Core Laboratories Inc (CLB) 2011 Q1 法說會逐字稿

Good morning, my name is Cassandra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Core Lab quarter one 2011 earnings 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. And now I would like to turn the call over to David Demshur. You may begin.

Thank you, Cassandra. I would like to say good morning in North America, good afternoon in Europe and good evening in Asia Pacific. Would like to welcome all of our shareholders, analysts and most importantly, our employees to Core Laboratories first quarter 2011 earnings conference call. This morning I am joined by Dick Bergmark, Core's Executive Vice President and CFO. Also again this morning we are at joined by Core's COO, Monty Davis who will present the detailed operational review. The call be divided into five segments. Dick will start with making remarks regarding forward-looking statements, and then we will come back and give a brief investor update in 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 invested capital. We will also discuss Core's long-held philosophy of returning excess capital back to our shareholders. And then Dick will come on and do a detailed financial overview and add additional comments about building shareholder value and give some color on our continued cautious and conservative second quarter and full year 2011 revenue and earnings guidance. Then Monty will go over Core's three operating segments detailing our progress in discussing the continued successful introduction of new Core Lab technologies and services and then highlighting some of Core's operations in major projects around the globe. Then we will open up the phones for a Q&A session. I will turn it back over to Dick 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 or uncertainties materialize or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. For a more detailed discussion of some of the foregoing risks and uncertainties, see item 1A, Risk Factors in our annual report on Form 10K, for the fiscal year ended December 31, 2010 as well as the other reports and registration statements filed by us with the SEC. Now with that said, I will pass the discussion back to David.

Well thanks, Dick. I'd like to give an investor update. Core's operations produced another excellent quarter, even though results were tempered by political instability in North Africa and certain Middle Eastern countries, and then seasonally cold weather in North America in January and February. Our growth strategies and execution by our operating units continue to serve our clients, our employees and our shareholders well. Core's continued focus on international, crude oil related developments, especially those in deep water environments, North American unconventional oil resource plays and the continued internal development of new technologies and services, have led to sustained growth and increased profitability.

Core has always followed and will continue to follow three key investment tenets that have led to 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 growing our 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 annual depreciation. Potential acquisition opportunities must pass these same high standards. This discipline produced free cash flow exceeding $53 million, equaling $1.09 per diluted share during the first quarter of 2011. This per share total will be one of the highest for all major oil field service companies for the first quarter. In fact, Core converted more than one of every four revenue dollars in to free cash during the first quarter of 2011. Core will continue to demonstrate strict financial discipline in 2011 and beyond.

The second financial tenet is to maximize the 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 the oil field service community. 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 was 29% and was approximately 21 percentage points higher than our peer group average as listed by Bloomberg Financial and approximately 19 percentage points above Core's weighted average cost of 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 proceed growth via acquisitions. Core strives to have the industry leading return on invested capital through continued execution of our growth strategies coupled with strict capital discipline. We believe that our commitment to both in 2011 will result in a continued superior share price performance for Core's shareholders. And then our third tenet is, return excess capital to our shareholders. During the first quarter of 2011, Core returned over $61 million to our shareholders in forms of quarterly dividends and the repurchase of some 550,000 shares, a sum which equaled over 1% of the Company's outstanding shares. Including the quarterly dividend of $0.25 per share paid during the first quarter, total capital return was approximately $1.24 per share which exceeded Core's first quarter free cash flow of $1.09 per share. Since 2002 when these programs were implemented, Core has returned over $880 million, or almost $18 per share to our share -- to our owners. We will continue to follow these three financial tenets in 2011 which should enable Core to continue to produce industry leading returns for all of our shareholders. So now, I will turn it back over to Dick for a detailed financial review. Dick?

Thanks, David. If we look at the income statement, revenues were $206.7 million in the first quarter versus $208.2 million in the prior quarter and $188.3 million in the first quarter of last year. Revenues were sequentially down slightly, but up 10% year-over-year. Of these revenues, services for the quarter, $153.1 million, up 7% when compared to $143.4 million last year, or an increase of $9.7 million. Product sales for the quarter were $53.6 million, up 19.4% when compared to $44.9 million in last year's first quarter. Moving on to cost of services for the quarter, 65.8%, an improvement when compared to 66.5% in last year's first quarter. And cost of sales, in the first quarter they improved to 67.2% of revenues compared to 69.3% for all of last year. G&A for the quarter is $9.5 million, up slightly sequentially from $9 million and up from $6.4 million in last year's first quarter. And we expect G&A to be around $34 million for all of 2011.

