Core Laboratories Inc (CLB) 2011 Q4 法說會逐字稿

Good morning. My name is Leah and I will be your conference operator today. At this time, I would like to everyone to the Core Lab Q4 2011 earnings conference call. All lines have been placed on mute to prevent any background noise. After the opening marks, there will be a Question-and-Answer session. (Operator Instructions) Thank you. David Demshur, you may begin your conference.

Thanks Leah. Greetings and good morning in North America, good afternoon in Europe, and good evening and Asia Pacific. We'd like to welcome all of our shareholders, analysts, and most importantly, our employees, to Core Laboratories fourth-quarter 2011 earnings conference call. This morning as usual 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 gross strategies. We believe these three tenets have produced industry-leading shareholder returns in returns on investment capital. We will also discuss Core's long held philosophy of returning excess capital back to our shareholders.

Then Dick will follow with a detailed financial overview and additional comments regarding building shareholder value in Core's first quarter and full-year 2012 revenue and earnings guidance, which confirm our confidence in the trends of increasing activity and unconventional oil reservoirs in North and South America, and especially international and deep water activities tied to crude oil development. 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 a Q&A session. I'll turn it back to Dick now for comments regarding Forward looking statements.

Before we start the conference this morning, I'll mention that some of the statements that we make during this call may include projections, estimates, and other forward-looking information. This would include any discussion of the Company's business outlook. These types of Forward-looking statements are subject to a number of risks and uncertainties relating to the oil and gas industry, business conditions, international markets, international political climate, and other factors including those discussed in our 34 Act filings that may affect our outcome. Should one or more of these risks or uncertainties materialize or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in the Forward-looking statements. We undertake no obligation to publicly update or revise any Forward-looking statements, whether as a result of new information, future events, or otherwise. For a more detailed discussion of some of the foregoing risks and uncertainties, see Items IA 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.

Our comments include non-GAAP financial measures. Reconciliation to the most directly comparable GAAP financial measures is included in the Press Release announcing the fourth-quarter results, which also can be found on our website. Now with that, I'll pass the discussion back to Dave.

Okay. Thanks, Dick. A quick investor update. Core's operations produced another record quarter and full year as the Company continued to benefit from our continued focus on and the increase in international and deep water off shore activities, and the increasing activities in unconventional oil price in response to higher oil prices and dwindling global oil spare capacity. The focus on crude oil related projects continued to build through 2011 as we discussed the projected decrease in natural gas rig count on our conference calls during the first quarter, second quarter, and third quarter of 2011. Therefore, Core's revenue mix is now closer to 80% oil and 20% natural gas, a shift from the previous 70/30 mix. Moreover most of the natural gas related activity emanates from international projects in the international theater. This would be the Eastern Mediterranean, Eastern Africa, and Western Australia.

Also, when we look at our operations, Core's reservoir description results reflected this trend away from natural gas, and the positive increases in both international and deep water activities tied to crude oil development. Also, our fourth quarter 2011 results were bolstered by North American activity levels in oil shale reservoirs, which drove incremental margins for our production enhancement unit. And, finally, reservoir management posted another strong quarter reflecting additional oil company support for its worldwide joint industry projects in oil shale reservoirs and international activities of interest like West Africa. Our gross 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, unconventional oil resource plays, and the continued internal development of new technologies and services, has led to a multiple year of sustained growth and increased profitability.

