Core Laboratories Inc (CLB) 2011 Q3 法說會逐字稿

Good morning. My name is Jarie and I will be your conference operator today. At this time I would like to welcome everyone to the Core Labs Q3, 2011 earnings conference call. A 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.

At this time, I would like to turn the call over to Core Laboratories' Chairman, CEO and President, Mr. David Demshur. Sir, you may begin your conference.

Thanks, Jarie. Good morning in North America, good afternoon in Europe, and good evening in Asia-Pacific. We would like to welcome all of our shareholders, analysts, and most importantly, our employees to Core Laboratories' third quarter 2011 earnings conference call. This morning I am joined by Dick Bergmark, Core's Executive Vice President and CFO. Also this morning we are again joined by Core's COO, Monty Davis, who will present the detailed operational review.

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

Dick will then follow with a detailed financial overview and additional comments regarding building shareholder value and Core's fourth quarter and full-year 2011 earnings guidance, which has been increased from our prior guidance, indicating our confidence in trends, North America, international, and deep water activities tied to crude oil developments. 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 highlighting some of Core's operations and major projects. Then, we will open the phones for Q&A.

So, I will turn it 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 risk 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 risk or uncertainties materialize or should any one of our assumptions prove incorrect, actual results may vary in a material respect 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 risk 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 Dave.

Okay, thanks, Dick, on the brief investor update. Core's operations produced another all-time record quarter as the Company continued to realize the long awaited increase in international and deep water offshore activities in response to higher oil prices and a dwindling global spare oil producing capacity. Core's reservoir description results reflected the positive increases in both international and deep water activities, a trend that continues into the fourth quarter.

Our third quarter 2011 results were also bolstered by North American activity levels, which drove incremental margins and sequential incremental margins for production enhancement as we projected during last quarter's earnings conference call. And finally, reservoir management hosted its best third quarter ever, reflecting additional oil company support for its joint industry projects in unconventional oil shale reservoirs in North America and the growing interest in unconventional shale reservoirs internationally. 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 America unconventional oil resource plays, and the continued internal development of new technologies and services have led to multiple years of 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, to maximize free cash flow through financial 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 30 years, the Company has determined that the appropriate capital allocation generally equals the amount of annual depreciation. Potential acquisition opportunities must also pass these same high standards. This discipline produced free cash flow for the first 9 months of 2011 of approximately $129 million equalling $2.68 per diluted share, and essentially equaling net income for the first 9 months of 2011.

As we have often said, net income is a good proxy for Core Labs' free cash flow. This per share total will be one of the highest if not the highest for all major oil field service companies. In fact, Core converted about 1 of every 5 revenue dollars into free cash during the first nine months of the year. Core will continue to demonstrate strict financial discipline in 2011 and beyond.

The second financial tenet is to maximize our return on invested capital. Core's board has initiated an incentive compensation program for 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 industry. Core's board believes that the stock price over time is directly related to its return on invested capital.

Based on the most recent calculations available from Bloomberg, Core's return on invested capital of 49% was approximately 39 points higher than the oil field services peer group average listed by Bloomberg Financial. It was also approximately 39 point 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 over investment for perceived growth via acquisitions.

And finally, the third tenet is to return excess capital to our shareholders. During the third quarter of 2011, Core returned over $169 million to our shareholders in the forms of quarterly dividends and the repurchase of shares and settlements of warrants representing approximately 1.474 million shares, a sum which equaled over 3% of the Company's outstanding shares. For the first nine months of 2011, Core has returned over $300 million to our shareholders, equaling approximately $6.25 per share. Since 2002, Core has returned over $1.1 billion, or almost $29 per share to our owners.

We will continue to follow these three key investment tenets in 2011 and into 2012, 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 his detailed financial review. Dick?

Thanks, David. Core Lab earned $1.00 per share this quarter ex items. Those items are listed on a schedule in yesterday's earnings release. The items included the one-time expense of $4.4 million in additional cost to our existing employee stock retention program as a result of our adjusting the cost of our stock award grants to reflect a 20% lower forfeiture rate from what was anticipated. Now that we have had several years of history with this award program that was commenced in late 2006, we can see that this retention tool is much more effective than originally anticipated.

Although this cost adjustment is reflected in our current quarter results, it is not representative of the normal stock award costs which are expensed in every quarter. For this one-off adjustment, we have removed it on a pro forma basis to give a more clear representation of how the Company actually performed. We have adjusted our forfeiture rate going forward on all of our grants to reflect this higher retention rate of our key employees as a result of the success of this program.

We also removed the impact of foreign exchange, as our guidance last quarter specifically stated that it was given without any impact that FX may have on our results. We incurred one off financing cost of $1.3 million pretax recorded to interest expense relating to the financings done in the quarter. And finally, we took out favorable outcomes from a lower tax rate this quarter as a result of some one-off FIN 48 tax adjustments. Had we not removed the benefit of reporting a tax rate lower than our 28% rate we gave on our guidance, we would be reporting EPS today of $1.06 ex the other three items.