Depreciation and amortization for the quarter, $5.8 million, virtually the same as last year. We expect depreciation in 2011 to total approximately $24 million. Other income this quarter is $1.8 million. This amount was comprised of, among other things, interest and royalty income, FX gains and an insurance recovery. EBIT for the quarter, excluding those FX gains was $56 million, which was up $4.6 million, or almost 9% year-over-year. Our first quarter EBIT represents EBIT margins of 27%, similar to last year's first quarter. Interest expense was $2.4 million for the quarter compared to $4 million in last year's first quarter. And remember that only $150,000 of that is cash interest actually paid to our note holders, while $2.2 million, or $0.04 per share was non-cash interest expense being paid to no one. For the full year 2011, GAAP reported interest expense maybe $8.9 million with $8.5 million of that being non-cash, while the cash interest paid may only be $400,000, representing $0.17 per share in non-cash expense.

Tax expense in the quarter was $7.5 million, reflecting the inclusion of a discrete item that caused our effective tax rate for the quarter to be 14%. This item reflects the recent acceptance of positions taken by the Company for the tax years 2007 through 2010, reducing our tax liability carried for those years on our books by $10.4 million. Since we had paid taxes to the extent of our position, there will be no cash impact as a result of this favorable outcome. We expect our full-year 2011 annual effective tax rate to be approximately 30%, excluding the impact of this discrete item. Net income for the quarter, excluding the FX gains and expenses relating to the notes and using a 30% tax rate was $37.8 million compared to $32.2 million in last year's first quarter. So, net income for the first quarter increased 17.5% on a year-over-year basis.

GAAP net income for this first quarter was up over 44% at $46.3 million compared to $32.2 million last year. Earnings per share for the quarter, adjusted for the items previously mentioned, was $0.77 compared to $0.75 reported as Bloomberg's Main Street estimate and compared to our prior guidance of $0.72 to $0.76 per share. Sequentially, GAAP EPS of $0.94 is up 16% from $0.81 in Q4, and is up 36% from $0.69 year-over-year. Now, if we go to the balance sheet, cash was $80 million compared to the prior year-end balance of $133.9 million, cash balances and our free cash flow were used primarily to repurchase stock, pay our dividends and fund the early exchange of notes. Receivables stood at $158.3 million, up slightly from $154.7 million at year-end. Our DSOs for the quarter were 69 days, a slight improvement from 70 days in 2010. Inventory, up from $33.9 million at year-end to $38.5 million, with inventory turns importantly remaining at 3.7 in the first quarter, which were the same as in Q1 of last year. Other current assets were $27.9 million, up slightly from last year-end of $26.7 million, BP&E, intangibles, goodwill and other long-term assets increased $5.8 million due to changes in deferred tax balances relating to the exchangeable notes.

And now to the liability side of the balance sheet. Our accounts payables were $48.7 million, up from the prior year-end balance of $44.7 million. Other current liabilities of $95.4 million are up $11.3 million due in part to an increase in unearned revenue of $8.7 million for certain consortium studies and $4.1 million for income taxes accrued but not yet fully paid in various jurisdictions. Our senior notes are now down to $105.3 million from $147.5 million at year-end and continue to be classified as current and are available for early exchange into the second 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 10 requests to exchange 46,568 notes in the first quarter which were settled for $46.6 million cash and 556,455 shares from treasury. 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.

Other long-term liabilities ended at $57.2 million, an increase of $1.7 million over the previous year-end balance. Equity component of senior exchangeable notes stands at or $4.5 million, down from last quarter's $8.9 million, due in part to the notes exchanged during the quarter and as a result of 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 $109.8 million in outstanding face value of the notes. Shareholders equity ended the quarter at $283 million, down from the prior year and balance of $292.3 million, primarily due to additions from earnings offset by share repurchases and dividends. Using annualized net income for the first quarter, our return on equity was approximately 53.5%, and that is certainly one of the highest returns earned in the industry. Capital expenditures for the quarter were $4.4 million, down from $6.2 million in the prior year. We expect our CapEx program in 2011 to be approximately $25 million to $27 million as a result of an expected continued improvement in the industry.