Core has always followed and will continue to follow three key investment tenets that have led to our industry-leading returns. These three tenets, which we feel are most important and usually receive only scant attention in our oil field services sector are, number 1, maximizing free cash flow through fiscal discipline. Core follows a strict discipline for allocating capital for investment in growing our business. Unless certain return on invested capital standards are met or exceeded, the capital expenditure is disallowed. Potential acquisition opportunities must pass the same high standards. This has produced a free cash flow for 2011 of approximately $172 million, nearly equaling our net income for the year. As we have often said, net income is a good proxy for Core Lab's free cash flow. In fact, Core converted about one every five revenue dollars into free cash flow during the year. Core will continue to demonstrate strict fiscal discipline in 2012 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 being able to produce an ROIC in the top decile for all oil field service industry. Core's Board believes that stock price performance over time is directly related to this return on investment capital. Based on year end calculations available from Bloomberg, Core's return on investment capital was approximately 36 percentage points higher than the oil field services group peer average listed by Bloomberg. And also 32 percentage points above Core's weighted average cost of capital. Core's fortunate and values its long term relationship with our top shareholders. As the Company's top ten holders own approximately 50% of all our outstanding shares with an approximate $57 ownership basis. Some of this ownership dates back to 1998.

Our top 20 holder's own approximately 66% of the Company's outstanding shares, with an approximate investment basis of around $63 per share. So you can see we have long-term shareholders owning about two thirds of all shares outstanding. And to these shareholders, we have returned excess capital, which is our third financial tenet. During 2011, Core returned over $327 million to our shareholders in the forms of quarterly dividends, and the repurchase of shares, and the settlements of warrants, representing approximately 3 million shares of some that equaled about 5% of the Company's outstanding shares. The shares and warrants were aggressively and opportunistically purchased at around $93 per share level. For all of 2011, Core returned approximately $6.76 back to our shareholders. Since 2002, Core has returned over $1.2 billion, or almost $24 per diluted share to our owners. We will continue to follow these three investment tenets into 2012, which should enable Core to continue to produce industry-leading returns for all of our shareholders.

So now I'll turn it back over to Dick for a detailed financial review.

Thank you, David. Over at the income statement, revenues were $243.8 million in the fourth quarter, versus $231.3 million in the prior quarter, and $208.2 million in the fourth quarter of last year. So revenues were up sequentially by 5.4%, and 17.1% year-over-year. For the full year, revenues were $907.6 million, up $112.9 million, or 14.2% from the prior year of $794.7 million. Of these revenues, services for the quarter were $162.9 million, and for the year they were $621.8 million. Product sales for the quarter were $80.9 million, and for the full year they were $285.8 million. Cost of services in the quarter were 62%, which was better than the 63% of revenue in 2010, and 64% for all of 2011. In the fourth quarter, our cost of product sales were 67% of sales revenues, which is an improvement compared to all of 2011 and 2010 when they were 69%.

G&A for the quarter $10.7 million, down sequentially from $11.2 million, but up from $9 million in the last year's fourth quarter. For the year 2011, G&A was $41.1 million, representing 4.5% of revenues for the full year, while G&A was 4.2% of revenues in the prior year. We expect G&A to be around $42 million in 2012, or 4.2% of mid point expected revenues. Depreciation and amortization for the quarter, $5.9 million, up slightly from $5.8 million incurred in last year's fourth quarter. For the full year 2011, depreciation and amortization expenses $23.3 million. And we expect depreciation and amortization 2012 to total approximately $24 million. Other loss this quarter was $257,000. For the year, Other was $919,000 of income compared to $2.2 million of Other income in the prior year.

EBIT for the quarter was $72.9 million which is up $11.3 million, or 18.4% year-over-year. Our fourth quarter EBIT represents margins of 30%, a quarterly high for the Company. Interest expense was $2.2 million for the quarter, compared to $3.7 million in last year's fourth quarter. Our exchangeable notes were repaid during the fourth quarter and have been replaced by our $150 million in senior notes, which do attract a lower interest expense than the exchangeable notes. Income tax expense in the quarter was $17.4 million at an effective tax rate of 24.6%. Our full year annual effective tax rate was 22.7%, and our income tax expense was $54.2 million. We expect our effective tax rate in 2012 to be in the 25% range.

