Core Laboratories Inc (CLB) 2010 Q4 法說會逐字稿

Good morning. My name is Therese, and I will be your conference operator today. At this time, I would like to welcome everyone to the Core Laboratory fourth quarter and full-year 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

I would now like to turn the call over to David Demshur. Go ahead, David.

Thank you, Therese. 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' fourth quarter and full-year 2010 earnings conference call. This morning I am joined by Dick Bergmark, Core's Executive Vice President and CFO. And then also this morning we are 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 team executes the Company's growth strategies. We believe these three tenets have produced industry-leading shareholder returns and returns on investment capital. We will also discuss Core's long-held philosophy of returning excess capital back to our shareholders.

Dick will then return and follow with a detailed financial overview and additional comments regarding building shareholder value and our first quarter and full-year 2011 revenue and earnings guidance. Then Monty will go over Core's three operating segments, detailing our progress and then discussing our continued successful introduction of new Core Lab technologies and services, and then highlight some of Core's operations and major projects. And then we will open the call for Q&A.

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

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 projection, estimates, and other forward-looking information. This would include any discussion of the Company's business outlook. These types of forward-looking statements are subject to a number of risks and uncertainties relating to the oil and gas industry, business conditions, international markets, international political climate, and other factors, including those discussed in our '34 Act filings that may affect our outcome.

Should one or more of these risks or uncertainties materialize or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether it's a result of new information, future events, or otherwise. For more detailed discussion on 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, 2009, as well as the other reports and the registration statements filed by us with the SEC.

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

Okay. Thanks, Dick.

A quick investor update. Year-end 2010 marked the close of Core Laboratories' 15th year of being a publicly-traded company. Over those 15 years, Core has returned 25.6% compounded annually to our shareholder, which ranks sixth out of all of the S&P 500 companies over that period. Our growth strategies and the 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, North American unconventional oil resource plays, and then the continued internal development of new technologies and services has led to sustained growth and increasing profitability.

Core has always followed and will continue to follow three key investment tenets that have led to these 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. On average, over the past 30 years, the Company has determined that an appropriate capital allocation generally equals the amount of its annual depreciation. Potential acquisition opportunities must also pass these same high standards.

This discipline produced a record high free cash flow of $3.70 per diluted share during 2010. This is one of the highest for all major oil field service companies. Core will continue to demonstrate strict financial discipline in 2011 and beyond.

The second financial tenet is to maximize our return on invested capital. Core's Board has initiated an incentive compensation program for its executive and senior management teams, based on the Company producing a return on invested capital and the top decile for the oil field service industry. Core's Board 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 34% was more than 28 percentage points higher than the peer group average listed by Bloomberg Financial. Moreover, it was 26 percentage points above our weighted average cost in capital.

Investors should also note that some oil field service companies continue to post returns below their weighted average cost of capital, a product of consistent over-investment in their company or overpayment for perceived growth via acquisitions. Core strives to have the industry leading return on invested capital through continued execution of our growth strategies, coupled with our strict financial capital discipline. We believe that our commitment to both in 2011 will result in a continued superior share price performance for Core Lab shareholders.

The third tenet is to return all excess capital to our shareholders. During 2010, Core returned over $132 million to our shareholders in the forms of quarterly dividends, a special dividend, and the repurchase of some 1.5 million shares, a sum which equaled approximately 3% of the Company's outstanding shares. Total excess capital return was approximately $2.74 per share, equaling a year-end yield of about 3% on Core's year-end share price of approximately $89. Since 2002, Core has returned over $825 million or almost $17 per diluted share to our owners.

We will continue to follow these three key financial tenets in 2011, which should enable Core to continue to produce industry-leading returns for all of our shareholders.

For now, I will turn it back to Dick for a detailed financial review.

Thanks, David.

Looking at the income statement, revenues were $208.2 million in the fourth quarter versus $199.2 million in the prior quarter and $181.6 million in the fourth quarter of last year. So revenues were up sequentially by 4.5% and 14.6% year-over-year. For the full year, revenues were $794.7 million, a record, up $99.2 million or 14.2% from the prior year of $695.5 million. Of these revenues, services for the quarter are $157.9 million, up 10% when compared to $143.6 million last year, so an increase of $14.3 million.

