Core Laboratories Inc (CLB) 2011 Q2 法說會逐字稿

Good morning. My name is Tabatha, and I will be your conference operator today. At this time I would like to welcome everyone to the Core Labs second quarter 2011 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, Mr. Demshur, you may begin your conference.

Thank you, Tabatha. 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 second quarter 2011 earnings conference call.

I'm joined by Dick Bergmark, Core's Executive Vice-President and CFO. Also, again this morning we are joined by Core's COO, Monty Davis, who will present the detailed operational review.

The call will be divided into five segments. Dick will start by making remarks regarding forward-looking comments. Then we'll come and give a brief investor update and highlight the three financial tenets by which Core's financial team executes the Company's growth strategies. We believe that these three financial tenets have produced industry leading shareholder returns and returns on invested capital. We will discuss Core's long held philosophy of returning excess capital back to our shareholders.

Dick will follow with a detailed financial overview and additional comments regarding building shareholder value and Core's third quarter and full year 2011 revenue and earnings guidance, which has been increased from prior guidance. Then Monty will go over Core's three operating segments, detailing our progress and discussing the continued successful introduction of new Core Lab technologies and services, and then highlight some of Core's operations and major projects. Then we will open the phones for a Q&A session. I the turn it back over to Dick for remarks regarding forward-looking comments. 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. There 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 of some of the foregoing risks and uncertainties, see Item 1A Risk Factors in our annual report on Form 10-K for the fiscal year ended December 31, 2010, 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.

Okay. Thanks, Dick. I would like to give a brief in investor update.

Core's operations produced an all time record quarter, as the company realized a long awaited increase in international and deep water offshore activities in response to higher oil prices and dwindling global spare oil producing capacities. Core's reservoir description results reflect these positive increases in both international and deep water activities, as Monty will make remarks regarding both of these. We see this trend continuing into the third quarter.

Our second quarter 2011 results were somewhat tempered by several transitory issues that affected margins and incremental margins for the Production Enhancement segment. Monty will give colors to these issues, but we expect Production Enhancement margins to return to historical levels in the third quarter of 2011.

And then finally from operations, Reservoir Management posted its best quarter ever, reflecting additional oil company support for its joint industry projects in unconventional oil shale reservoirs in North America and growing interest in unconventional shale reservoir internationally, specifically in Northern Europe. And we will have comments later on Argentina as well.

Our growth strategies and the 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 has led to a multi-year 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 financial tenets are, number one, to maximize free cash flow through fiscal discipline. Core follows a strict discipline for allocating capital for investment in growing our business. Unless certain return on invested capital standards are met or exceeded, the capital expenditure is disallowed. On average over the past 31 years, the Company determined that the appropriate capital allocation generally equals the amount of annual depreciation. Potential acquisition opportunities must pass the same high standards.

This discipline produced first half 2011 free cash exceeding $86 million or equaling $1.76 per share, and essentially equaling our first half net income. As we have often said, net income is usually a pretty good proxy for free cash flow for Core Laboratories. This per share total will be one of the highest for all major oil field service companies. In fact, Core converted about one of every five revenue dollars into free cash during the first half. Core will it 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 Core's executive and senior management teams based on the Company producing a return on invested capital in the top decile for oil field service companies. Core believes that stock price performance over time is directly related to its return on invested capital. Based on these most recent calculations available from Bloomberg Financial, Core's return on invested capital of 34%, which was approximately 25 percentage points higher than the oil field services peer group average listed by Bloomberg Financial and was approximately 24 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 companies 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. Our commitment to both in 2011 and beyond will result in the continued superior share price performance for Core shareholders.

The third financial tenet is to return excess capital to our shareholders. During the second quarter of 2011 Core returned over $75 million to our shareholders in forms of quarterly dividends and the repurchase of warrants representing approximately 628,000 shares, asum which equaled about 1.3% of the Company's outstanding shares. For the first half of 2011, Core has returned over $136 million to our shareholders, equaling approximately $2.80 per share. Since the program was initiated in 2002, Core has returned over $950 million, or almost $19.50 per diluted shares to our owners, a total that will likely exceed $1 billion later this year.

We will continue to follow these three key investment 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 the detailed financial review. Dick?

Thanks, David. [If] we look at the income statement,revenues were $225.8 million in the second quarter versus $206.7 million in the prior quarter and $198.9 million in the second quarter of last year. So revenues were sequentially up 9% and up 14% year-over-year. And given that the international rig count was down around 2% from a year ago, our revenue increase is materially higher than international activity levels if you use rig count as a close proxy for activity. Of these revenues services for the quarter, $169.8 million, up 11% when compared to $153 million last year, an increase of $16.7 million.