Net income for the quarter was $53.1 million compared to $39.9 million in last year's fourth quarter. Net income in the fourth quarter increased almost 33% on a year-over-year basis. Net income for the full year 2011 was up over 27% at $184.7 million, compared to $144.9 million for 2010. Earnings per diluted share for the quarter was $1.11. Excluding the impact of the $0.01 in FX loss and the $0.03 pick up from the lower effective tax rate, our operations earned $1.09 per share in the fourth quarter, which exceeded our prior guidance of $1.06 to $1.08 per share. Sequentially, EPS of $1.11 is up from $0.93, and is up 37% from $0.81 last year in the fourth quarter. For the full year, EPS was $3.82, up 27% compared to $3.00 in 2010.

If we go over to the balance sheet, cash was $29.3 million compared to the prior year end balance of $133.9 million. So our liquidity, as represented by our cash balances, our free cash flow, and drawings from our credit facility and the new senior notes, amounted to $531 million and were used primarily to repurchase stock, pay our dividends, fund the repayment of the exchangeable notes, settle our warrants, and pay for a small acquisition. Receivables stood at $170.8 million, up from $154.7 at the prior year end due to higher sales. Importantly, though, our DSOs continue to improve to 68 days for the year, compared to 70 days in 2010. Inventory is virtually unchanged from last quarter's $52.5 million. But it is up from $34 million at year end 2010, as a result of our acquisition at the end of Q3, and sourcing of raw materials in the prior quarter due to the supplier disruption discussed on our prior calls this past year. Importantly, though, inventory turns improved sequentially from Q3 into Q4. And for the most part, raw materials, but not finished goods, increased in furtherance of our growth prospects for product sales.

Other current assets were $22.8 million, down from $26.7 million at last year end, due to a reduction in current deferred tax assets. We had an $11.1 million increase from last year end in PP&E, due to an investment in our business assets, and the acquisition at the end of Q3. And our intangibles, goodwill, and other long-term assets were up $21 million, mainly from an acquisition in the production enhancement segment and an increase in deferred tax assets.

Now on the liability side of the balance sheet, our accounts payable were $57.6 million, up from the prior year end balance of $44.7 million, as a result of growth experienced in our business in 2011. As our exchangeable notes were paid off during 2011, our short-term debt is now down to $2.3 million. Other current liabilities of $72.8 million are down $14.3 million from the prior year end balance, in part to a decrease for taxes accrued but not yet paid fully in various jurisdictions. Our long-term debt at year end was $223 million, comprised of our new senior notes at $150 million, as well as our bank revolving credit facility whose outstanding balance was $73 million at year-end. Other long term liabilities ended the year at $57.4 million, up slightly from the year end balance. We no longer record an equity component of senior exchangeable notes as the exchangeable notes were repaid in the quarter.

Shareholders equity ended the year at $181.7 million, down from the prior year end balance of $292.3 million, primarily due to additions from earnings, offset by the warrant settlements, share repurchases, and dividends. Our return on equity for the year was approximately 102%. And this is certainly one of the highest returns earned in the industry. Capital expenditures for the quarter, $11.8 million. And for the full year, they were $30 million, up from $27.6 million in the prior year, as we addressed opportunities created by the strong growth in our business in 2011. We expect our CapEx program in 2012 to be approximately $33 million as a result of an expected continued improvement in industry activity, particularly internationally and in the deep water environment. Our growth CapEx is client-directed for the most part, meaning that we will increase our capacity for locations or for increases in technology on the basis of discussions with clients about their specific needs. Which is one reason why we are able to generate our high returns on invested capital. So when our CapEx increases in positive business cycles, it usually reflects upcoming demand for our services.

Now looking at cash flow. Cash from operating activities in the quarter was $57.3 million. And after paying for that $11.8 million in CapEx, our free cash flow was $45.6 million. For the full year, cash flow from operating activities was $204.1 million, while free cash flow after paying for our CapEx program was about $174 million. For the full year 2011, we used our free cash flow to pay $21 million for an acquisition, pay $46 million in quarterly dividends, repurchase almost $62 million of our shares, and to repay the exchangeable notes for $156 million, and to early settle our warrants in the amount of $219 million. Our use of cash continues to be designed to enhance shareholder value.