Looking at cash flow, cash flow from operating activities in the quarter was $58 million and after paying for our $4.4 million in CapEx, our free cash flow was $53.6 million. In the first quarter, we turned almost 26% of our revenues into free cash flow. Certainly one of the highest in our industry. The annualized per-share yield on this quarterly cash flow was 4.3%. Our free cash flow in the quarter equaled $1.09 per share as David mentioned, which is greater than $0.94 in EPS reported for the quarter. During the quarter, we used our free cash flow and cash balances to pay $11.3 million in quarterly dividends, repurchase $49.8 million of our shares and pay $46.6 million for the payment of the early exchange for some of our notes. Free cash generation such as this gives companies like Core Lab significant opportunities to enhance shareholder value.

Now, let's touch on our targets for the first quarter. For the sec -- sorry, for the second quarter of 2011, we continue to take a cautious view of the political turmoil in North Africa and parts of the Middle East and the expected increase in international activity for our clients. Consequently, we expect revenue in the range of $215 million to $220 million, with EPS in the $0.84 to $0.88 range, up approximately 15% over year-earlier quarterly totals. Using our outstanding diluted share count of 49,141 million for the second quarter, EPS guidance of $0.84 to $0.88 translates to approximately $41.3 million to $43.2 million of net income.

Operating margins are expected to be approximately 29% with year-over-year quarterly incremental margins above 40%. For the full year 2011, we expect revenues to increase about 12% to 15% to approximately $890 million to $910 million, generating approximately $270 million of operating income. Operating margins are estimated at 30%, up approximately 100 basis points from 2010 levels. Incremental margins are estimated at approximately 40%, yielding full-year EPS of approximately $3.55 to $3.60 per share, an increase of approximately 20% over 2010 earnings, excluding the impact from the favorable tax determinations. Keep in mind that these targets are ranges and included a touch of conservatism dependent upon the North Africa and Middle East unrest and patience while our international oil companies begin to ramp up their activity levels as the year progresses. Further, given the upcoming ramp up of our exchangeable notes, it is more problematic at this point to estimate what interest expense may be.

Our capital expenditures are expected to equal 2010 levels. This guidance assumes an essentially flat rig count in North America, with rigs drilling for oil replacing those drilling for natural gas. We also expect to begin work on deep water Gulf of Mexico projects late in the second quarter, and we still expect international activity to increase in the second half of 2011 over the tepid levels of the first quarter of the year. This 2011 guidance excludes any gains or losses that may originate from the repurchase of outstanding debt and any effects of foreign currency translations and it assumes an effective tax rate of approximately 30%. In addition, 2011 guidance does not consider shares that may be repurchased by the Company or shares that may be added to the share count relative to amounts outstanding on Core's notes and warrants. With that, I will turn the call over to Monty now for more in-depth operational review.

Thank you, Dick. Q1 2011 was our best first quarter ever as Core Lab revenue grew 10% over Q1 2010. And operating margins were maintained at 27%. This record was achieved through the constant efforts of our 5,000 employees around the world, and we greatly appreciate their work for all of our success. However, Q1 operations were affected as a result of work loss because of winter weather across much of the United States in February and political unrest in North Africa and certain Middle East countries. Operating margins were also affected, but equaled last year's Q1 margins of 27%.

Reservoir description revenue grew 3% over prior year Q1, and operating margins improved 100 basis points to 25%. Activity continued to be strongest in West Africa, the Middle East, Asia Pacific and unconventional oil plays in North America. We are currently performing enhanced oil recovery studies in the Middle East in Kuwait and the UAE. In Kuwait ,we are analyzing a major reservoir to determine the best injection gas, processed hydrocarbon gas, CO2 or a mixture of these for optimum oil recovery. The project utilized various analytical methods and will also examine the potential asphalting flocculation which may result from various gas injections. Asphalting flocculation may increase residual oil saturation and/or reduce permeability or cause difficulties as service handling facilities. We are currently working in phase 2 of a core analysis project on a large field from southern Iraq for a major international oil company. We performed 11 -- we performed studies on 11 fields in Iraq for 13 different oil companies to evaluate the potential for increasing production and ultimate recoverable reserves.