For the full year in 2010, they were up 9.4% to $606 million from $553.8 million in the prior year. Product sales for the quarter were $50.3 million, up 32.4% when compared to $38 million in the last year's fourth quarter. For the full year, product sales were $188.7 million compared to $141.8 million in the prior year, representing a 33.1% increase. Increase in sales is primarily result of greater horizontal well completion activity in North America, in addition to further market penetration outside of North America.

Moving on to cost of services, for the quarter 62.3% and for the year they were 63.2%, an improvement over the full-year 2009 cost of 63.6%. And cost of sales in the fourth quarter -- our cost of sales were 69.8% of revenues and were 69.3% for all of 2010 versus 74.6% for 2009. G&A for the quarter $9 million, up slightly sequentially from $8.4 million and up from $7.8 million in last year's fourth quarter. For 2010, G&A was $33 million, in line with our full-year guidance. Our G&A costs represent just 4.1% of revenues for the year. We expect G&A to be around $34 million in 2011.

Depreciation and amortization for the quarter is $5.8 million, down slightly from the $6.2 million incurred last year in the fourth quarter. For the full year 2010, depreciation and amortization expense was $23.1 million, and we expect that in 2011 to total approximately $24 million. Other income this quarter is $1.7 million, comprised primarily of asset sales, interest, and royalty income in some foreign exchange. For the year, other was $2.2 million of income, which is below the $3.2 million in the prior year.

EBIT for the quarter was $61.6 million, which was up $17.3 million or 39.1% year-over-year. Our fourth quarter EBIT represents margins of 30%, up over 500 basis points year-over-year. Interest expense was $3.7 million for the quarter, compared to $4 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 $3.5 million or $0.07 per share is non-cash interest expense being paid to no one.

Full-year 2010 GAAP interest expense was $15.8 million. For the full year 2011, GAAP reported interest expense may be $9.5 million, $9.1 million being non-cash, while the cash interest paid will only be $400,000, representing approximately $0.19 per share in 2011 in non-cash expense. Income tax expense in the quarter was $16.7 million at an effective tax rate of 29.4%. Our full-year annual effective tax rate was 30.5%, and our income tax expense was $63.7 million for the year. We expect our effective tax rate in 2011 to be in the 30% range.

Net income for the quarter, excluding the expense relating to the notes, was $41.2 million, compared to $29.7 million in last year's fourth quarter on a comparable basis. Net income for the fourth quarter increased 39% on a year-over-year basis. GAAP net income for the full year 2010 was up over 27% at $144.9 million, compared to $113.6 million in 2009.

Earnings per share for the quarter adjusted for the notes was $0.84, compared to $0.81 reported as Bloomberg's Main Street estimate and versus our prior guidance of $0.80 to $0.82 per share. Sequentially, GAAP EPS of $0.81 is up from $0.79 and is up 62% from 50% earned last year in the quarter. For the full year, adjusted EPS was $3.08, while GAAP EPS was $3.00, compared to GAAP EPS in 2009 of $2.43.

Now going over to the balance sheet, cash was $133.9 million, compared to the prior year-end balance of $181 million. Cash balances and our free cash flow were used primarily in the year to repurchase stock, pay our dividends, and fund the early exchange of notes. Receivables stood at $154.7 million, up from $133.8 million at the prior year end, due to higher sales. Our DSOs for the year were 70 days, which is virtually unchanged from 69 days in 2009.

Inventory up year-over-year to $33.9 million from $32.8 million in 2009, as a result of significantly higher product sales. Turns, however, improved to 3.8 in 2010 from 3.3 in 2009. Other current assets were $26.3 million, down from $43.6 million at last year end, primarily due to an increase in income tax receivables of $23.4 million. We had a $5.4 million increase in PP&E, due to investment in our business assets. And intangibles, goodwill, and other long-term assets were up $13.7 million, mainly from a small acquisition in the first quarter in our Production Enhancement segment.