Now looking at our statement of income, revenues were $231.3 million in the third quarter versus $225.8 million in the prior quarter and $199.2 million in the third quarter of last year. So, revenues were up over 16% year-over-year compared to the international rig count that was up only 5% from a year ago. Our revenue increase is materially higher than international activity levels if rig count used as a close proxy for activity. Of these revenues services for the quarter were $172.8 million, up about 14% when compared to $151.7 million last year, or an increase of $21.1 million. Product sales for the quarter were $58.6 million, up 23% when compared to $47.6 million in last year's third quarter.

If we look at cost of services for the quarter, they were 63%. That's an improvement compared to 66% last quarter. And cost of sales in the third quarter were 71% of revenues, also an improvement compared to 72% last quarter. G&A for the quarter, $11.2 million, up sequentially from $9.8 million, and up from $8.4 million in last year's third quarter from increased employee related expenses. We expect G&A to be in the range of $40 million to $41 million in 2011. Depreciation amortization for the quarter, $5.7 million, virtually the same as last year. We expect depreciation in 2011 to total approximately $23 million to $24 million. Other income this quarter, ex items relating to FX is $1 million, the same as last year's third quarter.

EBIT for the quarter was impacted by a one-time stock comp cost as a result of our higher than expected employee retention rates. And FX cost is a result of market volatility that drove the US dollar higher. Excluding those items, EBIT was $69.5 million, which was up $9.3 million or 15.4% year-over-year. Our third-quarter EBIT excluding those items represents EBIT margins of 30%, equal to our previous record-setting 30% incurred in last year's third quarter. On a GAAP basis, our EBIT this quarter was $63.6 million.

Interest expense was $3.8 million for the quarter compared to $4 million in last year's third quarter. Ex items relating to the financing done in the quarter, lowers interest expense to $2.5 million. Only $900,000 of this is cash interest that is due on the exchangeable notes and on the credit facility in the quarter, while $1.5 million or $0.03 per share was a non-cash interest expense being paid to no one. $1.3 million was cost relating to the financing in the quarter.

For the full year 2011, GAAP reported interest expense is expected to be $11.7 million, $6 million of that being non-cash. This represents approximately $0.125 per share in non-cash expense. Tax expense in the quarter was $14.6 million reflecting an effective tax rate for the quarter of 24.5% versus the expected rate of 28%, which would've created a tax expense of $16.7 million. Certain favorable FIN 48 tax adjustments this quarter caused the lower than expected effective tax rate. We expect our Q4 effective tax rate to be approximately 27%.

Net income for the quarter excluding items was $48 million compared to $38.6 million in last year's third quarter, which represents a 24.5% increase on a year-over-year basis. GAAP net income for the third quarter was up $44.9 million compared to $38.6 million last year. Earnings per share for the quarter adjusted for the items previously mentioned was $1.00 compared to $0.99 reported as Bloomberg's Main Street estimate and our prior guidance of $0.98 to $1.00 per share, which is an increase over $0.90 reported last quarter and $0.79 year-over-year. So, adjusted EPS was up 11% sequentially and up almost 27% year-over-year. GAAP EPS for the quarter was $0.93.

If we look at the balance sheet, cash was $17 million compared to the prior year-end balance of $133.9 million. Cash balances and our free cash flow were use primarily to repurchase our shares, settle our warrants, pay our dividends, fund the early exchange of notes, and pay for a small acquisition to add manufacturing capacity in our Canadian operations. Receivables stood at $157.6 million, up slightly from $154.7 million.

At year end, our DSOs for the quarter continued to improve. They're at 61 days from 70 days for all of 2010. Inventory is up from $34 million at year end to $52.5 million. Inventory turns, although close to where we expected were impacted slightly due to the short term steel tubular shortage, which has now been dealt with effectively, along with the addition of inventory acquired in a small acquisition in Canada, and the addition of warehouse stock points in the US in the last several months. We expect to see turns return to the high [threes] over the next few periods.

Other current assets were $27.3 million, up slightly from last year's money $26.7 million. PP&E, intangibles, goodwill and other long-term assets increased $21.8 million primarily due to an increase in goodwill of $8.1 million, an increase in PP&E of $4.4 million for the acquisition made in the quarter and an increase in our net deferred tax asset of $6.6 million. On the liability side of the balance sheet, our accounts payable were $46.8 million, up from their prior year end balance of $44.7 million due to increased business activity and our settling warrants. Other current liabilities of $78.9 million were down from $87.1 million primarily due to an decrease in income tax payable.

Our exchangeable notes are now down to $84.4 million from $147.5 million at year end and continue to be classified as current as they will hit final maturity in a couple weeks on October 31st. During the third quarter, we received 8 requests to exchange 6,990 exchangeable notes, which were settled for $7 million in cash and 89,316 shares from our treasury. As these shares were for the most part already included in our diluted share count, they had no impact on diluted EPS when they were issued.