Production enhancement revenues grew 19% over Q1 of 2010 despite the loss of activity due to extreme winter weather across much of the United States, most active plays in February. Operating margins declined 200 basis points due to the shutdown of field activities during the extreme winter weather to 28%. We are using our SpectraFlood technology to monitor a water and gas flood more recently discovered field offshore West Africa that is currently in the water injection phase. This study will be used to improve sweep efficiency and recovery from the reservoir. Our HTD blast firing system for perforating the toe of horizontal wells, the most difficult section of horizontal wells to complete, increased to 19% market share in Q1, up from 17% in Q4 last year. Our reservoir management revenue for Q1 grew 10% over prior year first quarter, and operating margins improved 300 basis points to 39% .

In the first quarter, we kicked off a new consortium study of the Avalon oil play to help operators in reservoir characterization and stimulation programs for this play. The area of focus is in the Delaware basin, which encompasses parts of New Mexico and West Texas. Operators are targeting the Avalon shale which is sandwiched between the Brushy Creek and Bone Springs sands. Production is primarily light oil from this mudstone. Our Eagle Ford consortium project is still gaining interest, particular in the liquid producing part of the play. In Q1, we added two new participant companies, bringing the total to 37. Our global shale study added three new member companies in Q1, bringing the total membership to 22 countries -- companies, sorry. The project included fields in Europe, South Africa, South America, North Africa and the Middle East. We will now open the call

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

Hey, good morning, guys .

Good morning, James.

David, as we think about the international business throughout the rest of this year, admittedly it -- the growth was -- had better -- there was really no growth in the first-quarter here because of North Africa. I believe your original guidance, as you stated it late last year, was for 10%, roughly E&P spending growth international. At this point, given what we do see is improving volumes, do think that number is still good or is there an upward or downward bias to that?

James, I think there is an upward bias to that. Certainly, it will come. When international expansion does arrive, it will arrive. We are surprised as you are, and the analysts and other companies, that we haven't seen an expansion in international operations, especially when we are looking at $120 print crude oil prices. We can see by the number of inquiries that we are getting that we are confident that in the second half we will see a ramp on that. And hopefully, we exit the year with a 10% increase. And that's why we put some of the conservative nature into our guidance because we would have thought we would've already seen that by now.

But certainly, it has to be in the pipeline with $120 crude. We are getting indications out of Saudi Aramco that they are looking at expanding capacity with recent announcement in Manifa. We were unusually active in South America related to a number of oil plays there, so the Middle East, South America and Asia Pacific all oil related plays, the indications are that we are looking for a stronger second half.

Okay, good. That is what I am seeing as well. One last question for me, David, on the North American side of your business, I know you guys are anticipating a flattish rig count as we go through this year. But given the increases in service intensity, what type of growth, even in that flat rig count environment, would your business see in North America?

We're probably, we probably don't have this service impact that may be a pressure pumper or a driller may have. But we probably estimate somewhere on the order of, probably, high teens . And from what we have seen so far out of the Eagle Ford and the Bakken, that would probably be a pretty

Okay, so high teens in a flat rig count?

Yes, that's correct.

Okay. Great, thanks, David.

Your next question comes from the line of Jim Crandall.

Good morning, guys.

Morning Jim.

David, another question on North America. Certainly the oil rig count is surging higher in here, and then maybe even meaningfully higher by the end of the year. So, you obviously expect further declines in the gas rig count, maybe even meaningful declines. Can you talk a little bit more about your thinking about the overall US market?

Yes, just looking at the US market, Jim, we would agree with that. We would still say that we see this switching out from natural gas drilling to oil drilling. Yes, there might be a bias on the net number of rigs running at the end of the year. We think this demographic works for us. We'd rather work in oily plays, as you know, as opposed to just strictly natural gas plays because of the increase in service intensity. We would not be surprised to see over 1,000 rigs running for drilling for oil by the end of the year and less than 700 drilling for gas by the end of the year. That's kind of what we have baked into our forecast for North America.

Great, just a specific question on North America, Dave, can you share your thoughts on the Eagle Ford and what you see as the duration and maybe growth potential of the play from here?

Yes I will that Monty speak to that now, but a couple comments on perhaps the oily Eagle Ford spreading into the northern parts of Mexico. Monty?