Now if we look at our outlook for 2012, we expect increasing international growth, especially in deep water projects supported by the scheduled arrivals of additional deep water rigs. Deep water pre-sold activities in several international basins, such as Kwanza basin off shore Angola, should increase significantly throughout 2012. In addition, we believe we should benefit from increasing activities in deep water Gulf of Mexico, which is projected to approach early 2008 highs by late 2012. And we should also benefit from increasing activities in unconventional oil shale reservoirs, not only in North America, but also South America, particularly Argentina and North Africa. We expect to generate $200 million in revenue from primarily oil shale reservoirs in 2012. And we assume that worldwide activity levels will increase by 10% and that our annual revenue growth is expected to be 13%. As a result of our Outlook for the first quarter 2012, we expect revenue of approximately $230 million to $240 million with EPS between $1.01 and $1.06, or the midpoints of guidance represent an increase in revenue of approximately 14%, and EPS growth of 35% over first quarter of 2011 totals, excluding year ago, non operational gains and charges.

First quarter 2012 operating margins are projected to be 29%, up approximately 200 basis points over year earlier totals. For the full year 2012, we expect revenue of approximately $1.005 billion to $1.045 billion with EPS between $4.50 and $4.82. Using the mid points of the early guidance, our annual revenue is expected to grow 13%. Using an effective tax rate of 25%, yields a midpoint EPS guidance at $4.66, a 23% increase over full year 2011 EPS, excluding non operational gains and charges. Full-year 2012 operating margins are projected to be in the 30% range, an increase of approximately 100 basis points over full year 2011 levels. For 2012, we expect to generate over $200 million in free cash flow, an all-time high, while increasing capital expenditures to an estimated $33 million. This capital program, the largest in our history, is in response to anticipated strong client demand for our proprietary and patented technologies in 2012 and into 2013. Up to 80% of our 2012 capital program will address opportunities that are driven by increasing client activity levels, primarily in international areas.

We will maintain our strict ROIC standards when deploying 2012 capital with the goal of remaining the industry leader for returns on invested capital. We also anticipate that we will continue opportunistic repurchases of shares throughout 2012. If worldwide activity levels increase more than anticipated 10%, our results will trend toward the upper end of the 2012 revenue and EPS guidance. Conversely, if worldwide activity increase less than 10%, our results will trend lower. This and future guidance excludes any foreign currency translations, changes in tax rates, or any shares that we may repurchase. With that, I will turn the call over to Monty for an operational review.

Thank you, Dick. We ended our best year ever with our best quarter ever. Our 5,000 employees around the globe have worked very hard to serve our clients. And we thank them for making Core Lab the choice of oil and gas clients around the world. In Q4, revenue reached a record $244 million, growth of 17% over the fourth quarter of 2010. Operating earnings for Q4 grew 18% over the previous year, and resulted in operating margins of 30%. Reservoir description revenue grew 14% over Q4 2010, and operating earnings grew 23% over Q4 2010 with operating margins improving to 28%, 200 basis points over the same period last year.

We are currently conducting flow visualizations studies for our Latin American clients to improve their flood performance in oil fields. In heterogeneous reservoirs, the remaining or residual oil saturation can be quite significant after primary or secondary production. The reservoir is only partially depleted in commercial quantities of oil can be bypassed because the reservoirs and fluid flow are complicated. Visualization of an experimental flood using Core Lab's high-resolution medical technologies CT scanning provides insight on the impact of the reservoir heterogeneities and fluid displacement mechanisms. With this information, and improved production strategy, we can formulate and test it to recover bypassed oil through improved flood projects. Our MR shale technology, which is based on magnetic resonance imaging, is leading the industry to analyze very tight rocks such as the shale in a faster time frame with accurate results. This technology has been extremely well received by our customers to provide the information needed to produce these unconventional gas resources. MR shale uses magnetic resonance measurements of a core to determine porosity and liquid hydrocarbon saturation. The combinations of the Company's new digital core analysis technologies including CD imaging, MR shale, and our to Nano-Perm capabilities, all of which are nondestructive to the core sample, are aiding our clients to produce more oil everyday from their non conventional oil shale reservoir plays.