Long-term debt now stands at $155 million as a result of the issuance on September 30th of our new fixed rate senior unsecured notes. $75 million of that amount matures in 10 years with a fixed interest rate of just about 4% and the other $75 million matures in 12 years with a rate of 4.1%. No principal payments are due until final maturity while interest payments are due semiannually beginning in March of next year. Other long-term liabilities ended at $59.1 million, up slightly from the year end balance. The equity component of senior exchangeable notes stands at $0.5 million, down from last quarter's $2.2 million due in part to the exchangeable notes that were exchanged during the quarter. And as a result of this balance continuing to amortize into the indebtedness balance shown in short-term debt, and ultimately will reach zero when the exchangeable notes are repaid in full on October 31st.

Shareholders equity ended the quarter at $138.1 million, down from the prior year end balance of $292.3 million and this is primarily due to additions from our earnings offset by share repurchases, the accelerated settlement of our warrants, and dividends paid. Using annualized net income for the third quarter, our return on equity was approximately 140% and clearly this is one of the highest returns earned in the industry. As a comparison for full year 2010 our return was 51%. Capital expenditures for the quarter were $6.2 million and we expect our CapEx program in 2011 to be approximately $25 million to $27 million, which continues to be slightly in excess of our depreciation as we continue to invest for growth.

Looking at cash flow. Cash flow from operating activities in the quarter was $48.9 million; and after paying for our $6.2 million in CapEx, our free cash flow was $42.7 million. The annualized per share yield on this quarterly cash flow was 4%. During the quarter we used our free cash flow and cash balances to pay $11.6 million in quarterly dividends to repurchase $3.4 million of our shares, to pay $7 million for the early exchange of some of our exchangeable notes, to settle 3.4 million warrants for $153.7 million along with 37,959 shares. And we paid $21 million for the small acquisition in Canada.

Now, let's touch on our targets for the fourth quarter. We expect revenue of approximately $240 million to $246 million with EPS ranging between a $1.06 and $1.08. For the full year 2011, we expect revenues to be up from the prior guidance to approximately $904 million to $910 million with EPS expected to range between $3.73 and $3.75 per share, up from prior full year guidance of $3.65 to $3.72 excluding one-time items, currency effects, and the favorable tax adjustments in the first and third quarters of this year. This quarterly and full-year 2011 guidance excludes any gains or losses that may originate from the repurchase of outstanding debt and any effect of foreign currency translations. In addition, this guidance does not consider shares that we may repurchase.

Due to volatility in the commodity markets for crude oil and natural gas, among other reasons, our clients have not yet established firm budgets for 2012; therefore, it is still early. We cannot provide reliable revenue, operating margins, and EPS guidance for 2012 at this time. That being said, we continue to be encouraged by recent activity trends in international and especially deep water activities and remain confident in activity levels associated with North American unconventional oil and deep-water plays.

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

Thanks, Dick. Our employees once again generated record quarterly revenues and operating earnings, and we commend them for making Core Lab the best oil field service company. Q3 revenue grew 16% over 2010, Q3 revenues and operating earnings, excluding the specific items Dick just mentioned, grew 15%. Operating margins improved 200 basis points over Q2 to our industry-leading 30%. Reservoir description revenues grew 13% over Q3, 2010 exceeding this year's Q2 growth rate. Operating margins improved 100 basis points over Q2 to 27%.

Our Abu Dhabi office is working on a number of projects from Iraq. These projects include Core processing, routine Core analysis, advanced Core analysis, reservoir geology and Geochemistry, as well as reservoir fluid and enhanced oil recovery studies. These studies are for a variety of oil companies in most areas of Iraq. International projects continue to be strong with offshore east Africa and west Africa both being very active. We also have a large projects from Vietnam and the eastern Mediterranean in various stages of geological study and lab analysis.

We have begun work on wells from the Gulf of Mexico, which were delayed by the drilling moratorium. We see this as very encouraging to have this market reopened with work planned to pick up for Q4 and 2012. Production enhancement revenue grew 23% over Q3, 2010 revenue levels; and operating earnings grew 25% over the prior year's. Operating margins of 34% were up 100 basis points over Q3, 2010.

In the third quarter, we delivered a large order of perforating systems to a customer in Iraq. Our patented Shogun perforating gun system is the preferred system in Iraq, as this system is designed to perforate or re-perforate wells through tubing. This saves the oil company the cost of pulling the production tubing to remediate the well through recompletion perforating. Our HTD blast system continues to gain markets hare for completion of horizontal wells. The system lets the oil and gas company complete the difficult toe section of the well with the coil tubing conveyed HTD blast armed perforating systems in the most efficient and economical method.

We have several international SpectraFlood stimulation monitoring projects underway. The project in Ghana involves tracing of a water and gas flood and is proceeding on schedule. Phase one of our SpectraFlood project in Equatorial Guinea is proceeding as expected with the monitoring of the production stimulation -- stimulated by this flood. Phase two of the project is scheduled to start in Q4. Two new flood monitoring projects were begun in Q3 in fields in Columbia. One is a water flood and one is a water and gas flood. Our patented SpectraFlood monitoring system is critical to understanding flood effectiveness as Colombian fields come into this secondary production stage. We are continuing and 8 well project in the eastern Mediterranean using our patented PackScan evaluation to ensure integrity of the gravel pack to protect a well coming on production.