Product sales for the quarter were $56 million, up 22% when compared to $45.9 million in last year's second quarter. If we look at cost of services for the quarter, they were 66%, compared to 63% in last year's second quarter. And cost of sales in the quarter were 72% of revenues, compared to 69% for all of last year.

G&A for the quarter was $9.8 million, which was up slightly sequentially from $9.5 million and from $9.2 million in last year's second quarter. We expect G&A to be around $36 million or $37 million in 2011.

Depreciation and amortization for the quarter, $5.8 million, virtually the same as last year. And we think for the full year 2011 it will approximately be $24 million. Other expense this quarter is $147,000, which compared to an expense of $1.3 million in last year's second quarter. And the difference is primarily due to the effects of currency fluctuations in last year's second quarter that did not reoccur this quarter.

EBIT for the quarter, excluding the items, was $62.2 million, which isup $8.5 million or 15.7% year-over-year. Our second quarter EBIT excludes items represents EBIT margins of about 28%, so slightly higher than last year's second quarter of 27%.

Interest expense was $2.5 million for the quarter, compared to $4.1 million in last year's second quarter, butonly $577,000 of this is cash interest that is due the noteholders and to the credit facility in the period, while$1.9 million,or $0.04 per share, was noncash interest expense being paid to no one. For the full year 2011 GAAP reported interest expense may be around $8 million, $6.6 million of that being noncash, while the cashinterest paid will only be $1.4 million, representing approximately $0.14 per share in non-cash expense.

Tax expense in the quarter was $14.7 million, reflecting an effective tax rate for the quarter of 26.7%. We expect our full year 2011 annual effective tax rate to be approximately 28%.

Net income for the quarter, excluding items, was $43.9 million, compared to $34.2 million in last year's second quarter, which represents a 28.2% increase on a year-over-year basis. GAAP net income for the second quarter was up over 18% at $40.5 million, compared to $34.2 million last year.

Earnings per share in the quarter adjusted for the items previously mentioned was $0.90 compared to $0.88 reported as Bloomberg's main street estimate and our prior guidance of $0.84 to $0.88 per share. And that compares to $0.77 reported last quarter and $0.71 year-over-year. So adjusted EPS was up almost 17% sequentially and 27% year-over-year. GAAP EPS for the second quarter was $0.83.

Now, going over to the balance sheet. Cash was $24.6 million, compared to the prior year end balance of $133.9 million. Cash balances in our free cash flow were use the primarily to repurchase our shares, settle our warrants, pay our dividends and fund the early exchange of some of the notes. Receivables stood at $160.2 million, up slightly from $154.7 million at year end. Importantly, our DSOs for the quarter improved to 64 days from 70 days for all of 2010.

Inventory; up from $34 million at year end to $42.5 million. Turns improved and are now at 3.8 for the second quarter, compared to 3.7 in the first quarter. So our operating managers did a great job improving inventory turns during a time that our product sales were up 22% year-over-year.

Other current assets were $27.4 million, up slightly from last year end of $26.7 million. And there is no real change in PP&E, and intangibles good will and other long-term assets increased $9.9 million, primarily due to increase in deferred tax assets of $6.8 million relating to the notes that were early exchanged this quarter.

And now to the liability side of the balance sheet. Our accounts payable were $61.3 million, up from the prior year end balance of $44.7 million due to increased business activity and our settling of some of the warrants.

Our senior notes are now down to $89.7 millionfrom $147.5 million at year end and continue to be classified as current and are available for early exchange into the third quarter of 2011. As a result, noteholders, if they choose, can send their notes to the trustee, and we will exchange their notes. We received nine such requests to exchange 17,909 notes in the second quarter, which were settled for $17.9 million in cash and 213,936 shares from treasury. And 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.

Our current liabilities of $85 million are unchanged from the prior year end balance, andother long-term liabilities ended at $61.8 million,an increase of $6.3 million over the previous year end balance due to additional tax contingencies that have been established in a variety of international locations.

Equity component of senior exchangeable notes stand at $2.2 million, down from last quarter's if $4.5 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. This balance plus the short-term debt balance equals the $91.9 million inoutstanding face value of the notes. This classification is required while the early conversion condition of the notes is in effect.

Shareholders' equity ended the quarter at $252.2 million, down from the prior year end balance of $292.3 million primarily due to additions from earnings offset by share repurchases, the accelerated settlement of warrants and dividends paid. Using annualized net income for the second quarter, our return on equity was 69.6%, and this is certainly oneof the highest returns earned in the industry. And as a reminder, for full year 2010 our return on equity was 50.8% peers.

Capital expenditures for the quarter were $7.6 million, up from $6.5 million in the prior year second quarter. 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 from operations in the quarter was $39.9 million, and after paying for our $7.6 million in CapEx, our free cash flow was $32.3 million or $0.66 per share. The annualized per share yield on the year-to-date free cash flow was 3.2%. During the quarter we used our free cash flow and cash balances to pay $11.4 million in quarterly dividends, repurchase $2.3 million of our shares, paid $17.9 million for the repayment of the early exchange of some of our notes, and settled 3.2 million warrants for $57.8 million plus 668,436 common shares.

