural gas is not sustainable. This might be a short-term decision that will hurt us on the revenue side, but we think long-term as opposed to putting on a shift and then having to take off a shift in a short period of time probably would not be a good exercise for us.

Okay. Good answer. The next question I have is similar in nature. We are hearing increasing reports of more competition in the fluid tracer business. Could you give us an update in terms of where you feel your differentiation point is with SpectraChem versus the competitors as it stands today?

I believe certainly there have always been small mom and pop shops out there, but clearly 95% to 97% of the market, remember, this is a market that we, a technology that we invented and developed, and continue to execute on. Again, this technology will continue to evolve, and as our R&D efforts continue to evolve this technology many times these small mom and pops get caught into a time warp and we move on. This would be no different from any other technology that we have. From our standpoint we don't see any recognizable competition that we have out there.

Okay, thanks. I guess my next question is for Monty, comes on the back of the HTD Blast system, a follow-up there. Is this system, Monty, still just for perforating the initial toe stage?

That is the purpose of the system, that is the most difficult part of the completion on these long horizontal wells.

Right.

Is the toe stage. And so that system is designed so we can do it more efficiently, more safely, more surely, and get that toe perforated in the best possible way. And it is gaining wide acceptance and as I said, it is the pull-through of all of our perforating system that goes with that, that adds significantly to the revenues.

How much of the toe, typical toe productivity issues do you think are as a result of perforating versus the fact that all subsequent stages you are in essence pumping down the plugs and guns, and that fluid has got to go somewhere?

I think the toe stage is going to be your highest pressure most difficult part to do, and that is why we had to invent this system to address those problems. Once that is completed, we have not been having great difficulty in completing the rest of the well.

Yes, Rob on that toe, some of the imperical data sets that we have seen, that some of our clients have shared with us, you get a delta of about 20% to 25% in the productive capacity, from let's say the four to eight stages out on the toe. That is pretty significant.

Okay. So this then the HTD Blast is for multiple stages at the toe, or just the first stage?

No, no, no. Okay, let me explain the system a little bit. What that does is allows you to put the perforating system into the toe of the well, and pull out on the coiled tubing while you are perforating as designed, up to four to eight different sections of the well. So you are pulling back on the well, and this is a firing system that fires selectively the different sections as you are completing.

But essentially Rob, those eight individual and discrete perforating events would create the first stage at the toe.

Right, the first stage, okay. Because otherwise isolation of the stages becomes an issue again.

Yes, you are right. You could not do that.

Okay. Thanks. And then on Reservoir Description, obviously that was impacted by really not much of a pickup in international spending this quarter, probably not going to see it in the fourth quarter. That is something, though, that we should be getting some visibility on for 2011 from the various operators. What if anything are you hearing from your customers in terms of their plans to spend in the coming year in oil in the international markets?

We are encouraged by that. Jim Mulva last night was on CNBC, and Jim said that their CapEx for next year was going to look at to grow double-digits, and maybe as much as 20%. So that is the first encouraging sign that we saw that next year from the international markets, may be a little bit more robust than actually 2010 is turning out.

Great. That ties I guess into my final train of thought on Reservoir Management here. Historically you guys have thought this business could maybe grow kind of mid-teens percent year-over-year, you highlight having hundreds of meters of core coming in from international shale plays. How should we think about that business given what you have seen as inbound grows over the next several quarters?

I think those parameters that you laid out are fine.

Great, thank you. I will turn it back.

Okay, Rob.

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

Good morning guys. I have a question on the Gulf of Mexico moratorium. If I remember correctly last quarter you said that you expect to sense of an effect, was the impact in Q3 as you expected, and as a follow-up now when the moratorium is lifted, when if at all do you expect things to go back to normal from your standpoint?

Veny, we are thinking it is around a $0.02 to $0.03 impact. Unchanged from what we discussed before. The moratorium has been lifted. Our permits being issued is the question, and I think it will be a good while before we see a positive impact from that.

So we still can assume that in Q4 we are going to see at impact?

Not at all. I don't think they issued a single permit in Q4.

So we are still going to see the $0.02 to $0.03 negative impact?

Yes, that is correct.

Okay. Thank you so much.

Okay, Veny.

Your next question is from the line of Stephen Gengaro with Jefferies.

Good morning guys. Just a couple of questions just to kind of understand how the quarter played out. I understand your decision not to increase the shifts in Production Enhancement. Was that something that you expected to do going into the quarter when you gave your guidance, and I am just trying to understand sort of the variation versus what we had expected and maybe what you had expected?

Yes, our variations from our guidance from a corporate standpoint played out pretty much like we thought it would. As a matter of fact, if you use the original share count which we gave guidance on, we exceeded the parameters that we thought we would lay out for the quarter. If you remember back to our last call when asked about guidance for the rest of the year, the caution that we gave at that time was also related to the North American natural gas count. And so we did take that into account, and we are taking that into account for our guidance for the fourth quarter, and it is a reason why we won't give guidance, or we don't feel that we can give accurate guidance at this time for 2011.