Reservoir management revenue grew 2% over Q3, 2010; and operating earnings decreased 24% with operating margins of 30%. This business has traditionally had results that were up and down depending on the completion of major projects, which are a major part of this business. In Q3, we continue to build on our multi-client consortium studies highlighting our tight oil reservoirs in the Midland Basin, global shale reservoirs, and Eagle Ford shale studies. We have also started new studies for petroleum systems of the Northeast Equatorial basin offshore Brazil, Utica shale, and a regional study of Peru evaluating existing and new potential reservoirs.

We will now open the call for questions.

Thank you. (Operator Instructions). Jim Crandell, Dahlman Rose.

Good morning.

Good morning Jim.

David, what impact did your decision to downsize Russia have on the reservoir description group? And if you could just -- not in terms of numbers, but just talk to the impact that it had on your revenues here and also on your margins in that business

Okay. Good question, Jim. With respect to looking at our greater Russian operations, revenues were essentially flat, margins were up significantly. So the actions of reducing workforce there as we had projected internally within Core and being able to retain almost all the revenue was successful and margins increased significantly there. And I think that was reflected in the general all over margin picture of the Company.

With respect to revenue, Jim, and we've been getting a lot of calls last night and this morning with respect to that. In looking at revenue guidance for the Company after our second quarter earnings release, essentially our third-quarter, we were about 3% below midpoint guidance for revenue; and if you take that into account and look at fourth quarter, added another 4%. So collectively for those two quarters, 3% and 4% below that mid-point. Most of that is tied to the loss of revenue generating projects, primarily from North American gas shales. Even though we look at a rig count in the North American natural -- drilling for natural gas, as staying -- or as increasing slightly or staying flattish, the amount of work that we are doing in those projects now continues to dwindle.

So when we look at the all over revenue picture of Core, and that's why I think all three of us in our comments continued to talk about increases in projects tied to international deepwater and tight oil reservoirs of North America, we continue to see nice increases there. And as we know, the service intensity tends to be higher, pushing our incremental margins higher. The reason why we have had a little backup in revenue from our original guidance setback at the end of Q2 really is taking out the strip of revenue that would have been tied to North American natural gas projects essentially $7 million or $8 million this quarter and maybe $9 million or $10 million next quarter. You add those back in, you get right to the middle of our revenue guidance.

Okay. That is helpful, Dave. So, in the production enhancement group ballpark, how much of that business is now tied to crude oil and liquids-rich gas, and what is the -- where are you in the whole rollout of HTD Blast? What is the potential for increased penetration now of that service?

Okay, couple of good questions there, Jim. When we look at production enhancement in its totality, about one third of that business now is outside of the United States and is actually oily. So you see we are migrating that business to markets. Monty made several comments on a number of the SpectraFlood tests or projects that we are doing offshore, west Africa, down in Colombia. So we continue to migrate that way.

That being said, the remaining two thirds of that business here in North America is still tilted towards natural gas; but collectively because of the increased penetration of HTD Blast, it is also becoming more oily. So right now when we look at HTD Blast, we think that might be a market -- have a market potential of $50 million to $60 million, and right now it is probably down in the low teens. So, again, we will continue to see the growth of that. One of the limiting factors still is the availability of coil tubing units. When we look at the coil tubing unit population, it is somewhere between 500 and 600; and in discussions with clients and in reading some of the research work that you have done, the demand for coil tubing units could be double that.

So we do have some throttle placed on the application of that business based on the availability of coil tubing units. Moreover, when we look at the coil tubing in itself, we know that there are several projects underway from some of the coil tubing manufacturers that are looking at different metallurgical components for the coil tubing itself, because it is being limited on how far they can push the coil tubing out in a horizontal lateral. Some were limited to 15,000 to 16,000 to 17,000 feet. Now, if that was able to be overcome, we would indeed see longer laterals and again more use of our HTD Blast.

Okay, great answer. Thank you, Dave.

Okay, Jim.

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

Good morning.

Good morning, Jim.

Dave, with North America being somewhat of a question mark for next year, how are you thinking about sizing your business? What is your best and worst case scenario and how do you think about reacting if the rig count does fall or if the rig count goes up from here?

Yes. I'm thinking -- just a brief comment on what we are seeing right now. We still expect activity levels in tight oil related reservoirs not only increasing in Q4 but continuing to do that if we can have WTI at 85 or above. And probably seeing a falling rig count in natural gas. But in saying that, we already see a diminution of the amount of work that we are doing tied to, for instance, the number of projects in the Haynesville or the gassy part of the Barnett. And that being said, it will be tempered a bit. For more specifics, I will turn it over to Monty.