Okay,let's now touch on our targets for the third quarter. For the third quarter we expect revenues to be approximately $230 million to $245 million, with EPS ranging between $0.98 and $1. This revenue and EPS guidance could be negatively affected by as much as $6 million in revenues and $0.04 EPS by Production Enhancement results, depending upon the severity of the vender shortages of high performance specialty steel tubulars needed for the Company's perforating system.

For the full year 2011, Core expects revenue up from prior guidance to approximately $910 million to $930 million, withEPS expected to range between $3.65 and $3.72, up from prior full year guidance of $3.55 to $3.60, excluding one-time items, currency effects and favorable tax termination reached in the first quarter.

This 2011 guidance excludes any gains or losses that may originate from the repurchase of outstanding debts and any effects of foreign currency translations. In addition, 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.

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

Thank you, Dick.

The second quarter of 2011 was our highest revenue and operating earnings quarter ever. Revenue growth over Q2 2010 was 14%, and operating earnings, excluding items, grew 16%. Those records were achieved through the efforts of our nearly 5,000 employees around the globe, and we thank them for their combined success.

Operating margins of 28% improved 100 basis points over Q1 2011 and Q2 2010. The Company has initiated a restructuring and further cost reduction within our Russia-based operations to increase efficiency and profitability. The Russian market continues to lack the demand for Core's higher technology and high margin services. Therefore, 300 positions are being eliminated and several locations are being consolidated. We will continue to have a substantial presence in the greater Russia marketplace to position the Company to react when the market demand for our higher technology services increases.

Our Reservoir Description revenue grew 11.5% over Q2 2010, and operating margin as grew 200 basis points to 26%. The year-over-year quarterly revenue growth rate was the largest since 2008, signaling the pickup of international and deep water activities expected earlier this year.

In one international offshore -- in one international study offshore Core Lab is analyzing core from a deep water East African well for a large independent oil and gas company. We have conducted a comprehensive analytical program for the independent oil company that has been drilling offshore East Africa. Our involvement includes well site services, routine rock properties, advanced rock properties and geological analysis of these high potential reservoir targets. Core Lab has been involved with this study since the initial exploratory wells were drilled. This multi-well project has now moved into the appraisal delineation phrase, requiring a wide range of formation evaluation data sets that we will be generating in our laboratory operations.

We are working closely with the operator to design an efficient analytical program that will meet their reporting timelines. As part of this program, we have deployed some of our new proprietary digital imaging technologies that allow us to quantify certain challenging rock properties through the pay intervals in great detail. In addition, we will be employing our full range of traditional analytical services, including a variety of Core Lab-developed processes. We anticipate that this program will continue over the next several quarters.

We have developed a new service that uses CT technology to image rock samples and fluid dynamics in real timeduring our laboratory simulation of a field flood test. This technology has provided our clients with valuable insight into the efficiency of various gas-displacing oil floods. The digital imagining we developed follows the progression of the flood front through the core samples, revealing areas of varying sweep efficiency. The tests are being conducted on full diameter samples of vuggy carbonates and will allow the client to determine the optimum combination of gas type -- CO2, natural gas, nitrogen, et cetera -- and flow rate so as to maximize ultimate recovery in this material field. These complex tests were conducted using live reservoir fluids as well as simulated reservoir pressure and temperature. This new service will be applicable in many similar carbonate reservoirs around the world, including some of the largest in the Middle East.

Production Enhancement revenue increased 11% over Q2 of 2010, with sales of completion products growing 24%, while diagnostic service revenue was down slightly from the all-time high set in Q2 2010, partially due to disruptions in the Bakken area from flooding and the delay of international field flood diagnostic studies now underway. The year-over-year comparison was also made difficult, as Q2 2010 revenue included two large diagnostic projects in China that had superior operating margins and did not repeat in Q2 of 2011. Operating margins of 28% were equal to Q1 2011 but below those of Q2 2010 due to the aforementioned flooding and international project delays, along with the general mix of products and services delivered in the quarter and the rising cost of metals used in our manufacturing products. We believe that many of the margin-depressing issues were specific to the Q2 2011 and expect Production Enhancement margins to return to historic levels in Q3 2011.

We are currently using our proprietary SpectraFlood technology to help a customer in Asia optimize a water flood project. The water flood focuses on the two major contributing reservoirs in the field, both with geological faults. Currently there are numerous wells drilled into this field, with 46 producers. Due to the high water production, the field has been selected for diagnostic surveys. The first tracer campaign included five chemical tracers. The objectives of the tracer survey are to evaluate the heterogeneity of the formation, understand how the natural faults affect communication of the flood, and also to calculate swept pore volume between each well pair. This information will lead to a better design for water injection allocation and/or repatterning of the injection production wells, which in return improves sweep efficiency, hence enhancing hydrocarbon recovery.