More importantly, ultimate hydrocarbon recovery factors will increase over time from a single digit into low-double-digit percentages. Production enhancement revenue grew 19% over Q4 2010 revenue levels. Operating earnings grew 22% over the prior year quarter. Operating margin improved 100 basis points to 33% for the fourth quarter of 2011. [Man] rate remains very high for Core's HTD-Blast Perforating gun systems used in completing the toe end of laterally extended horizontal wells. This technology is performing very well in long lateral horizontal wells drilled for liquids production in addition to good success in gas wells.

Core's High Efficiency Reservoir Optimization, HERO, charges, and SUPER HERO, and SUPER HERO+ Plus, charges continue to be the lion's share of our perforating charges sold, as our customers value this ultra low debris perforating technology and the performance it brings to their wells. Our SpectraStim and SpectraChem fractured diagnostic technologies are critical to determine the performance of fracture stimulization. These technologies are helping customers in the Eagle Ford and Bakken design the most efficient fracture stimulations. A customer in Colombia is currently using Core Lab's SpectraFlood technology on a pilot project alternating water and gas to design a flood optimization program for an oil and gas reservoir. Reservoir management revenue grew 31% over Q4 2010 with operating margins of 26%.

Reservoir management initiated several new joint industry projects in the fourth quarter that have been well received. Our project entitled Utica Shale Reservoir Characterization and Production Properties, has 11 initial member companies and is focused on the Utica liquids play in eastern Ohio and western Pennsylvania. Our study is focused on improving reservoir description, stimulation, and well performance for the member companies. Initial completion and production results in this play have been promising. Reservoir management also introduced a joint industry project in Canada focused on the emerging Duvernay shale play. We have seven initial members and the first pilot wells and horizontal completions are being evaluated. The Duvernay has both gas and liquids production.

Reservoir management second Atlantic margin transform study, equatorial basins of Brazil, was initiated with five initial participants. Given the success of the transformed margin play of Ghana, Sierra Leone, and more importantly, French Guiana, we expect further participants when the license round for deep water acreage opens. Further to Core Lab's extensive portfolio of African based geological and petro physical regional data sets, a new study of the post-salt reservoirs of West Africa, Equatorial Guinea through Angola was initiated. This study is designed to a deep water players in the South Atlantic margin by establishing regional controls on reservoir development and regional seals within the study area. The study complements Core Labs' pre-salt reservoir study of West Africa. Further capitalizing on our extensive database and expertise in shale reservoir evaluation, reservoir management has begun several proprietary projects in the Middle East, directed at the evaluations of potential shale reservoirs.

We will now open the call for questions.

(Operator Instructions) Rod McKenzie.

Good morning. Question for you, David. Reservoir management and the multi-clients studies you have done, and they have historically been reasonably lumpy from quarter-to-quarter. But it seems like with the proliferation of unconditional plays around the globe and the studies you guys have kicked off, that could be in for a period of some material growth here. Can you give us a feel for how bullish you are and what you think the prospects are there for growth in that segment?

Yes. If you look at that segment, Rob, it should indeed on a revenue and earnings side, grow faster than the worldwide activity because we are highlighting the world's most active plays. So, even though it just represents some 7% to 8% of our revenue, I think when we look at it from an annualized basis, as you said, it can be lumpy. We can see growth prospects up in the low-20s on the revenue side for that business. And it may approach the mid-20s. So yes, indeed, because we are highlighting the active plays around the globe.