And now to the liability side of the balance sheet. Our accounts payables were $44.7 million, up from the prior year-end balance of $33 million, as a result of growth experienced in our business in 2010. Other current liabilities of $87.1 million are up $13.7 million from the prior year-end balance of $73.4 million, due in part to an increase in unearned revenues of $3.7 million for certain consortium studies and $5.6 million for income taxes accrued but not yet fully paid in various jurisdictions.

Our senior notes, at $147.5 million, continue to be classified as current and are available for early exchange in the first quarter of 2011. As a result, note holders, if they choose, can send their notes to the trustee, and we will exchange their notes. We received 17 requests during 2010 to exchange 82,251 notes, which were settled during the year for $82.3 million in cash and 808,367 shares from treasury. But remember that these shares were, for the most part, already included in our diluted share count and had no impact on diluted EPS when they were issued.

Long-term debt continues to be zero, as a result of our senior notes being classified as current. Other long-term liabilities ended at $55.5 million, a decrease of $5.4 million, primarily due to a reduction in deferred tax liabilities. Equity component of senior exchangeable notes stands at $8.9 million, down from last quarter's $16.1 million, due in part to the notes exchanged during the quarter 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 $156.4 million in outstanding face value of the notes. This classification is required while the early exchange, early conversion condition of the notes is in effect.

Shareholders equity ended the year at $292.3 million, up from the prior year-end balance of $281.8 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 56.4%. And this is certainly one of the highest returns earned in the industry that have been posted year-to-date.

Capital expenditures for the quarter were $7.9 million, and for the full year they were $27.6 million, up from $17.3 million in the prior year-end, as we addressed opportunities created by the strong growth in our business in 2010. Recall that we completed the construction of two new fluid analysis facilities in Aberdeen, along with the consolidation of two facilities in Houston during the year 2010. We expect our CapEx program in 2011 to be approximately $25 million to $27 million as a result of an expected continued improvement in industry activity.

Looking at cash flow, cash flow from operating activities in the quarter was $36.7 million, and after paying for our $7.9 million in CapEx, our free cash flow was $28.8 million. For the full year, cash flow from operating activities was $205.8 million, while free cash flow after paying for our CapEx program was about $178.3 million, up compared to the prior year. As David mentioned earlier, our free cash flow in 2010 equaled $3.70 per share, up from $3.53 per share in 2009, and this improvement in free cash flow came due to strong growth in our business in 2010.

So in the year 2010, we used our free cash flow to pay $10.8 million in quarterly dividends, $29 million in special dividends, to repurchase $92.5 million of our shares, and $82.3 million for the payment of the early exchange of some of our notes. Our use of cash continues to be designed to enhance shareholder value. Free cash generation such as this gives companies like Core Lab significant opportunities to continue to enhance shareholder value.

So now let's touch on our targets for the first quarter. For Q1 of 2011, we expect revenue of approximately $205 million to $210 million with EPS in the $0.82 to $0.84 range, which would be up approximately 20% year-over-year. Using our outstanding diluted share count of 49.2 million shares for the first quarter, EPS guidance of $0.82 to $0.84 translates to approximately $40.3 million to $41.3 million of net income. Operating margins are expected to be approximately 29% to 30%, with year-over-year quarterly incremental margins at or above 40%.

For the full year 2011, we expect revenue to increase approximately 12% to 15%, to approximately $890 million to $910 million, generating approximately $270 million of operating income. Operating margins are estimated at 30% for the year, up approximately 100 basis points from 2010 levels. We expect incremental margins for the year to be approximately 40%, yielding full-year EPS of approximately $3.55 to $3.60, which is an increase of approximately 20% over 2010 earnings. Capital expenditures are expected to equal 2010 levels.

This guidance assumes an essentially flat rig count in North America, perhaps with rigs drilling for oil replacing those drilling for natural gas, and international activity levels up 10% when compared to the very slight increase in 2010. This 2011 guidance excludes any gains or losses that may originate from the repurchase of outstanding debt and any effect of foreign currency translations, and it assumes an effective tax rate of approximately 30%. Additionally, 2011 guidance does not consider shares that we may repurchase or shares that may be added to the share count relating to our notes and warrants.