Reservoir Management grew for Q2 -- revenue for Q2 grew 44% over Q2 2010, operating earnings grew 99% over Q2 2010, and operating margins improved 1,100 basis points. Our newly initiated study of the Avalon Shale in the Delaware basin of New Mexico and Texas has eight members. The Permian-Avalon Shale Play has had some very encouraging results for liquid hydrocarbons. The first horizontal well averaged 580 barrels per day. Subsequent wells have initial productions of 800 to 1,000 barrels per day.

The Tight Oil reservoirs of the Midland basin has a great deal of activity, with companies fracturing stimulating -- fracture stimulating a number of formations, including the lower Spraberry, Wolfcamp, Strawn and others. These zones are producing liquid hydrocarbons and gas. The difficulty is trying to determine which are the best zones and to high grade the pay intervals. We are studying cores and production data to resolve these questions and guide our consortium member companies.

Core Lab's global shale study has grown to 25 consortium members. Since the initiation of the global shale consortium, reconnaissance work has been completed on 75 wells and outcrop sections. These are spread across a broad geographic area from Ireland, the United Kingdom, Netherlands, France, Germany, Poland, Hungary and Romania, with encouraging results from the formations in the lower Paleozoic, Carboniferous and Jurassic. Additional sample materials are currently being acquired through various operators and national repositories. The aim of this campaign is to expand the European database within these specific stratigraphic units, as well as to extend the geographic reach into adjacent areas such as Sweden and the Ukraine. The prime focus is the Cambrian to Silurian in Poland, which has seen active drilling of shale prospects over the last year.

Beyond Europe, an evaluation of a Silurian shale core from a well in Tunisia was made available to study participants in June 2011. Further major reviews of shale potential have been undertaken in South America, South Africa and Australia. Efforts are being made to acquire appropriate sample materials for analysis from these regions. In South America the prime countries of interest of Brazil, Peru and especially a potential liquids-rich shale reservoir located in the Neuquen basin of are Argentina. Reviews of shale potential in North Africa, India and China are planned for the coming year.

We will now open the call for questions.

Tabatha, we can open the call for questions.

(Operator Instructions). Your first question comes from the line of Jim Crandell with Dahlman Rose.

Thank you. How about those Pirates, Dave?

Jim,I'm enjoying it, and I haven't been able to enjoy it for 18 years.

Dave, you made a comment in your last quarter report. You said you wouldn't be surprised to see over 1,000 rigs drilling for oil by year end in the US. And gas you thought could go down to 700. We are over 1,000 already for oil, and gas seems to be hanging in there in the high 800s. How has your thinking I guess about the US market evolved, and what implications does that have to your business and capital expenditures in the region?

Jim, certainly we are focused on the liquids-rich plays because of the increased returns for our clients. We are gearing technology, as we have done with the HTD-Blast, for the liquid plays. Would not be surprised to see the amount of rigs drilling for oil to breach 1,100 and approach 1,200. And again, we would still see a continuing decrease in the amount of rigs drilling for natural gas. That is kind of the way we geared our business for the second half.

As we mentioned in Production Enhancement, we saw a lot of our issues there transitory, so we think this trend bodes well for Production Enhancement. In looking at the amount of specialty steel tubulars needed for some of our specialized guns needed for these long lateral completions, that might be a little bit of a bump in the third quarter. But certainly we have gotten additional suppliers, whereas by the fourth quarter we should be totally geared back up for that.

Okay. And has your I guess increased optimism about the shale plays here, Dave, has that impacted your decision on capital and how much to invest in the business?

We are still right there at around a little bit over depreciation. And when we look at the amount of CapEx needed to look at some of these shale plays, we feel that we are at sufficient amounts in the US, but interesting enough and we did make a note about it, we are probably going to up a little bit more CapEx and direct that to Argentina, with an expansion of Production Enhancement opportunities there for the shales in the Neuquen basin, which we believe will be the first substantial oil resource play in the shales outside of the US.

We had often made comment about some of the Silurian [dock landian] shales that Monty had referenced in North Africa, but we think, due to political unrest there, that those will be put on hold for a bit. So the Neuquen basin looks like it might be the first off the block.

Okay, and my second question, Dave, is could you give a little bit more detail on Russia? How far back, I guess, do these issues go in Russia? Is this something that has deteriorated further, and why now, versus some other point, make these decisions?