Yes, that's certainly the active part of that play is the oil rich shale. We are going to continue to see some growth in that. I mentioned we added two new companies to our study on the Eagle Ford, that is focused on the oil rich portion of that play. And that and other oil rich shales are going to be the focus that we have and that we see the activity level in. We think there is growth in that, we think there is other growing opportunities in the oil rich shale plays.

And Jim, added to that, if you look at the petroleum geology of the northern part of the Eagle Ford as it turns a little bit further to the south and going into northern Mexico, you can find areas where the Eagle Ford will be in the oil rich zone and actually, probably will be thicker. There is a good potential for a large breakout of some horizontal drilling in the northern regions of Mexico to take advantage of this Eagle Ford play, and we will be well positioned for that as well.

Okay, thanks, Dave.

Your next question comes from the line of Rob McKenzie. Mr. McKenzie, your line is open.

Sorry, I had it on mute. Good morning, guys.

Good morning, Rob.

Question for you, David. Can you give us a feel for how much conservatism you are baking into your guidance for unrest , war, et cetera, in North Africa and the Middle East and whether or not you are risking anything happening in Algeria

Yes, I would throw all of those into the box, Rob. If you look at our revenue estimates ranging from $890 million up to $910 million, if you are at the bottom of that revenue range and let's say you miss your margins from 30% maybe down to 29%, you quickly get into the range, especially with some of the comments Dick had regarding interest, you get in that range which we quoted in our guidance. Although it may be conservative, we take that cautious outlook as we always do, baking in continued unrest in North Africa, parts of the Middle East, and we also are confident about the ramp in international, but we would have, again, thought we would have already seen that. So, when you mix that all in, you can come up with the numbers on the $3.55 to $3.60 on the guidance that we gave.

Okay, thanks. If things just kind of stay where they are now with Libya being shut down and everything else being okay, is that the midpoint of your scenario range?

I would say that, if that is indeed the case, then probably our guidance is conservative.

Okay. That's helpful. Separate topic, it looks like your product sales revenue was up, call it 19% year-over-year here in the first quarter. That had been a concern of some and you guys had talked about not adding extra shifts in the perforating charge business last year, where do we stand on that? It looks like some decent growth there, and how much of that would you say is volume versus price?

It's mostly volume, Rob. The -- we are producing at our current level, plenty of product to supply that market. Obviously, we couldn't achieve those growth rates if we weren't. We are not short on supply. We are opening three new distribution centers in the US, and we are expecting those to enhance and help us reach those growth targets. The activity is strong, we are de-bottlenecking , we always are working on this to make sure we can produce and deliver the products that we need to produce. So, that

And the other thing that Monty mentioned, I just want to amplify on that, he talked about these three new locations. You did see our inventory go up, and that was for the purpose of stocking those locations for other reasons as well. That clearly shows we don't have a productivity issue, we have de-bottlenecked, and our goal, of course, is to make and produce our higher margin products like the HTD Blast. And again, as we said on the call for the last two quarters that we are deemphasizing the lower margin products.

Right, fair enough. And then I guess my final question would be posted to either David or Monty. David, oftentimes you highlight up-and-coming trends or plays that you think generate -- can or will generate substantial growth opportunities. What have you seen emerging over the past quarter or two that is largely not on Wall Street's radar screen yet that you think can be a meaningful new play for Core Lab and perhaps others in the service industry over the next year or so?

Yes, Rob, we maybe a little -- even further out than that, we have started to generate some new technologies here as we did in the third quarter last year on NanoCeram, which would be the first step in putting together a series of technologies to look at the possibilities of miscible gas floods in oil shales. We think that this is a real possibility. We are probably still a couple of years away from that, but combinations of CO2 and helium, which is of course is the smallest molecule known to man. And we understand, being peak oil guys that ultimate recovery factors are critical for us to be able to maintain plateau production at 88 million or 89 million barrels a day, which we believe is peak in the globe, that ultimate recovery factors will be critical over the next one, two , five and 10 years in this industry. And, we think we have positioned the Company nicely for that.