Now with that, I will turn the call to Monty for a more in-depth operational review.

Thank you, Dick. 2010 was a much-improved year, with revenue growth of 14.25% and 29% operating margins. These dynamics allowed Core to post record revenue and operating income. These results are a credit to our employees around the world, and I thank them.

In Q4, Core's revenue increased 15% over Q4 2009 and 4.5% sequentially over Q3 2010. This record quarterly revenue resulted in record quarterly operating income up 30% over Q4 2009 and operating margins of 30% up 400 basis points over Q4 2009. Reservoir Description revenue increased to $109 million for the fourth quarter, and operating margins improved 200 basis points over Q4 of last year to 26%.

We are currently analyzing cores from Iraq for several different clients. These studies cover a broad range of our services, from initial core evaluation to sophisticated full-reservoir condition analysis. These studies are mostly being performed in our Advanced Technology Center in Abu Dhabi.

Enhanced oil recovery studies continue to be a large part of our business in the Middle East. These studies are determining the best flood methodologies to sweep oil fields to increase recovery from existing fields. We are currently conducting a number of these studies on fields in the UAE, Kuwait, and Qatar.

We are currently performing a reservoir condition core flood program employing a 3-D CT imaging technology. This proprietary technique enables us to visually image the progression of a gas flood in an oil recovery test. The current testing is designed to evaluate the difference in total oil recovery between a miscible and immiscible gas flood performance, to accept sweep mechanisms, and to monitor the field -- the flood front throughout the test. The technique is being applied to full core -- full-diameter cores, which allows us to work with heterogeneous pore systems like buggy carbonates and coarse-grain sandstones.

Production Enhancement revenues increased sequentially by 9% over Q3 2010 and 41% over the year-earlier fourth quarter. 2010 revenues grew 36% over full-year 2009. Operating margins that are our highest level ever, 32%, a 300 basis point increase over Q4 2009. During 2010, we increased our number of Production Enhancement employees by 20%, including field personnel, while growing revenue 36%. We continue adding qualified employees and automation in 2011 to further increase our capacity and productivity.

Our HERO family of ultra-low degree perforating charges continues to be the dominant technology in perforating and two-thirds of the charges we sell. Our HTD-BLAST System for perforating the end of horizontal wells furthest from the vertical well bore was used to complete approximately 17% of horizontal wells in the US in Q4. The sale of these systems in 2010 grew 177% over 2009, as this technology is quickly being accepted by the industry for improved efficiency and safety.

In Q4, we began flood evaluation studies using our proprietary SpectraFlood technology in Ghana, Thailand, and France. The Ghana project is the first phase of a three-phase study of a water and gas flood. We also completed a successful evaluation of a frac pack in the eastern Mediterranean to ensure well bore Integrity for our client in their new giant gas field.

Our Reservoir Management group had another excellent quarter, with 38% margins on $13 million in revenue. Reservoir Management increased -- revenue increased by 10% over 2009, making 2010 our best year ever, and operating margins improved 700 basis points in 2010. We now have 35 member companies in our South Texas Eagle Ford project, which is focused on the liquids portions of the play. We had five new members join in Q4 2010. Operators are seeing some impressive rates of 1,500 barrels of oil per day from horizontals in the play.

We now have 12 members in our Rockies and Niobrara Shale project, which is focused on the liquids portion of that play. We kicked this project off in June of 2010. We had two new members join in Q4 2010. We initiated a regional petroleum systems study in Kenya for six companies, which is on the heels of new discoveries in the area. We also initiated our sale -- our shale reservoir assessment study of Indonesia, which was commissioned to us from MIGAS, an arm of the National Oil Company.

In summary, Core's continued focus on international crude oil developments and North America oil shale reservoir plays bodes well for continued growth in 2011 and beyond.

We will now open the call for questions.

Thank you. (Operator Instructions) Your first question comes from -- one moment. James West with Barclays Capital.

Good morning, guys.

Good morning, James.