Jim, this is Monty. We have been working to get the margins up in Russia for a period of years. We are not getting where we are -- where we need to be, where are we want to be. The market is not taking in our high technology services as the rate, and quite frankly, willing to pay those -- what we require for that. So, we have just kind of run out of patience and said, okay, we are going take a more drastic action here and get this down in cost structure to where we can make an acceptable margin. Up -- get it up to Core Lab standards in the next few months.

And if you remember, Jim, back in 2007 and 2008, we sold our real estate positions there and had a reduction in forces at it as well. We still are seeing far too many solutions being fracking the well and putting in electric submersible pump. And when that happens, it doesn't use a lot of our higher technology , higher margin services needed to sustain production levels in Russia at greater than 10 million -- let's say 10.2 million barrels a day. Sooner or later they are going to start have to look at missable gas flood solutions for these fields, because that will be the only way they will be able to sustain that level of production.

So, we will be stationed there and wait for the uptick where they are going to need these higher technology, higher margin

Got it. Okay. Thank you very much.

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

Good morning, guys.

Good morning, James.

Dave or Monty, in your Production Enhancement business, a few quarters back we ran into some capacity issues, and I know you did some debottlenecking work. Given that North America is going to [continue] to grow in here, do you need to debottleneck further to increase your capacity there, or are you comfortable -- and excluding, of course, the third quarter supply chain issues, but are you comfortable that you have enough capacity to support the market over the next, call it, four or five quarters?

We are -- our sales -- I mentioned our product sales increased 24% over Q2 of last year. And that demonstrates we have done a pretty good job up there at debottlenecking. I won't say there is nothing to do, because we are always working on efficiencies and improving the process, James. But they -- our guys have done a really good job at this. Our production is good and strong. You mentioned the steel -- upcoming potential steel shortage. That is an issue we have been working for the last several months to resolve, and that is really the issue out there for us for Q3. Beyond that, we are in good shape on production.

Okay. And, Monty, last quarter you said HTD-Blast was, I believe, on one of every five oil shale wells that are being drilled today. Do you have an update to that number?

It's up a bit, particularly in the liquid-rich plays that are the most active, the Eagle Ford and Niobrara and so on. The one issue the we are facing is some shortage of core tubing units that go out. This is pushed down on the core tubing unit to perforate the toe of the well, and we have run into several instances where the core tubing units just aren't available. So they have to try other means to complete their wells. But the acceptance is still real strong, James. And we think it will continue to be.

Okay. Good. And then switching over to the international side of the business. Clearly the deep water, the international recovery is now underway. Which markets or which regions do you see the fastest growth as we go through the second half of this year?

Yes, James, if we look at the amount of rock and fluids that we are getting out of West Africa, Monty mentioned East Africa. We are talking about cores that are 2,000 meters. Over 6,000 feet. So we are seeing significant amounts of rock and fluids coming out of both offshore deep water West Africa, East Africa. Appraisal plans continue in the Eastern Mediterranean. We would say the Middle East, looking at increasing the productive capacity of these fields, is penultimate now for these countries because of what we believe is just a limited amount of spare capacity that is in the marketplace. And Asia-Pacific continues to be strong for us as well.

Okay, and then just one last question for Dick. Dick, what was the share count at the end of the quarter?

Share count at the end of the quarter was -- got it right here -- 48,662.

Okay, great. Thanks, guys.

Your next question comes from the line of John Daniel with Simmons & Company.

Hi, guys. Good quarter.

Good morning, John.

Just two questions for you guys today. Just on the HTD-Blast system, can you just tell me what exposure that has internationally at this point and what efforts are being made to take the product overseas?

We are constantly looking, but it has to be a play where they are drilling horizontal wells. And there is just not a whole lot of that market out in the international marketplace. With our global shale study, we are on the forefront of what is happening in shale plays. We will be there when the horizontal wells start going. We think there is going be some opportunity in Argentina. That is probably going to be the -- one of the first most active places for who horizontal wells, and certainly we will be out there with our HTD-Blast system as horizontal drilling takes off in some of these shale plays.

Okay. I mean, I understand there is not much horizontal activity at this point, but it would be my impression that on -- when they do the test wells, they'd use best technology, and I just didn't know if you guys have been approached that the point for that.

We haven't been, but we do have plans. Actually, John, our thinking is a little bit broader than just the shale plays actually. We believe that there is going to be HTD applications in some of the redevelopment of these fields in Iraq. Because we just don't see enough efficiency coming from vertical wells being drilled into these reservoirs that in some sections have been susceptible -- have been highly damaged. So we wouldn't be surprised to see this technology applicable in carbonate reservoirs in the Middle East as well.

Anywhere there is a horizontal drilling program. Another area might be Australia. We going to see some who horizontal drilling in those gas fields, and HTD-Blast is a great technology for completing the toe of any horizontal well.