We continue to work away on a lot of miscible gas work. As Monty mentioned, a number of projects right now in the Middle East, so our clients, they are certainly are very concerned about their ultimate recovery from their fields when it may be difficult for them to expand their production as much as they would like, going back to the fields that they have in trying to up the recovery, 100, 200, 300, 400 basis points over what would be the recovery of the field having not entered into some of these miscible gas projects that we are now

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

Your next question comes from the line of Stephen Gengaro.

Thanks, good morning gentlemen.

Morning, Stephen.

Two quick questions, one just to follow-up. Your rig count guidance or your rig count base case in North America is -- you said flat. Do you mean flat from here, or flat for the year on a year-over-year basis?

We use about 1,700 rigs, somewhere on the order of that, so if it is up from there, it will be up a little bit, Stephen.

Okay, okay. And then secondly, when we look at the deep water markets around the world, and I'm sort of thinking about Brazil specifically, what is your presence down there? And is there -- how big is that opportunity?

Yes, for us, South America -- and Dick, you do have some information on that -- was a good grower here last quarter.

Actually on the revenue and EBITDA basis, that was one of our out performers from the group, David had mentioned South America, Middle East and Asia Pacific were good for us, actually, South America was the best one.

When we look at our exposure to South America, primarily four markets. Venezuela, which as you know we have been deemphasizing, moving some of those operations into Bogota, Columbia, which has now expanded into a pretty good base. Our exposure in Brazil and then in Argentina. Now, a lot of the work from Brazil is either done here in the United States or can be done in places like our advanced technology center in Aberdeen. We do have a small base of operations in Brazil, but because of various tax laws and local content, it is much easier for us to conduct that work outside of that marketplace. It gives us a better return, it gives us much better margins and it gives us much better efficiency as opposed to landing a large, hard base there.

And when you talk about Brazil, can I assume you're talking about Petrobras or other operators or both?

We have worked just for about every -- we've worked for every operator that we know of in Brazil.

Great. And then just one final follow-up from a technology perspective, there has been some traction, I guess, away from -- and I guess it is still pretty small, but away from plug and perf jobs in North America. How does that impact you? Is it something that you are A, either worried about or B, can address in a different way with different products?

Yes, with respect to that Stephen, we have really not seen any movements in the replacement of technologies that we provide away from plug and perf. As a matter of fact, if you look at year-over-year growth in our product sales, it is one of the highest quarters that we've had. So, we essentially don't see that in the marketplace. We see that slide and sleeve is such a limited application horizontal wells that we don't think it will have a material impact on us. And as you know and as we have discussed, we look at multi-phase fluid flow through porous media. So, that is going to be getting out there the most technologically advanced perforating charges to deeply perforate the formation where we are not causing damage. So, we can get that fluid flow into the well bore.

That was easy for you to say. Thank you.

Your next question comes from the line of Blake Hutchinson.

Morning, guys.

Morning, Blake.

Just trying to characterize a little more fully the frustration with year-over-year growth within reservoir description, understanding that is typically back half loaded to begin with. You guys have been kind of hammering us a little bit more with the prominence of enhanced oil field recovery and away from typical coring and fluids analysis. Can we take it that some of the delay here is that your inquiries are for more elaborate studies that beg more upfront analysis from the customer and therefore there is delay, but when it kicks in, it kicks in at higher ticket levels and higher incremental margins? How should we characterize how this kind of unfolds over the years?

Yes, Blake. I think you have got more of a one-to-one correlation with reservoir description and international crude oil related projects. And of course, a lot of the data that has to be generated for these production enhancement, miscible gas flood projects has to be generated by our reservoir description group. So, I think you will see a correlation, a tight correlation to a pickup in international activity to an increase year-over-year in those revenues. That is why we put out some cautionary words that at $120 for a barrel of red crude, certainly you would think we would see an increase in international activity. It is there somewhere in the pipeline, and we thought we would see by now. But the number of inquiries we're getting, we're starting to feel more comfortable that in the second half we will see a ramp on that.

Well, I guess the question is more to the quality of the inquiry you're getting and the ticket attached, the sophistication of the analysis attached. Is the mix shift working in your favor on the inquiry you're seeing today?

Yes. Because when we look at large miscible gas floods, you are looking at really dynamic flow tests of several cocktails of gases through these core samples at reservoir temperatures and pressures. Those are higher margin services that we provide and in some cases, ultimately we are the only Company that can provide those in the industry. We should see a bias to the upside on margins and on the size of the tickets that we write for that as we go forward in 2011.