Yes, James, we talk to clients all the time and this time of year, we are looking at what their plans are for next year to guide us. There's definitely some people that are looking at spending less money next year, but the majority of our clients that we have spoken to are planning on increasing their spending next year. And that leads us to believe that we are going to see growth in through next year. Dave mentioned the onshore play, the deepwater has a pent-up demand; and as the permits rollout, and we don't know how fast that is going to be, but we are seeing some. We are working on deepwater projects now. And that's a big plus for us next year, I think, because it is something that has been missing up until this point this year. So it is good.

We think that we will have -- continue our overall Company, 70% of our work will come from international, 70% will be oily based. So we have a positive outlook for next year. Obviously, if things in the US turn down, we will make adjustments as needed as we always have. But that's not our expectation now. We are working on hiring more people, adding to our growth, improving our efficiencies, so that we can continue to maintain industry-leading margins as well as grow with the business. So, we are positive about next year.

Okay, good. And then on the international side, obviously it looks like CapEx spending should be up significantly. Do you want to hazard a guess as to what you think E&P spending could be up internationally in 2012?

Well, I think somewhere between $105 and $110. James, we will see low double digit. You are working on your server right now, I'm sure as we are now internally within Core and our clients. But if we saw low double digit revenue -- CapEx spending internationally, certainly translated into more deepwater, I think that benefits us, again, to the fact that we will grow faster than that by 200, 300, 400 basis points. And actually we are trending a little bit better than that this year.

Right. Okay, good. Thanks.

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

Thanks. You have all highlighted some of the technology that is getting traction internationally, whether it's the spiral Shogun, the fractured diagnostic studies, and field flood products. Really, getting some traction internationally. When you think about production enhancement in the context of a flat US rig count, do you think it would still see revenue growth and margin growth in that type of environment?

Yes, Doug, good question. Because of that business is migrating more internationally every quarter, the answer would be yes; moreover, because we are seeing continued increased penetration of technologies like the HTD Blast, the greater use of SpectraFlood technologies, I think you do see increasing revenue.

Margin is a little bit tougher to call, but as long as we can keep those incremental margins higher than the margins that were reported; and if we look at this quarter, they certainly had robust margins reported. We can probably get some margin expansion. I would think that certainly on the revenue side, I would give that a positive. On the margin side, depending on the incremental margins, we probably could have some margin expansion as well.

Makes sense. And in the context of finally completing the senior exchangeable notes maturing, what are the thoughts about taking on some debt and doing what I'd call a mini recapitalization just buying back stock?

Yes. One of the things we have done to prepare for the ultimate maturity of those senior notes, which are just going to be in a couple of weeks, we did do a private placement for $150 million that closed and funded on September 30. So on the last day of the quarter, we did put on some new debt. $150 million priced very nice, 10-year tranche of $75 million was priced at 4.01% fixed.

And the 12-year tranche of $75 million was at 4.11% fixed, and there is no principle due until that final maturity. So, Doug, we did that right at the end of the quarter. We are very pleased with our capital structure now, and we will use our revolver and our free cash flow to pay off whatever remains on that senior exchangeable note. And then over time, we will use our free cash as we always have to ensure that we returned to our owners through share buybacks, dividends, and we will continue with that discipline.

Okay, and then just a housekeeping item. The share count that you are assuming for fourth quarter EPS guidance?

What we will say is at the end of the quarter the diluted share count was 48.09 million shares. And so our guidance is based on that number, assuming no share buybacks.

Understood. Thanks very much.

Okay, Doug.

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

Good morning.

Good morning, Rob.

Question for you David, coming back to your reconciliation as to why you ratcheted down the revenue guidance some. I understand in the North American shale gas projects, economics are what they are, but help me understand why that wasn't made up or more than made up by incremental new perhaps liquids -- tight liquids work?

Well, it just depends on -- when we look at the total number of rigs running, let's say 2,000, and you are doing as many jobs as you can right now in the oil shales. When you pull out the jobs not being done now in the gas of sales, it is quite easy to see where you would strip out. This quarter we estimate somewhere about $6 million or $7 million of projects that were done in the gas shales last quarter that were not done this quarter, where our revenue would have been essentially $237 million, $238 million, right in the middle of our guidance. And then just duplicating that for the next quarter.

Did most of that come out of reservoir management?

I would say that there was some in reservoir -- I would say one third reservoir management, two thirds production enhancement.

Got it. Okay. And then I wanted to come back to the question Monty talked about with doing some early work on the deepwater Gulf of Mexico. To the best of your ability, Monty, can you tell us kind of -- give us your feel for where we stand in terms of getting back to some semblance of normalcy? What kind of timeframe does the amount of work and the type of work suggest to you?

Well, we are seeing the start of work. It will ramp up, there will be some activity in Q4 for us. And we see 2012, we are pretty positive -- I think you're going to have a new normalcy. I don't think were going to be back to the level in the near term that we were at before the Macondo disaster.