Yes. Okay. Last one for me, and I will turn it over. In the release you guys mentioned one of the studies on a Granite Wash well, which showed, if you will, the ineffectiveness of a sliding sleeve. When you have presented that data to the customer, what remedies did they take?

At that point, with the sliding sleeve in place, there is not much they can do to remedy that well.

Well, maybe not that well, but on future wells within the program.

On future wells we --

We certainly recommended --

Yes, we recommended --

We certainly recommended that HTD-Blast be in place.

Of course, but I'm just wondering if maybe they switched and stopped using the sliding sleeve.

John, I don't think we know that, nor have we gotten a release from the client on that information.

Fair enough. Okay. That's all for me, guys. Good quarter.

John, a point that should be made on sliding sleeve, we absolutely think that there are opportunities and circumstances where the sliding sleeve is the proper answer. And it as good technology. However, it is not a universal cure for the shortage of hydraulic horsepower throughout the US in the shale plays currently that we see now.

Yes, I understand. There is, as you know, a lot of talk about it right now, and when you highlight it in a release, it kind of jumps out, that's all. The ineffective. That's it for me, guys. Thank you.

Okay,John.

Your next question from the line of Rob MacKenzie with FBR Capital Market.

Hi, guys. How are you?

Good morning, rob. We are doing well.

Good. I wanted to follow up just on John's question a little bit vis-a-vis the sliding sleeve and the tests you did. How much other analysis work of this type is taking place? I mean, to date [slide sleeves] are predominantly most popular in, say, the Bakken. Are other operators testing them out in other basins, and what does that mean for potential opportunity for Core?

Yes, absolutely, andI would say the number is up in the hundreds of wells where reviews our fracture diagnostics technology to determine which stage has been efficiently and effectively stimulated using the sliding sleeve, and also, in conjunction with our completion profiler, we can gage the amount of production coming out of every stage.

If you look at the well in the Granite Wash, there were 20 stages. Only seven actually contributed to production. And actually, Rob, the client was initially pleased with the initial production from that well, because it looked like multiple stages -- almost all stages were stimulated. It was only when we did the fracture diagnostics on it that he saw that all of that production was coming from as little as seven of his 20 stages. So a remediation or plans for the next wells, certainly you would want contributions from all stages, especially the eight toe stages on that well did not give contributions.

So we see a real nice application of our Spectra-- when we look at our SpectraScan and SpectraChem combined with our completion profiler, it is a great way to determine if each stage was stimulated and the amount of production contributed from that stage. So it is a perfect diagnostics tool to look at plug and perf versus slide and sleeve.

Okay. Thanks for that, David. And, Monty, next question for you, I guess, is can you give us some more color on what moving parts to determine whether or not you'd take a bit of a -- or you don't hit your target in 3Q for Production Enhancement as you guys reference in the press release? What's the moving parts in terms of your supplier, in terms of [production] and price increases to your customers to overcome higher costs? What are those factors we should look at?

What we are doing, we have got a multi-pronged effort to replace that supply of steel. And we are bringing steel from Japan, from Argentina. We have a big order in China. We bring in steel in from Romania to produce these guns.

The key to remember is these are high-strength, high -- tubulars that can be used under extremely high pressure of a perforating event in a deep oil well. And so it is very important that the steel strength and quality be there so that we don't have a collapse, rupture, or coming apart of a perforating gun in a well. So, it makes it difficult.

We are flying in tubulars from Argentina. We are flying in tubulars from China at manufacturers that we have qualified to -- that are able to produce these type of tubulars. That is an additional cost obviously over our normal supply stream. We have increased, put a surcharge on these guns for the time period that this shortage exists, and that will be in place probably toward the end of the year to recover those costs.

So we have take and lot of action. We are in contact with our customers, have been in contact with our customers, keeping them advised of the situation, what we are doing and what is going on in the marketplace so that they understand the shortage. And most of them were pretty well aware that there could be a shortage.

Okay. And then so whether or not you take a $0.04 hit relative to the guidance in third quarter depends on the success in pushing through some of the surcharges and the impact on sales?

It is not really the success of pushing through the surcharge. That is in place. That has happened. It is receiving these tubulars and getting them through our QA system to make sure they are what they should be. We can't [put] a bad gun in a well.

Okay, was that an impact in 2Q as well, here?

There was some effort in Q2. We have not had a shortage in Q2, but we have certainly been expending efforts. It is very hard to quantify costs, but we have had guys go into steel mills in lots of places around the world. We have been doing some QAwork. We have been working on system. So there is some. And this shortage is way broader than just us. It affects virtually everybody that buys these tubulars.

Okay. Thanks. And I guess my last question, related to Production Enhancement. Is that -- is the shortage and cost of the steel the entirety -- or most of or where we see kind of the margin issues this quarter? Mike?