Dave, the Production Enhancement division -- a nice sequential move in revenue here. I know last quarter we had the great debate about adding a shift to that operation. I'm curious, I guess, number one, if your review on adding additional capacity has changed, given that you are now looking for a flattish rig count environment?

Then number two, with the current operation as it's configured or set up now, are we peaking out in terms of revenue capacity?

We never thought we would get that question, James, but I will turn it over to Monty, because we figured as we were asked that 20 times last call, we were going to be ready for it.

Sure.

James, our philosophy has been to de-bottleneck the holdups in the operation to allow us to increase our efficiencies and production. That includes people automation machinery in the right areas. That, we believe, is a good strategy for the past year and for the year going forward. We do not believe that we have peaked in our revenue production capability in -- for the performance enhancement. So we think there is going to be continued room for growth, even with the flattish rig count.

And I will point just to our HTD-BLAST System. The HTD-BLAST, as I said, was used in 17% of horizontal wells in shale in the fourth quarter. 17% leaves a lot of market room as that's becoming accepted, and we expect to see that system and others continue to grow.

Okay. That's helpful, Monty. Thank you. And then one last question from me. With respect to the overall guidance for 2011, you are looking for international spending growth of, I believe, about 10%. Given that Core, historically your customers -- your biggest customers have been the super majors and they are all spending above those types of levels next year, is there any reason to think that you shouldn't outperform the underlying market growth?

If they do spend more than that James, we will see higher growth.

Okay. Great. Thanks, guys.

Okay, James.

Thank you. Your next question comes from Rob McKenzie with FBR Capital Markets.

Good morning, guys.

Good morning, Rob.

Question for you, David. With the industry being chronically short of fracturing equipment for several quarters now, and that looking like it's going to ease up some with 30% or more growth in fracturing capacity, is it unrealistic to think that your fracture diagnostics business might grow, kind of in line with the growth in frac capacity in the US market?

Well, it all depends where that frac capacity is going to be applied. So certainly we are seeing higher levels of capacity out there. I think that bodes well for growth for Production Enhancement. I think the 9% sequential growth from Q3 into Q4 is an indicator of that. So certainly, Rob, the continued addition of fracture -- frac capacity does bode well for that business.

Okay. Then kind of a related question to that. How would you characterize what you are seeing in terms of the mix for your Company, as the industry transitions more away from dry gas to more liquids-rich plays?

Well, as you know, Rob, our focus is on international crude oil developments, and that's what drives the Company. With respect to looking at oil shale resource plays, certainly we prefer those plays over natural gas, because the application of our technology is more service-intensive. So that is a demographic that works in our favor as well.

Along those lines, David, how would you characterize kind of an update on your view of the international oil shale and tight reservoir opportunities going forward? I know we heard Halliburton become more positive on it, hearing more and more people talking about it these days. Are you changing your mind in terms of how soon that might be relevant?

Rob, this is Monty. We think it's very relevant. We've had a study that we started a couple years ago on international shales, and that study continues to grow. We have been working in various parts of the world in shale. And we think it's going to be a nicely growing market, a continued market for some time, and we are pretty bullish on that market.

Yes, but with the speed of development of that, Rob, if we look at, for instance, what we think has great potential in North Africa -- this lower hand shale that is through Tunisia and into Algeria -- we are just now getting the first cores cut in for our laboratories for the evaluation of that. Any reasonable development plan would still be years off for that, as would -- I think certainly would still be the case for some of the major plays that might be developing in Europe.

I still think that we are years off from seeing major production coming from these gas shales and oil shales worldwide. That being said, I think there will be a lot of work to evaluate those over the next couple, three years.

Great. Thank you, guys. I will turn it back.

Thank you. Your next question comes from John Daniel with Simmons & Co.

Hi, guys. Good quarter, again.

Thanks, John.

Just real quick, looking at the margins for the segments, they were down slightly quarter-over-quarter. Can you give us just a little color on the compression there?