So things have slowed down with permits, they are going to stay slower I think. But we are seeing activity for the first time, and we have customers that have a lot of plans. So how fast that can happen is really hard at this stage to say. Since we had none for over a year now, this is really positive for us. We are very happy to see the work start flowing again, and as you may know, we are very strong in deepwater plays all around the globe. And so, it is a very positive element for us.

Great. And then just building on that a little bit, can you give us a feel for roughly what percentage of your revenue deepwater might have been in '06, '07, '08?

Yes, about 3% of our revenue, Rob.

Will that be mostly in reservoir description?

Two thirds reservoir description, one third production enhancement.

Got it. Okay. And then one of the things, perhaps I missed it, but you have not commented as vocally on some of that pre-salt and opportunities offshore west Africa? Any update on how you see that play playing out, if you will?

Well, we are in interesting times, Rob. We are going to have some wells that are finally going to test the pre-salt sequence going down starting a little later this year. I think first quarter of next year we should be getting some of those early results. And if the geology is parallel for what we have offshore Brazil, we should see similar results.

We do know, from a scientific basis, that there is pre-salt oil offshore west Africa that is produced from post-salt reservoirs. So at least we know that we have had an active source there, and when you look at that oil chemically, it parallels what we see pre-salt offshore Brazil. So it would suggest that those petroleum provinces are indeed parallel. Whether you have the trapping mechanism, the amount of oil being generated from those source rocks, one could only tell by putting a drillbit down through there. So I think first quarter of next year, we could have some exciting results from there. And, of course, you know we are rooting hard for that because certainly the more costly and difficult a reservoir is to develop, the better it is for Core Laboratories.

Great. Thanks very much, Dave.

Okay Rob.

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

Good morning. My first question is on the reservoir management. You talked about seasonality and level of completion. Going into Q4, are there any new surveys coming? What is the current status of the existing surveys? What can we expect for Q4?

Veny, I mentioned a couple of new ones that just kicked off in the third quarter. We have our new studies in Brazil, Utica shale, and Peru that are just getting started. The ones that will be more important are the ones that we kicked off earlier in the year, the tight oil reservoirs of Midland Basin, our global shale reservoirs continue to a gain steam. So those projects continue on at a very nice pace.

We are very happy with what is going on in that arena. There is nothing spectacular for Q4 that I can think of right off the top of my head, but it is a nice steady progression with these projects. And others may join. Q4 is a time when oil companies might have a tendency to make their final decisions on these type of things and move forward rapidly. So we can hope that that will happen again this year.

Thank you. And my second question is, the small acquisition in Canada that you mentioned. Can you tell us more about it? How much manufacturing capacity is that, are you going to be looking for any more of these possibly down the road or are you just (inaudible)?

Sure. What we are doing there is trying to diversify geographically our manufacturing base. This is a pretty small acquisition, but they do have the only license in Canada currently to produce perforating charges. What we are doing is a retooling that small plant to produce charges that match the ones that we are making in our big plant in Godley, Texas. And that gives us another source.

It is one that is obviously close in that market and will allow us to supply that market with Owen quality perforating charges from there locally in Alberta. That is the strategy behind that acquisition. It is a small acquisition. It is not going to be a big jump in revenue or anything come with it, but it strategically places us very well and gives us some capacity that quite frankly we need.

Yes, it from a corporate tax standpoint, the Canadian rates now are significantly lower than US rates. So from a tax standpoint, it is a good place to locate a business.

Thank you so much.

Okay, Veny.

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

Hello.

Good morning John.

A follow-up on Veny's question real quick on the acquisition. So it's safe to say you bought a competitor up there? Were you previously selling your charges into Canada from the states?

Yes, we were. What we have previously been doing, we've been manufacturing the guns, the heavy metal tubulars in Canada, and all the gun systems for quite some time. Our only perforating charge plan was located in Godley, Texas. It is a pretty large plant on one site. And this gives us the opportunity to manufacture those charges in Canada rather than taking charges from the US and shipping them to Canada to match up with our gun systems up there. So, it is a much more efficient delivery system.

Fair enough. Are there any plans at this point increase capacity at Godley?

We have steadily been increasing capacity at Godley. And we will see how that is going to go. We are adding a plant this year, which will be -- it's a Brownfield deal, it's not an acquisition. Sorry, Greenfield. So we are coming in Argentina with a new plant, but that will come online sometime towards the end of 2012, I hope.

Yes. John, if you remembered on our last conference call, we talked a great deal about the Vaca Muerta down in the Neuquen basin in Argentina. And we thought that had significant potential to parallel something like the Eagle Ford results that we are seeing from the oily section of that. So to take advantage of that, we started a number of quarters ago of licensing and permitting a Greenfield operation there for the purposes of putting together charges -- specifically charges aimed at being the completion -- best completion practices in the Vaca Muerta.

Sounds good. Can you say the Argentina plant, what the size will be vis-a-vis Godley?

It will be much smaller than Godley. It's not going to be anywhere near the size of our Godley plant. But it will allow us to be much more cost effective in that marketplace.