No, the margin issues this quarter were in a product -- well, there are a couple of things. Metals have been increasing in price. I think that is pretty common knowledge. And so we use a lot of metals in our manufacturing of charge cases and guns and the ancillary equipment. So that is one factor. But the biggest factor is our product mix. As we mentioned, the sale of completion products has grown way faster than our service component, and so you are running into the fact that the incrementals on manufacturing are not anything like they might -- they are in the service. And decremental is the same way because of the product cost. So that is really what affected this more than anything.

Yes, it was the weather delays in the Bakken, Rob, where we had costs for crews that could not be activated, and still we weren't going to lay those crews off. Moreover, the delays of two international flood projects off of West Africa, where we had the crews keyed up, and yet we wouldn't be able to -- we weren't able to generate any revenue. Those were more a drag on the incrementals than the increasing cost of steel.

Got it. Okay, that's very helpful, David. And, actually, if I may, one more follow-up. When you guys -- when you mentioned in the prepared remarks that you expected Production Enhancement margins to return to more are normal levels in 3Q, are you referencing kind of the low 30% range we have seen over the past year?

Correct.

Yes.

Okay. Thanks very much.

Okay, Rob.

Your next question comes from the line of Doug Becker with Bank of America.

Thanks. David, during the second quarter you normally update your revenue capacity analysis. Was just hoping to get where Core Lab's revenue capacity stands today.

Very good, Doug. Yes, if we look at ability for Core Lab to generate, we were on a run rate of about $1.2 billion. We are going to now set a foothold where we are looking at between $1.3 billionand $1.4 billion. We will fine tune that for you actually later today.

Okay. And does it look like there is any of the three segments that is accounting for more of the growth, or pretty broad-based.

Actually, pretty broad-based, because we look at the capacity utilization in all three segments,certainly Reservoir Description, Production Enhancement, nice area, nice fields to run there. Maybe a little bit less in Reservoir Management, because that is more of a people-intensive business. But all in all, it will be somewhere between $1.3 billionand $1.4 billion.

Okay.

And, Dick, you have a program in place to accelerate the repurchase of the warrants. How much is left on that program, and how long do you think it will last?

We have settled half of the warrants. So there were about 6.4 million warrants initially, and we have done about 3.2 million of those. Right now we follow the standard ISDA warrant document, which calls for a 20-day settlement period following the expiry date, which is in December. So it would be 20 business days following that unless we reach an agreement with the warrant holder to do additional settlements early. And if we do, we will put out an 8-K on that like we did with the first two early settlements.

Is that something that you are working towards?

We will put out an 8-K when we have completed that decision.

Fair enough. One last one, probably for David or Monty. What is the revenue opportunity for Core Lab on the sliding sleeve versus a plug and perf, just to get a sense for a difference from the Core Lab standpoint?

I would say they would -- we would hope they would be exactly equal, because the more stages that are run, the more revenue opportunities we have on the fracture diagnostics. So what we would prescribe to our client is that each stage ought to be looked at from a SpectraChem standpoint for flow,ZeroWash tracer in SpectraScan to ensure that proppant has been properly placed, and then our completion profiler to measure the amount of production from that zone that is contributing to the entire production of well bore.

Okay. Thank you very much.

Okay then.

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

Good morning, guys.

Good morning, Veny.

My first question is on Russia. You are streamlining the business there, and at the same time you have other markets that getting stronger, someof them close by. Do -- is there any way you can transfer or allocate some of the resources?I know that for the employees it is probably very difficult, but some of the other resources from Russia?

Veny, we do that where we can. We reallocate our capital and equipment where we can to where it is most productive for our shareholders, and of course, where our client demand is. So certainly on the high tech equipment, more on future than what is currently in place, but we will be going to the places where that demand is high. On the people, it as much more difficult issue to transfer people. We do some -- we have done some of that, will do some of that, but it just depends on where the right capabilities will fit in. And we do look at that in these processes.

Thank you. And then my second question, and Monty gave us some details, but on the Reservoir Management side. For the studies, how many do you have that you are still adding participants, where are you wrapping cap. and where do you expect to start new service in the near future?

Well, we mentioned two new ones we started, Tight Oil reservoirs of the Midland basin, and Avalon Shale, which is Texas / New Mexico study. Those are new studies kicked off in the quarter. We are constantly working on those. Those obviously are growing because they are new.

The global shale study is growing very nicely. We added people in the Eagle Ford. We added people in Marcellus study in this quarter. So those studies continue to grow, and over time we evolve those studies. We add people in, and studies do wrap up over time. So some of them have very long lives, and some of them not quite so long.

Thank you so much. I appreciate it.

Okay, Veny.

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

Good morning, guys.

Good morning, Blake.

How are you?

We are doing well.