Yes, I think that's more or less project mix in Reservoir Description. And so from that standpoint, I think the margins we are talking about, just double-digit basis points. We are not a widget manufacturer, so the product mix is going to come into play. And with respect to Reservoir Management, that is essentially those margins have to do with the number of projects initiated, older projects that are wrapping up, off the shelf purchases, and as we've always said, revenue and margins in that business are going to tend to be a little bit more lumpier.

Fair enough. Just checking the box here. The press release mentions the increasing interest in the Utica. Early stage, but at this point would you be willing to hazard a guess as to what you think the rig count opportunities that might be there, Dave?

Don't know that as of yet, because we have, I think, three cores in the shop that have been evaluated, so I think it's early days for that. But in saying that, the Utica is a very anoxic, organic-rich shale that certainly is, in many cases, more widespread in parts of Appalachia and probably a better prospect than the Marcellus.

One other note. We had talked to you guys over the last couple of years when asked about the new oil plays developing, and I think about a year ago, we said we thought there would be two or three new ones develop. I think over the last several months, you've seen the Woodford has been developed and has been announced by a number of operators as an emerging oil play. That certainly is one of the two or three we spoke of.

Okay. And just one last one for me. There's obviously been lots of questions out there on pressure pumping and the 100-year flood of new capacity coming into the market. One of the key drivers for modeling the pumping industry is, of course, service intensity and stages per well. At this point, as you guys look across the gray spaces in your studies, can you give us a sense as to where we are today, what you think will be in terms of the intensity, number of stages, et cetera?

Going up. With our HTD-BLAST, as Monty talked about, and its success, this technology enables longer laterals, because we can have effective perforating and stimulating occurring out of the toes of these wells. So we continue to look at and we are on record of saying that we will see dual laterals in the Bakken greater than 10,000 feet and in each lateral as much as 60 stages. So, going up.

And I know you guys have talked about that the last couple of quarters. When do you see that particular opportunity playing out and --

Certainly, that's -- we have planned that. From our standpoint, we have planned that completion. It's up to the operator now.

Okay. Fair enough. Thanks, guys.

Okay, John.

Thank you. Your next question comes from Doug Becker with Bank of America.

Thanks. First time you're providing annual guidance in some time. Certainly, the industry visibility has been improving. Just curious how much of your revenue growth you would define as high visibility, maybe going as far as saying locked in, and then just the biggest variances going forward? Obviously, US activity or spending would be one of those.

Yes, Doug, if you look at -- profile, on average we have about 1,500 jobs going at any one time. Average length of job is about six weeks. Our visibility any one time is somewhere on the order of six weeks, might be a little bit longer than that right now. It just -- we just looked at the number of projects that we see in the queue, and that gave us comfort in the international theater to give guidance there. And then just confidence in the continued increasing service level needed in some of these oil shale play developments in the US, and that's what gave us better comfort there.

Okay. The thought process behind such a tight range?

It just -- on the ranges we have given in the past, that's usually pretty much the range that we've used.

Okay. Fair enough. On the revenue guidance into the first quarter, pretty flat. How much of that seasonal, typical seasonality, and any impact with some of the weather that we have seen in some of the unconventional areas in the US?

Yes, our view is weather is weather. And certainly seasonality does play in. I think we look back historically over Core over the last decade, we will see many cases where we had revenue down from fourth quarter into first quarter. This year relatively flat we think is a pretty good call.

Okay. And you have been highlighting the deep water a little bit more. Just any quantification we can get, like the revenue opportunity per well, and just roughly what percent of your revenue comes from the deep water at this point?

If we look at just worldwide, we look at 30% of the world's crude oil is produced offshore. 40% of our revenue originates from offshore. When we look at revenue streams offshore versus onshore, you have about a 30% up on revenue generated from deep water, as opposed to a typical long core taken from onshore.

These deep water areas that we continue to emphasize, offshore Brazil, West Africa, emerging now in East Africa, the eastern part of the Mediterranean, as mentioned by Monty, these all bode well demographically for our revenue and margins.

And then just one last quick one. Has the compensation committee determined the minimum EPS needed for the discretionary incentive awards?

They are discussing that, and that will be in the proxy when it's published in the next few weeks.

Got it. Thank you very much.