Great, thank you. Coming back to your guidance for $200 million of oil shale revenue this year. Can you give us a feel for what that was last year and perhaps the year before, if even anything?

If we look at the year before I would say that was probably in the $20 million to $30 million range. Now Rob, you have to remember, what we tried to do is de-emphasize gas shales and emphasize oil shales. So, it may have been half that much last year. But as we have discussed on these calls, actually in the third quarter of 2009, remember the famous why we did not have the shift? We were starting to de-emphasize at that time natural gas shales looking to enter oil based shales. As you know, our technology is much more applicable in crude oil and crude oil situations as opposed to natural gas. We have had this de-emphasize of natural gas shales taking place over, I would say the last year and a half. For instance, we generated very little revenue, expected very little revenue out of the Haynesville shale during the fourth quarter of 2011.

So, that has to be tempered by, when total shales, we talked about being maybe mid-digits for total revenue. That now is probably at 20% with the vast majority of that being in the oil shales. So, materially, we have seen the shale revenue over the last couple of years, year-over-year go up probably somewhere on the order of $40 million to $50 million over what it was last year. So, last year was probably in the $140 million to $150 million range with this coming year somewhere around $200 million, $200 million-plus.

That is very helpful, David. How is that split between the segments? I know you do not normally break that out, roughly, can you give us a feel there?

It is really across all segments, Rob I don't really have those numbers available. I would imagine it would be equal across all three.

Fair enough. Coming to a reservoir description, one of the things that was talked about in [all the] calls, is that the US Gulf of Mexico deep water coming back. What I would like to get some help for you on is how material is that to your potential earnings growth here, if the deep water activity returns to pre Macondo levels like we expect by year-end of this year?

It represents somewhere on the order of about $30 million of our revenue, about 3%. So, right now we are probably at about 1%. So, going into 2013, we would probably get it ramped back up to that $30 million to $40 million range if activity reaches pre moratorium levels. And we actually think that in 2013 it will probably surpass that.

Great. One final question for you Dick, return of capital. You're expected to generate over $200 million of free cash flow this year, net of the CapEx. Your dividend is only a small fraction of that. How do you see your share repurchases or other returns of capital to shareholders preceding this year?

I think we've made it pretty clear on our prepared remarks and in the earnings release that we will be opportunistic as we always have, and certainly the level of free cash that we have available to us after our investment program suggests that we can also be very aggressive with that.

Okay. Thank you very much. I'll turn it back.

James West.

As you think about production enhancement in 2012, if a consensus of thinking of a flattish rate count is right, what revenue growth would you see in that segment as you push more into oil plays as you penetrate more with your newer technologies? What would you guys expect in terms of revenue growth?

We are thinking around 15% for production enhancement, maybe more. You have to remember, US rig count is one thing, international penetration is another driving factor in what we are doing. Our technologies are very well received as I stated earlier, and we are seeing really strong growth in those technologies as we saw this year.

Is that the international portion of production enhancement, is that still 40%-ish?

It is more like 30%. We are pretty strong in North America too, you have to remember.

Then related to North America, some of the big pressure pumping companies have had margin issues as this transition has unfolded. It seems given the way you sell your products and get your products to market that should not be an issue, but I wanted to make sure that we should not expect some type of transition costs that would sharpen your margins in the near-term and your PE business.

We do not see the same things that they do. We sell on the value of the product all along. We are not in the restrained commodity mode versus excess commodity mode that you might see in the pressure pumping from time to time and drilling from time to time. We are selling products based on the value they deliver to the client. So, we are not up-and-down like they are.

Fair enough. Then, Dick, the tax rate's come down pretty substantially over the last four quarters. Two questions, one, how did we get to this 25% range? Is that from restructuring or is it just the revenue mix? And then two, can we come down lower than 25% over time?

We are thinking the revenue mix is the primary driver for that. It depends on where your earnings are, and we think the rate that we see in Q4 is indicative of full year. Certainly FIN 48 creates some volatility from time to time and that's generally out of the control of companies. But we think over time, that rate right now is at 25%.