Good, good. I will be brief, since time is short here. I just wanted to -- you harped on Production Enhancement here, and I think the notable thing about the quarter is you finally got the nice growth rate out of Reservoir Description. Can you talk, David or Monty, kind of in broad strokes?I guess last quarter you had alluded to the fact that you saw some offshore projects coming on. Was that the more profound effect in terms of quarterly and year-over-year growth? And can you also give some color to new engagements versus kind of legacy activity? And then, nextly, do we -- on top of this, is your revenue guidance mainly anchored on a more -- visibility toward a more typical NOC spending pattern in the back half of the year here?

Yes, Blake, I think you are seeing a response to -- remember, we are not an exploration-focused company. We are more on a appraisal and then development. And so you are seeing a lot of these projects, especially in the submarine plan plays in both West Africa and East Africa, entering into that stage, as well as what we are seeing in the Eastern Mediterranean. And then more legacy in the Middle East, excluding Iraq because I think that will be a little bit of a different animal.

But, yes, we were confident that in our last quarter's remarks that we saw that these projects were going to be coming on. As I had mentioned some of these cores being cut now, one was over 6,000 feet in length, and so that is a pretty healthy job for us. We see a continuation of that going forward. We looked for more development in both Atlantic margins, offshore West Africa and then offshore Brazil. So we think that leads to a healthy second half for us.

So a combination of appraisal and development, and also looking at legacy fields in some other places like the Middle East, Asia-Pacific, the North Sea, and then with the shale plays continuing on in North America and then spreading worldwide. That is why I think we give a more optimistic view than maybe we did 90 days ago.

Okay, great. And then can you just expand a bit upon your commentary around Neuquen? Are you more bullish there because of the geology, or is it simply you have -- it is one of places where you already have an oil field infrastructure at hand, which just make -- moves it up in the development queue?

No, it is based on the geologic properties of that. When we -- as we mentioned in our release, our shale quality reservoir index is being used not only there, but worldwide to determine where the best quality developments could be. And I think recent drilling there has confirmed that. So we look at it from a geological standpoint, where we should locate and increase capital and our attention to services and product sales, and Argentina right now fits that bill.

Okay, great. And then finally -- I mean, I think maybe it lost a little bit in the conversation tying up kind of 2Q within Production Enhancement, we brought up the tubular issue, the little bit of a bottleneck in conveyance of HTD-Blast, although that sounded kind of secondary. Where did the field flood diagnostics work fall in terms of the hierarchy of effect on Q2? The release made it sound a bit as if that might have been the lead factor of revenues performance versus prior expectations. Is that not the case?

That is -- there were two factors there that I mentioned. The -- China -- last year in China we had two very large projects in the second quarter, andthose projects we didn't -- didn't reoccur. And we had two international projects that were supposed to happen in the second quarter this year that for reasons out of our control were delayed into third quarter, fourth quarter. So those were pushed off. And that certainly has a big factor, because our cost structure doesn't change very much with each of those. So that -- huge incrementals last year, and when it comes down, they are not there, the decrementals kick in. So service has a much more dynamic range on the incrementals than the product sales.

So plausibly more a effect than late quarter kind of tubular dislocations?

Absolutely correct.

That's correct.

Yes, okay. Great. That's it, guys. I will let you go, thanks.

Very good, thank you. Okay, I think we will take one more question.

Your last question comes from the line of John Lawrence with Tudor, Pickering.

Hi, guys. Thanks for fitting me in.

John, we knew it was you and had to get you on.

Thanks. Just a couple of quick ones. Just on the deep water side, abunch of bullish data points. Are you seeing bullish data points out of the Gulf of Mexico at all?

Yes. As we mentioned last quarter, we are going to initiate a couple of projects there. We are on those now. And see several more coming later this year. So we haven't returned to pre-Macondo levels by any stretch of the imagination, but we do have activity and work going on there. We will give a nice update on that at end of the third quarter.

Okay. So the body language is better there. And then just also on Argentina, is there any way just to quantify the size of the opportunity for you? I mean, over three or four years, could this be another Eagle Ford maybe?

Don't know. It's too early there, John. There have been acouple of very nice wells, very encouraging wells that have been drilled. Products levels look to be encouraging, and they have not used best and most effective and efficient completion techniques yet. So stay tuned on that one. I think that will be an interesting development here over the next several months to several quarters.

Great. Thanks, guys.

Okay -- John, thank you very much. Tabatha, I think we going to close.

So 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 technological advanced reservoir optimization in the oil field services sector. This positions Core well for the challenges of 2011. We are encouraged by recent activity trends in international and especially deep water activities, and realize that events affecting Production Enhancement results will be transitory and should be returned to historical standards in the third quarter.

So 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 Board of Directors of Core Laboratories give special thanks to our 5,000 employees worldwide that made the outstanding second quarter 2011 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.

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