Okay. And then just as a follow-on. How applicable is the Production Enhancement business into this sort of burgeoning liquid rich and oily areas in North America? Because your oil/gas mix shifted from kind of an historical 80/20 to 70/30. I am just wondering what sort of a shift in the demographics of the North American rig count, how that impacts your business? I understand the gas concern. I am just not sure I understand the impact of the switch to more oily reservoirs?

It should have no effect if we think about multistage frac jobs in natural gas, you can parallel that to the number of stages in some of these oil plays, and as we know in the Bakken, we are seeing some of these 8,000, 6,000 to 8,000-foot laterals with more than 30 stages. Each stage is at a discrete event for a chance for perforating, and then using and applying fracture diagnostics.

If there is a one-to-one direct correlation, the number of rigs that move from gas plays into the oil shale plays should have no effect on us. What we are concerned about are the number of natural gas rigs that are dropped that do not go into the oil plays and our read is that there won't be a one for one transfer, and we don't have a sideways movement in the rig count. We will just have 100 to 200 to 300 gas rigs drop over the next several quarters. Could be wrong on that, Stephen but that is kind of the way, using the parameters that we are going to execute and run the operations.

And just a follow-on. Is there not a sort of multiplier effect if we drop conventional gas, and we end up with maybe a flatter or maybe even in your case a lower rig count, but it is made up of more horizontals and oily plays?

Yes, absolutely, correct.

And certainly the intensity is higher, so that is good for us. And when you think about the commodity that those services are relying upon, which is oil rather than natural gas, that is certainly positive.

So can you grow your revenue in -- if I told you the rig count was flat and you were going to get 150 rigs moved to oil shales versus gas, would your revenues grow in that environment?

All depends. Are those horizontal rigs or are those vertical rigs?

I am thinking horizontal.

Horizontal should just be a one-to-one transfer. It would have to do with the service intensity of each individual rig, whether they were going to drill longer laterals and have more frac stages, as opposed to the natural gas play that they just left.

Okay.

So a multivariant equation that would have to be looked at really from a rig by rig basis.

And then just one final on the international side is it, sort of the relationship that you sort of historically talked about between international spending growth and your revenue growth growing a couple hundred basis points higher than that. Is that still consistent?

If you look that the quarter and I think Dick broke that out that international growth year-over-year was 10%, and we know that international spending probably is up somewhere around 5%, 6%, 7%, 8%, so that seems to have held true.

Very good, thank you.

Thank you, Stephen.

Your next question is from the line of John Daniel with Simmons and Company.

Just a couple for you. First, Dave, when you talk about you read into the rig count, are you arriving at that conclusion from speaking to your customers, or is that just your view on the economics of gas directed work?

Both.

Okay. And when you speak to the customers, what are they telling you in terms of the timing of the shift in the rig count?

Certainly as soon as they can hold their lease acreage within some cases vertical wells, a lot of those rigs we will start to see peeling off.

Okay.

So you can look at client acreage and with your database be able to determine, I would think pretty accurately, when some of these rigs are going to start dropping off, as they fully hold their acreage by production.

Right. I think most people think that is sort of next summer. But when I think about the gas prices, clearly they suggest a need for a lower rig count but I think we both know reality is that E&P companies don't always exhibit the best capital discipline.

But sooner or later, John, they have to. Moreover a number of these wells that are being drilled are not being completed, and so that is adding to a backlog there, that is work not being done today, but will have to be done in the future.

How much of that growing backlog do you think is a function of just their inability to get the fracs crews today?

Difficult for us to answer because that is a mix and match. Some of them obviously can't get a frac spread, but a number of them have no plans in actually stimulating that wellbore.

Okay. Just want to turn over to Production Enhancement for a second and I hate to beat on a dead horse. You mentioned electing not to do lower margin sales on the perf business. Does not wanting to do the lower margins, does that mean that customers were looking for price concessions, or is this a function of new competition coming in with lower priced products?

No, it is just run of the mill let's say non-HERO related charges.

Okay.

Still 35% of our production is that. We would rather gear our production to HERO-related charges, as opposed to some of the basic charges, commodity charges that are out there. And our decision on if we were going to have a manufacturing shortfall it was going to be on standard make a hole in the pipe charges which are low margin. And there mom and pop competitors that are out there that will service that market, and we are okay with that.

Right, okay. Just one final one. Dave, your thoughts on possible new oil shale plays being announced in 2011?

Again, we still believe that there probably are two to three that are out there that are being looked at with great intensity right now. That could come to fruition in the years in 2011 and 2012.

Okay. Thank you.

Okay, John.

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

Thank you, good morning, guys.

Good morning, Victor.

First question just on the revenues revenue guidance for the fourth quarter, could you provide some color as into geographically how you are thinking about the fourth quarter relative to the third, and also by segment?

Our guidance is for the entire company. I would say that when you look at the growth rates that we would expect, just based on US and international, I would continue probably to use about the same, Victor. And I think that gets you up to about $205 million in revenue. So somewhere on the order of 30% US, 10% international, I just don't see any delta with that.

With the growth coming out of international relative to the US?

Well, international revenues still year-over-year growing somewhere around 10%, and the US somewhere around 30%.