Thank you, guys.

Veny Aleksandrov.

My first question is again on your guidance and without giving me specific numbers, how much of your budgeted growth is coming from international, and how much is coming from domestic?

I would say probably out of that growth area, we say that we look at activity levels being up worldwide about 10%. We see the majority of that growth being internationally, maybe 10% to 13% and a flattish rig count here in the US. But in saying that, because oil related activities here are more service intensive, you're probably going to get somewhere near high single-digit growth levels to get you to that, when you average that out to about 10%.

Thank you. My next question is on your CapEx budget for next year. Is the $33 million all going for organic growth or do you have any other plans?

On our CapEx, one-third is to replace instrumentation that gets old. But two-thirds is for growth. That's why our comments was about that growth was client directed. That's why we are able to generate pretty high returns on that invested capital. So, if the clients, as the year progresses suggest that there are other additional revenue opportunities for us, we will spend that capital because it will also generate high returns for us.

Thank you.

Blake Hutchinson.

First of all, probing earnings guidance as it applies to the reservoir description business. We look at both top line and margins for 4Q -- and I guess it would suggest, given that, that segment is prone to seasonality. Should we be thinking about the first half of the year is a flat year-over-year trajectory with getting back to the double-digit growth in the back half of the year? And we see the same fit and then start again in terms of margin progression?

You see traditional seasonality, with Q1 being lower than the previous Q4. That is a historical -- and you're right, you tend to see that more in reservoir description. What we have seen in the last few years was production enhancement activity levels carrying through that mask that reservoir description softness in Q1. So, for the guidance we have put together, it assumes a more traditional seasonal pattern.

I want to go back and make sure we understand this question. Are you seeing flat from a margin standpoint or flat from a revenue standpoint?

I look at your 4Q margin and essentially the guidance for the year, ends up being flat from a margin perspective with 4Q. I am wondering, is that because the reservoir description has to experience a fairly significant retreat in the first half of the year, before growth accelerates and you start to gain a level of confidence around a higher margins or higher increments year-over-year?

Yes. If you look last year, first quarter, there margins were somewhere on the order of 26%. So, when you look at that, I would say, yes. For the first half of the year, I would say we are good with flattish on that, maybe down a little bit. But then, that business is typically the strongest margins in Q3 and Q4.

Good. That is exactly what I was looking for.

Okay, I like that in your model.

Yes, good. Then, I think from looking at your press release commentary and Monty's commentary about the digital core analysis. I'm trying to understand this as it applies to the business. Is this saying that, many of your competitors have been out there claiming that they can do these rapid turn well site analysis? Is this saying that you've gotten to a point where you have product, an extremely high-quality product now, that is rapid turn, that also meets your margin hurdles, that competes with that, trumps that, and opens up a new market? Or is that reading too much into the commentary?

I think that is reading a little too much into that. When we look at generating data sets, we have to generate precise and accurate data sets. Over the thirty some years that I have been here at Core Laboratories, we have attempted to do that at the well site probably three or four times, or iterations of that. It always gets back to, those data sets have to be generated in a laboratory controlled environment. As opposed to giving estimates at the rig, or doing core analysis at the rig site, our clients expect a higher level of precision and accuracy from us.

When we develop these technologies, they are made for the laboratory environment. Do we provide a core analysis and some reservoir fluid analysis at the well bore? Yes. But very elementary, very low-tech. We need to bring them back to our laboratory to ensure that the data quality for what our clients expect from, us is always there.

So, this is an enhancement to product rather than making another run at the wells site here?

Absolutely. If you look at our Nano-Perm, we announced that about a year ago. This is the first step in what we think will be the direction of looking at missable gas floods in oil shales. We are several years away from that, but it was a technology that was the first step in the development of that. Now we can combine that with our MR shale and our CT shale and we get an enhanced product where we can look at digital imagery and calibrate that. Two algorithms used to determine what the porosity might be in that rock that has just been imaged. It's impossible to determine what the permeability of a rock is through imagery. You're just guessing to what that would be because you do not know the extent of the interconnectivity of the pore spaces.