Importation from the US to Argentina, we have been selling product; but it is very difficult and it is hard to build any volume due to the cost and the import restrictions. This gives us a base there to service Argentina and the surrounding countries actually where they have trade agreements that we can go in and improve our penetration in that market area by a lot, we think. But it is not anywhere near the size of our Godley plant.

Fair enough. I want to go back and follow up on one of James' questions earlier in the Q&A and then on a statement you made. You talked about some clients likely to spend more, others looking to spend less, and then I think you went on to say international expected to increase low double-digit. Therefore, is it safe to assume that the clients there would be traditional NAM focused clients, are they the ones telling you they're going to spend less and how pervasive is that commentary?

International, I just want to clarify that was based on a brent crude price of somewhere around $105 or $110 is what I've said.

Fair enough. I hear you.

I just want to make sure and then I'll turn it over to Monty.

Actually, our North American client base has different plans amongst themselves. I'm not going to give out any names or any numbers, but we have clients, some are telling us they're going to spend less, some are telling us they will be the same; and we actually see most of our North America clients with plans to increase their spending. That's what we are seeing. And that's from talking to executives in those companies.

John, included in that, in North America, you have to remember the three big plays that we look at are Canadian oil sands, tight oil reservoirs, and deepwater Gulf of Mexico. So it might be a little misleading if we are just talking about very dry gas clients of Core Lab. We know that they will be spending less.

So that could be skewed a little bit by the clients that we focus on. For instance, I would say across the board if you are involved in the deepwater Gulf of Mexico, anywhere from Chevron to BP, blanket statement, yes, indeed they are going to increase expenditures related to those plays. So there's a little bit of caution I want to throw in there in making a direct relationship of Core Lab says their clients are going to spend more. Our focus in North America is probably a lot more oily than most other oil field service companies.

Fair enough. Well, you have previously speculated on the onshore rig count and I was just trying to hopefully take you down that path to see what you would speculate for rig count next year. But just based off the initial commentary you're getting from clients, because we're probably not going to hear official budgets from these guys. You might get some this quarter but probably --

And correct. But to add a little bit more color to that, at 85 WTI, the projects that are being worked on tight oil, worked very nicely. So, okay, if you hold it at 85 WTI, essentially you're going to see a flat to maybe up. On the natural gas side, we can't help but think that the natural gas count -- rig count will go down. If it does not, surprisingly, which it hasn't, the number of projects that we will do from those rigs that are drilling will continue to dwindle.

And in the natural gas space, that too is highly variable. Some plays are going to see decreases and some are going to continue on and have increase. So it depends on where these companies are positioned in these plays, and some plays are currently at the current economics working out better than others.

Okay, last one for me. Can you tell us how many people are in your Utica shale study?

In the Utica shale study, okay, that's a good question. Let me see if I have that. It is a new study, and I believe we have -- hold on -- yes, I will come back to that in two seconds.

All right, that's it for me. Thanks.

Your next question comes from the line of Stephen Gengora with Sterne, Agee.

Thanks. Good morning, gentlemen.

Good morning, Stephen.

Just one follow-up for me. The production enhancement margins, can you talk a little bit, and was it just volumes that pushed them higher, and could you talk a little bit about the strength there and how we should think about volume versus price going forward as a margin driver?

Yes, Stephen, as always, let's think about this from a volume side. Any pricing regulation would've been produced by the introduction of new technology, and we've talked about the success of HTD Blast. So, yes, that is pushing incremental margins. But let's always think about that as more on the volume side as opposed to price-pushed aside.

Okay. And as we go forward, what do you think -- your incrementals are obviously very, very good, but where do you think you can get those margins? If we are at a pretty solid run rate for growth, where do you think you can get them in 2012?

Let's say mid-30s, mid to maybe a little higher 30s for that if we have a robust market. Being led by, and I think your bell cow will be what those incrementals continue to be.

Okay. Thank you, that's helpful.

If we could go back to that Utica shale question, we have had 9 companies enter that in the third quarter.

That was for John Daniels.

Yes.

J'aree, do we have additional questions?

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

Thank you. Good morning. I just have a couple of quick ones. The first one is just a follow-up on the Gulf of Mexico and understanding that pre-Macondo levels in the near term would be a difficult assumption to make; but I just wanted to see if you could maybe quantify what you are at from an activity standpoint relative to pre-Macondo. I know you had mentioned you're just at the start, but are you at say, 10% of pre-Macondo, is it something higher than that?

Yes, I would say we did two projects. We talked at the end of the second quarter that we would do two projects in the third quarter, I think we did a little bit better than that. We have a number of projects lined up in the fourth quarter. I would say we are probably in the 10% to 15% level pre-Macondo, somewhere around that level. And Victor, by the end of 2012, we may be approaching the Macondo levels again, but this is probably a first or second quarter 2013 event.