Great. And just again, you note that the second quarter guidance is very cautious. Would you rule out a change from tepid for reservoir description for 2Q or just stick to saying it's definitely a back half phenomenon at this point?

It's a back half phenomenon. Because as it stands right now and some of the other conference calls that have taken place in this earnings season, we are anticipating a stronger second half. But as we stand right now, inquiries are up, activity remains about the same.

Great. And then, just a point of clarification as we talk about the HTD technology. We understand, you have given us numbers on the numerator in terms of market share that you think you have on the completion basis. What are you using -- where do you find -- how do you define the denominator? In other words, what is your target audience? Is it 36 plus stages, is at length of lateral? Fluid composition? How should we be thinking about how you defined market share with HTD technology?

That is just the number of wells drilled in oil shale reservoirs and the number of applications of our HTD Blast.

And then --

So right now, one in five jobs completions, in oil shale related reservoirs

Horizontal wells.

Yes, sorry, horizontal wells.

Okay, excellent. And is there -- is that a hard and fast rule that you are also using the HERO charge along with that? Or is it most of the time, or how do we define the percentage on that?

That is certainly most of the time. We are -- the HTD Blast is the firing system. It is a pull through for all the guns, charges and ancillary equipment that we sell that goes along with that operation. So, yes. We always are selling on the HERO charge.

Okay, great. Thanks a lot for your time, guys.

Your next question comes from the line of Victor Marchon .

Thank you. Good morning, guys.

Good morning, Victor.

First question I have is just on deep water side. I just wanted to get what you guys are seeing there outside of the Gulf of Mexico. And if you could remind us, how big that business is as a piece of your overall, as well to the revenue intensity for a deep water well relative to what you see onshore?

Yes. If we look at Core Lab, worldwide about 30% of all crude oil is produced offshore. It generates about 40% of our revenue . Deep water is somewhere north of 10% of all crude oil produced. It's about 20% of our revenue. You can see the service intensity is much higher on these deep water wells. When you spend $120 million to $230 or in the eastern Mediterranean, $150 million to drill a well, you are going to use a lot of science and when you use a lot of science, that is good for a Company named Core Laboratories. When we look at the amount of opportunities we get, if we look at 1,000 foot core deep water Angola, all in, that -- probably somewhere between $1 million and a $2 million opportunity. If you could cut a horizontal core in a shale reservoir 1,000 feet, that might be somewhere on the order of a couple hundred thousand dollars. You can see our great emphasis on offshore deep water crude oil related projects because as Willie Sutton said, that's kind of where the

Great, okay. The second I had tied into what you guys talked about in the press release regarding reservoir management in the shale studies that you're doing in some of these international plays, and just want to see if you can talk to how you see that developing over the next couple of years. What countries specifically do you see the greatest opportunity for a ramp in activity -- from a timeframe perspective?

Well, that's -- on the international shale plays, it's variable -- Eastern Europe has been one of the more active areas. North Africa is an area that we have done work, but of course, but the political instability there has disrupted that to some extent. We are seeing a lot of activity in the South America interest on that. And don't forget, bringing back from international, in North America the oil rich shale plays are picking up. I mentioned the Avalon study that we just kicked off, so that is going to continue to develop as well. Timeframe on -- if you're looking for production timeframe from those, that is out a ways. There's a lot to be done before we see production from those shale plays.

Thank you for that. And the follow-on I had was on the cost side and here in the last two months, from a number of service companies, the cost creep that they are seeing. And just wanted to ask what you guys are seeing on that end and how you are thinking about that as it is baked into your guidance for this year?

Just take the 30,000 foot level when we talked about our cost of services and cost of sales. Each one of those improved year-over-year as a percentage of revenue. We are mindful of that, and we do what we can to reduce those costs, and that is all about productivity gains. And we haven't seen any large inflationary increases in our business just yet.

Yes, and if you just look at past history, if you go back to 2006 to '07, 2007 to '08, we had about $100 million gains in revenue. Essentially, we hired both those years between 100 and 200 additional employees. So, as Monty emphasizes, we are always trying to de-bottleneck, increase efficiency, automation; so that has helped with our cost curve over time. More of that to come as we go into 2011.