Okay.

Year-over-year concept.

Right, okay.

As opposed to sequential.

Okay. And just as it relates to Production Enhancement in looking at it, if we are looking at a flat US rig environment next year relative to where we are now, and then looking at international, is it a fair assumption that you guys will lag the rig count in the US, and grow maybe more than that 100 to 200 basis point delta internationally, as you continue to expand your footprint on the Production Enhancement side?

I think that is a very fair comment.

Okay. And the last one just from my standpoint, if you have these numbers handy, the Foreign Ex by segment, in the third quarter?

I have Forex consolidated for you. If you like it is the usual suspects that you see in all of our Qs, Aussie dollar, Sterling, Canadian, Ruble, those are the main.

Alright, nothing by segment?

No, sir.

Okay. Alright, thank you, guys. That is all I had.

As you can imagine, the preponderance would be Reservoir Description, just because 85% of that business is outside of the US. You should look at primarily this being Reservoir Description based.

Okay. Great, thank you for that.

Yes.

Your next question is from the line of Blake Hutchinson with Howard Weil.

Good morning, guys.

Good morning, Blake.

Just understanding that visibility is tough into 2011, I was just wondering if you could maybe give us a comparison in terms of how the table is set at this point in the year versus last year, and maybe just speaking around the most elemental part of our business, your success in adding 40 major producing fields a year, and where we stand in terms of those additions this year versus where we were around this time last year?

And I think that you have hit it right on the head. We have added certainly the year-over-year somewhere on the order, we don't have that totaled, but it is going to be again somewhere on the order of 40 to 50 new fields. We would like the activity to be up in all of those fields more than they were, but essentially right on target for the number of fields added. And we believe that that is indeed going to be the case for what we see in the queue for our international operations for next year being about the same.

And just to be clear, 2009 the success rate was a bit lower, which is kind of what we see in terms of translating into 2010 growth rates, or were you on in 2009, and it was just lower investment in the field that you did add?

No, you are right. Certainly 2009 probably was in the 30 to 40 range, and being transmitted into what we are seeing in 2010 now. In saying that, let's not try to be so precise on that. The reason being is that a lot of the activity levels in the fields that we are already established in are again a little bit lower, and that adds to the year-over-year in growth international not being as robust as we would have liked to have seen it. And there is some relative factor that the number of fields we added might have been a little bit lower, but I think when we look at that, Blake, we have to take into account all of the existing fields, plus the new fields as well. We are not as active as we would like them to be.

Sure, understood. And then continuing on how the table may be set for 2011 the one thing we have learned from this call is that you guys are not ones to invest if the business isn't there. The release here is loaded with your investment, and expanding these technology centers. Should we read that as another indicator that the confidence for 2011 at least within Reservoir Description has grown quite a bit as the year has progressed?

Yes, that is correct. And on the fluid side because as we are finding that the more that we know about the interactivity of the fluids in the well bore, those being natural gas, crude oil and the formation waters, the more that we can discern from those, the more that we can help our clients and get out incremental production. One of the big pushes that we are having now that was mentioned in the release, is we are right now manufacturing and essentially inventing equipment where we can look at that CO2 driven miscible gas studies, and high H2S crudes.

Read that big projects in the Middle East. These are carbonate reservoirs. Most of the crudes there are high in sulfur, and we know that sooner or later in the Middle East we are going to get sources from CO2, from refineries or power plants, and we are trying to stay ahead of the curve. That is why you are seeing more and more fluids labs going in from the rock standpoint, although we may be expanding those, we are not putting up any new buildings at this time. Yes, more international. More Reservoir Description from the fluid side.

In this technology investment, maybe we should think about it more in terms of margin enhancement, because correct me if I am wrong, these analyses would be at the higher end of the margin spectrum, than just kind of a pure volume play?

Absolutely, correct.

Technologies only available from Core Lab adding to incremental margins, absolutely.

One last question just for Dick. When we get past the exchangeable note paradigm here for Core Lab, is there some optimal balance sheet that you envision as we head into 2012?Do you like to carry some debt on the balance sheet, and what might it look like as we start to, the optimum balance sheet look like as we start to model for 2012?

We believe it is appropriate for an oil field service company that generates free cash to have debt to cap in say the mid-30s. So the 35% range over time. So as these notes are, as they mature, I think you will see us replace that with some type of indebtedness that brings our debt to cap to around 35%.

Okay. Perfect, guys. I will get you go. Thank you, you have been generous with your time.

Very good. Stephanie, I think we will wrap here. In summary, Core's operations posted another solid 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 oil field services sector. This positions Core well for the remaining challenges of 2010 and into 2011.

The Company remains committed to industry-leading levels of free cash generation, returns on invested capital, with all excess capital being returned to our shareholders. So in closing we would like to thank all of our shareholders and the analysts that follow Core, and as Monty Davis has already noted, we would like to give special thanks to all of our 5,000 employees worldwide that has made this outstanding quarter possible, and has made Core Lab the Company that it is today. We are proud to be associated with their continuing achievements. Thanks for spending your morning with us, and we look forward to our next update. Goodbye for now.

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