Thank you. Your next question comes from Veny Aleksandrov with Pritchard Capital.

Good morning, guys.

Good morning, Veny.

My questions are about margins. You said that there is revenue growth potential in North America. How about margins? With existing capacity, can we see margins improving going to the Production Enhancement side?

We, Veny, have been teasing pretty high margins, record margins. We continue to try and improve those. I don't think we are going to see huge dramatic improvement in those margins. But we will try and improve on the high levels that we are already at.

And if you consider the -- Veny, if you consider the incrementals that we are experiencing there mathematically, those margins should continue to accrete upwards.

All right. And then on the Reservoir Description side, activity internationally, speaking GAAP, can we see improved pricing and improved margins again?

Well, Veny, you remember our model for increasing margins is always looking at adding revenue streams through fixed-cost base. And then you are having the incremental margins driving margins, just as Dick mentioned in Production Enhancement. We continue to believe that increased revenue growth internationally will produce higher incremental margins that will drive our margins higher there. So the answer is yes. If international activity picks up, as we believe it will, that should drive those margins higher.

Thank you. I appreciate it.

Thank you. Your next question comes from Stephen Gengaro with Jefferies.

Thanks, good morning, guys.

Good morning, Stephen.

Just back through the Production Enhancement side for a second. The margins dipped sequentially by 100 basis points, I think. Is that just mix? Does that have anything to do with added capacity, and I know you just addressed this a little bit. But just kind of what's behind that, and how does that impact us going forward?

All mix. You guys measure these margins a lot closer than we do.

All mix. And what about the mix was worse, though? Is that --

Might have done more low-cost natural gas wells than higher, and extended laterals up in the Bakken.

But nothing -- It's just quarterly noise? It's not anything that we can pinpoint at all?

Correct.

And then just -- you also mentioned the -- I think you said it was 17%, might have been 19%, market share of 17%?

Yes.

What is -- what's out there that could act as a headwind to you getting that number higher? Whether it be customers' decisions, price perspective to use other products, or other products that are evolving to compete with that? Or is it purely your ability to penetrate the market? How should we think about that?

I think the -- if you look at that's been used on 70% on eligible horizontal wells for that technology. That's creating market. There is no competing technology for that in the marketplace today. Essentially, that is just market penetration and us being able to educate clients to the benefits of using HTD-BLAST in extended lateral wells, especially in these oil plays.

Okay. That's helpful. And then just one final question. I think, Dick, you said 49.2 million shares in the first quarter. Is that the share count you are using for the full year as well?

Yes, at this point. We don't try to forecast share price to impact that number. We just extrapolate that for the whole year.

Great. Thank you, guys.

Thank you. Your next question comes from Blake Hutchinson with Howard Weil.

Good morning, guys. A quick question, David. With regard to the top line prospects for Reservoir Description. In the past, you've extolled the virtues of the business and that you did not have to add head count at ever-increasing revenue run rates. Do we -- can you give us an update on that, and do we finally kind of run into a little bit of that this year and holds back incrementals a little bit? Or is the same kind of construct in place where there just isn't a lot of investment that needs to be made incrementally as you scale up here?

Yes, Blake, we think it's more related to international activity levels. if we look at 2010 over 2009, they may have been up two or three or four percent. What we look at here, our bottoms-up analysis is this Company has the capacity with its brick and mortar and personnel right now to generate about $1.2 billion of revenue. So we are not running into any capacity constraints with respect to the amount of revenue we can generate, and that is especially the case for Reservoir Description. As we see international activity levels pick up throughout 2011, I think we will see increasing levels of revenue, which will drive the incremental margins, which will drive the margins within that business.

Great. And then a couple of questions to kind of recalibrate the model as we go into the new year. If we sat here a year ago, you would have talked about, you know, Core Labs not necessarily being a shale play and having 10% of overall revenue stemming from the shale plays. Can you give us an update of what you think the overall revenue is shale-based at this point?

Probably low teens.

Okay. So still low teens.

So again, still our focus, and actually our management activity, is tied so much more into international crude oil developments than looking at the shale plays.