Great. Thank you, guys. That's all I had.

Okay, Victor.

Your next question comes from the line of Matt McGeary .

Morning.

Morning, Matt.

How are you doing? Maybe sort of piggybacking on the last question. You used to talk about, now and again, how much revenue you could put through your operations and trying to help us understand when to expect the next little bit of CapEx increase to increase your capacity. I remember when that number was like $600 million in revenue. So, it has obviously been a while, but do you have an update on that and how you are thinking about that?

Yes, sure. That's right. We talk about that each year, in fact. And our own internal CapEx program is designed to increase that capacity. So, when you think about the $25 million or so that we think we will spend this year in our own CapEx program, I think of two-thirds of that being for growth. And so, that should expand that, what was $600 million several years ago, and think about last year what we spent our growth capital on. We talked about two new fluid facilities in Aberdeen, we talked about the consolidation of two facilities here in Houston. All of those designed to raise that capacity number up, and right now it's around $1.2 billion. I think, we're not saying there is a step function required at $1.2 billion, what we are saying is every year as we spend our own internal CapEx, that number should continue to increase. And we'll update as we go forward each year.

Thank you.

You have a follow-up question from Jim Crandall.

The CEO of a major oil service company recently told me that two of the majors that he had met with told him that of all the technologies of this oil service company had been working on, the thing they were most interested in what was core analysis, which I found very interesting. And certainly, no one would be in a better position to know that than you. Given that they are always interested in core analysis, do you think we have seen a meaningful step up in the interest of some of the biggest companies in the world in the whole technology?

Yes. No question about it, Jim. If we just look back over the last 30 some years that I have been with Core, I thought that we entered kind of the golden age of core analysis in the years 2002, 2003. And this was about the time that, I think, you had a lot of the think tanks at these major oil companies starting to think about production capacity, spare capacity and recovery rates in the importance of recovery rates.

When you look at the combination of reservoir description and production enhancement, it's now become a powerful technology tool for them to maintain production levels and in some cases, expand production levels. I think over the last seven or eight years we have entered that golden range. And I can just tell by the number of jobs that we have, the detail that we do, with respect to not only core analysis, but remember, a critical factor here is looking at reservoir fluid analysis. The combinations and the interactions of natural gas, crude oil and the waters that are in these reservoirs are critical.

As you guys know, Core Lab generates more revenues now from analyzing reservoir fluids then we do from core analysis. And, as it turns out, if we look at it, the rocks remain static. Well, not exactly, but let's, for this discussion, the rocks remain static. When we look at reservoir fluids, they are dynamic. When we change the pressure and temperature conditions of that reservoir, we change the dynamic of that fluid. When we change the dynamic of the fluid, we can increase recovery factors. And we think having the combination of core analysis, it has to have a critical component, and that is reservoir fluids. And as we look just down at our numbers, we see that our growth on the reservoir fluid side, in interest there, especially in miscible gas studies, far outstrips the growth rates of looking at rocks.

So, we think the critical decision that we made some 15, 16 years ago when we bought Core Lab, from Western Geophysical was to emphasize reservoir fluids and its relation to enhanced oil recovery and maintaining production rates. So, I couldn't agree with you more. Core analysis is important, and I'm sure when they answer that question they included the importance of looking at reservoir fluids, looking at interactions of pressure, volume and temperatures and how these fluid interact with gases that we can inject in the reservoir. Be it nitrogen, CO2, heavy and light hydrocarbon gases or, in some cases, even water. We would agree with that wholeheartedly.

Okay, great answer. Thank you, Dave.

Okay, very good, Jim. Okay Cassandra, I think we are going to go ahead and wrap it up. Our time is up and there is another call on the line. 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 technologically advanced reservoir optimization Company in the oil field services sector. This positions Core well for the challenges of 2011 and beyond.

The Company remains committed to industry-leading levels of free cash generation and returns on invested capital with excess capital being returned to our shareholders. In closing, would like to thank all of our shareholders and analysts that follow Core. And as already noted by Monty Davis, the executive management and board of Core Laboratories gives a special thanks to our 5,000 worldwide employees that have made these outstanding first quarter results and past results possible. We are proud to be associated with their continuing achievements. Thanks for spending your morning with us, and we look forward to joining you on our next conference call. Goodbye for now.

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