Right, understood. And then just the last one is just on the production enhancement. I'm looking at the revenue split as we progressed over 2012 to 2013 and seeing what you are doing on the international side. You are still a 65-35 split approximately in that business, North American international. And one, if that is the case, how do you see that transitioning as you continue to push product outside of North America?

In a years time, we could have that as a 60-40. There are many more projects being now targeted. The critical factor with production enhancement, if you think about those services, they are used in reservoirs that don't have sterling quality. And when we look at the reservoir rock outside some of the deepwater reservoirs that we are now dealing with, reservoir quality onshore internationally continues to be less sterling in that first class, now into the second tier of reservoir quality.

When that happens, more production enhancement services are needed because you need specialized completion tools -- techniques, specialized stimulation techniques. So that follows along for our perforating gun technology, right along with our fracture and flood diagnostics technology. So as that reservoir quality continues to become poorer, that's additional revenue opportunities for Core Lab.

Great. I appreciate that. Thank you.

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

Good morning.

Good morning, Blake.

Just understanding that '12 is extremely foggy at present, you have characterized the reservoir description business as benefiting from growth areas really since the second quarter, IOC spending growth. Haven't heard a lot about the typical second half spending dump from the NOC clientele. This says to me that perhaps this transition from second half '11 to first half '12 doesn't necessarily -- won't necessarily be prone to the typical seasonality. Would you caution against thinking that way with regard to our thoughts for first half of '12 in reservoir description?

I think if you keep brent crude between 105 to 110, we would probably see less seasonality than we would because you're going to have the markets continue to be driven by North Sea and parts of the greater Russia market. So I think that all depends, Blake, on what the crude oil prices for brent are going to be. If they maintain at this level, yes, I think we would see less.

Less seasonality, but you probably would caution against more of a seamless transition into the first half next year?

That's correct.

Okay, great. That's excellent. And then I'll limit it to one more question. You mentioned in your press release the acceleration of frac diagnostic growth here. Should we take that as sliding sleeve technology grows, there is a higher level of having frac diagnostics as a must for accountability of the sliding sleeve actually effectiveness, or is it more pitting sliding sleeve versus plug and perf that you are benefiting from here? Just interested around that commentary.

Yes, excellent question. When we look at, and we do an analysis of revenue and more importantly profit opportunities from plug and perf versus sliding sleeve. With the respect to sliding sleeve, we are seeing more use of our fracture diagnostics. Our fracture diagnostics on a parallel job of 10,000 foot lateral, 30 stage frac will generate over twice the EBIT dollars delivered for that project if it was plug and perf. So when we look at the sliding sleeve, because of the rigor in which each sliding sleeve completion of stimulation has to be looked at, this has turned out to be a net margin positive for Core Lab and we would have not thought that four quarters ago.

Good. That's great color. I appreciate and I'll let you go here.

Thank you.

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

Okay, very good. John, good morning.

Hi. Good morning. Just a quick question on the Utica, just a follow-up there. Obviously you talked about on the press release and Chesapeake has had some positive results. Do you think this could be a 100 rig market over the next few years?

I think that is a potential. John, I think we need to drill a lot more wells. I think you'll see at demarcation of that at the borderline, really of Pennsylvania with that rig count growing to the west. Because you've already seen right inside of the Pennsylvanian border in Beaver County, Pennsylvania that they drilled what was a solid dry gas well, I think of about six MCF a day well, all dry gas. So I think for that rig market to grow, it's going to grow west of there. Where you get the Utica at shallower depths, less thorough maturity, and more oily. But indeed that can be a 100 rig market over the next several years.

Okay, great. And then just the last one from me. I know you talked about eliminating jobs in Russia, but then you also talked about adding people elsewhere. Could you just tell me where you are short of labor and where you need to add capacity?

We have been adding capacity in the perforating manufacturing area. We are adding highly skilled technical people into most of our geology disciplines. So that's really around the globe. We are adding people here in Houston, we are adding people in the Middle East, we are adding people in Asia-Pacific; but these are highly skilled professionals. They are not just everyday jobs.

And, John, that's why we have gone to great lengths on this employee retention program. We couldn't be more pleased on the positive impact that it is having. I know it has caused some concern this quarter; but from our standpoint, it has worked brilliantly and will continue to strengthen the Company as we go forward.

Okay, great. Thanks for the color.

Okay, J'aree, I think we are over our time limit, so I would like to say in summary, Core Lab's operations posted another solid quarter. We have never been better operationally or technically 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 that await in the remainder of 2011 and into 2012.

For the fourth quarter and into 2012, we continue to be encouraged by recent activity trends in international and especially deepwater activities, and remain confident in activity levels associated with the North American unconventional oil and deepwater plays. 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. So in closing, we would like to thank all of our shareholders and the analysts that follow Core.

And as already -- as Monty Davis has stated, the executive management and board of Core Laboratories gives a special thanks to our worldwide 5,000+ employees that have made these outstanding third quarter 2011 and past results possible. We are proud to be associated with their continuing achievements. So thanks for spending your morning with us, and we look forward to our next update at the end of Q4. So, goodbye for now.

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