One other thing, remember that our data sets are used for a different purpose than some of those who have been talking about having mud logging capabilities or wells site capabilities. Their data sets tend to be used for decisions at the rig site. Do I complete or not? Our data sets are not used for that. Our data sets are used for developing field floods, longer-term projects where accurate measure data is required. The applications of the technologies are for different purposes and we are not in the surface logging, mud logging business and have no intentions to.

Great. I appreciate the depth of answer on that. I will turn it back.

(Operator Instructions) John Daniel.

Dave, on the $200 million in oil shale revenue, can you give us a sense as to what is domestic versus international?

The lion share is going to be probably 90% of that being in North America. Because as Monty talked about, we have the Duvernay and parts of the Montney that probably are going to be liquid rich. We are doing quite a bit of work on that. So, North America probably upwards of 80%, pushing 90%. But in saying that, we have rock in house now from Vaca Muerta from the Neuquen basin. We have rock in house from North Africa, Silurian Gothlandian shale that we talked about. We also have proprietary studies in house from some of the countries that Monty mentioned in the Middle East and also from China. Although this is a very North American centric look right now, John, we see that progressing out.

As we have talked about in previous conference calls, certainly we think the Neuquen basin, maybe not just the Vaca Muerta, but there is some other, Los Molles shales there that might be interesting, mentioned in last year's annual report. The Middle East and China. And also there is some potential in Australia. This will become much more international in scope as we go forward.

Is there any material difference in the margins between the NAM work and international?

No. Exact same price schedule. Exact same globally. Same prices. Same margins.

I want to follow up on Blake's question, with respect to the guidance. I understand the Q1 seasonality on the revenue. But should we look at the flat to down revenue guidance as any possible suggestion that your initial view on worldwide activity growth is below is 10% or off to a slow start?

Nope. None whatsoever.

Fair enough. Also, on the pricing on the NAM services. We are hearing lots of pressures building for other product lines. Are any of your businesses starting to face any price headwinds at this point?

As we've said earlier, we value price all along. So, we don't go through those same pressures that they do in other services. We're holding our prices with reasonable increases.

Then, the last for me is on the buy back. Dick, when you do this can you say -- is it set up based off of a price grid, such that you buy more when stock declines? Or, can you elaborate a little bit on the opportunistic?

It is opportunistic. We have to take a variety of things into account. For example, last quarter we had a variety of other matters going on where we refinanced our exchangeable notes. We early settled our warrants and we were also able to buy back 65,000 shares while doing that. We don't have those other matters in front of us right now. It clearly gets down to is it accretive to value? And that is very important to us and our owners.

It is not necessarily that the stock needs to drop $10, $20, or whatever.

No. The point we're making is it's not a regular scheduled every day there's a program we've outsourced to someone to buy back shares for us.

Okay. Thank you.

At this time, there are no further questions.

Then we're are going to wrap it up. In summary, Core's operations posted another solid year. We have never been better operationally, or technologically positioned to help our clients expand their existing production base. We remain uniquely focused and are the most technically advanced reservoir optimization Company in the oil field service sector. This positions Core well for the challenges that lie ahead in 2012.

For 2012 we continue to be encouraged by recent activity trends in international and especially deep water activities and the growing activity levels in the deep water Gulf of Mexico, and remain confident in the activity levels associated with unconventional oil plays. The Company remains committed to industry leading levels of free cash flow generation, returns of invested capital, with all excess capital being returned to our shareholders.

So in closing, we'd like to thank all of our shareholders and the analysts that follow Core. As already noted by Monty Davis, the Executive Management and the Board of Core Laboratories give a special thanks to our 5,000 worldwide employees that have made these 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. Good bye for now.