Great. And then around the time of Macondo, you outlined that exposure to the Gulf was probably about 5%. Understanding it's not all exploration-related business, can you give us an update on how the Gulf play is playing in currently to overall, and maybe what you are building in for your outlook?

We had said at the time it's around 3% or so, a couple of three pennies on earnings at the time, and we look forward to the recovery of the permitting process and the activity levels coming up.

I think Chevron is going to be the first indicator of when a deep water permit will be issued. Hopefully, that will be within the next couple of weeks.

But the results we are seeing for 3Q and 4Q are reflective of the absence of that revenue and earnings stream?

Correct.

Okay. Great. And then final question, just on the Utica shale, just for point of clarification, was that a study that you already had on the shelf and had people coming back to this quarter? Or one you initiated this quarter?

That is part of our North America study. There are three cores that have been done and put out, released.

Okay, initiated with a North America study. Okay, I get that. And then, sorry, I lied, one final question just for Dick. Interest expense assumptions you gave out, you indicate -- I mean, that more or less indicates that in fourth quarter we go down to something fairly close to zero or fairly close to your cash interest expense, correct?

That assumes no further early exchanges of the notes and that we repay it in full with cash when it matures at the end of the year.

Okay, excellent. Appreciate the help, guys. Great quarter. See you.

Okay, Blake.

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

Thank you. Good morning, everyone.

Good morning, Victor.

A lot of my questions have been asked, but I just wanted to hit you guys up on incrementals for 2011 and what you guys talked about from an activity standpoint, both in North America international, as well as rolling out the new technologies like the HTD-BLAST. In thinking about incrementals for Production Enhancement and Reservoir Description, would it be a fair assumption to think that they are going to be both fall out in the plus or minus 40% range for '11?

Give or take, yes, probably somewhere, 35% to 40% range -- in a robust atmosphere, higher.

But there's no reason to believe that there is going to be a significant differential between the two segments?

No. Historically there has not been, and there should be no reason why we should see any differential developing.

And the second one I had was just on the Production Enhancement mix, international versus North America, if you guys have an update on a percent of revenue for that business?

Can you ask that again, Victor?

Sure. Just the revenue mix for Production Enhancement international and North America.

Oh, 67% North America, 33% international.

So that continues to trend modestly more towards the international side?

Correct.

And did you have a -- sort of 12 months ago, what that split was?

I want to say 70-30.

Great. And that's all I had. I appreciate it, guys. Thank you.

Okay.

Your next question comes from Rob MacKenzie with FBR Capital Market.

Thank you. My follow-up was already answered.

Thanks, Rob.

Thank you. (Operator Instructions) Your next question comes from Thad Vayda with Stifel Nicolaus.

Good morning, guys. Again, most of my questions have been asked and answered, but just quickly, you alluded to sort of your forward-look and the number of jobs you might have in the queue at a time. Can you give us a feel for how sort of where we stand now compares to prior years? Does it look to you more like an '06 or an '07 or '08, just in terms of interest and sort of your outlook in general? Thanks.

Yes, Thad. Big victory last night for you guys, congratulations. We looked at the jobs queued up, the comparison between right now and a year ago, they are up somewhere in the low double digits, and that's what has given us comfort with our guidance internationally.

Great. Thanks.

Thank you.

Okay, Therese, I think we are at the end of our call.

I would like to thank everybody for joining us, and in summary, Core's operations posted another solid quarter. We have never been better operationally or technologically positioned to help our clients expand their existing production base. We remain uniquely focused and are the most technically advanced reservoir optimization company in the oil field service sector. This positions Core well for the challenges that await in 2011. 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.

In closing, we would like to thank all of our shareholders and the analysts that follow Core. And as already noted by Monty Davis, the Executive Management and the Board of Core Laboratories give special thanks to our 5,000 worldwide employees that have made these outstanding 2010 and past results possible. We are proud to be associated with their continuing achievements.

So thanks for spending your morning with us, and we look forward to our next update. Good-bye for now.

Ladies and gentlemen, thank you for joining today's conference. Thank you for your participation. You may now disconnect.