Core Laboratories Inc (CLB) 2012 Q1 法說會逐字稿

Good morning. My name is Erika, and I will be your conference operator today. At this time, I would like to welcome everyone to the Core Labs Q1 2012 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session.

(Operator Instructions)

I would now like to turn the call over to Mr. David Demshur. Mr. Demshur, you may begin your conference.

Thank you, Erika. I'd like to say good morning in North America, good afternoon in Europe, and good evening in Asia Pacific. We'd like to welcome all of our shareholders, analysts, and most importantly our employees, to Core Laboratories first-quarter 2012 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 will 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.

And then Dick will follow with a detailed financial overview, and additional comments regarding building shareholder value and Core's general industry outlook for 2012, which confirm our confidence in the trends of increasing activities in unconventional oil reservoirs in North and South America, and especially international and deep water activities tied to crude oil developments worldwide. Core cannot give specific Q2 revenue and earnings guidance, as the Company is in the process of a dual listing of our shares on the NYSE Euronext Exchange in Amsterdam. We expect this listing to take place in mid-May.

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. And then we'll open the call for Q&A session.

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 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 one of our assumptions prove incorrect, actual results may vary in material respects from those projected in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. For a more detailed discussion of some of the foregoing risks and uncertainties, see item 1A risk factors in our annual report on form 10-K for the fiscal year ended December 31, 2011, as well as the other reports and registration statements filed by us with the SEC.

Our comments include non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are included in the press release announcing our first quarter results. Those non-GAAP measures can also be found on our website.

Now, with that said, I'll pass the discussion back to Dave.

Great. Thanks, Dick. I'd like to give a quick investor update. Core's operations produced another solid quarter, the Company continued to benefit from our continued focus on, and the increase in, international and deep water offshore activities in unconventional oil plays in response to higher oil prices and the dwindling global spare oil-producing capacity. The focus on crude oil-related projects continued to build into 2012 as we discussed the projected decrease in natural gas drilling in North America on our three previous conference calls. Therefore, Core's revenue mix now is closer to 80% oil, and 20% natural gas, a shift from the previous 70/30 mix that we had last year. Moreover, most of these natural gas projects related to, and emanate from, the international theater and are LNG related. These would be in the Eastern Mediterranean, East Africa, and Western Australia.

Turning specifically to our operations, Core's Reservoir Description results reflected the focus, again, away from natural gas, and the positive increases in both international and deep water activities, which continue to strengthen into 2012. Also, our first-quarter 2012 results were bolstered by North American activity levels in oil shale reservoirs, and increased activities in tight sands in the Permian Basin of West Texas. This drove incremental margins for Production Enhancement.

Finally, Reservoir Management posted another strong quarter, reflecting additional oil company support for its joint industry projects in oil shale reservoirs and international areas of interest like deep water East and West Africa. 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 higher return, international crude oil-related developments, especially those in deep water environments, and unconventional oil resource plays, and the continued internal development of new technologies and services, has 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 important tenets, which usually receive only scant attention in our oil field services sector are, number one, maximizing free cash 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 discipline produced free cash flow for the first quarter of 2012 of $46 million. In fact, Core converted about one of every five revenue dollars into free cash during the quarter. Core will continue to demonstrate this strict financial discipline in 2012 and beyond.

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. This is based on Core producing a return on invested capital in the top decile for the oil field services sector. Core's Board believes that stock price performance over time is directly related to its return on invested capital. Based on the most recent calculations available from Bloomberg Financial, Core's return on invested capital was approximately 38 percentage points higher than the oil field services peer group listed by Bloomberg Financial, and more than 30 percentage points above Core's weighted average cost of capital.

Core is fortunate and values its long-term relationship with our top shareholders, as the Company's top 10 shareholders own approximately 50% of our outstanding shares, with an approximate $57 ownership basis. Some of this ownership dates back to 1998. Our top 20 holders own approximately two-thirds of the Company's outstanding shares, with an approximate investment basis of around $63 a share. And to these shareholders, we have returned excess capital, which is our third financial tenet.

During the first quarter of 2012, Core returned over $26 million to our shareholders in forms of quarterly dividends and the repurchase of share. Core also reduced debt in the quarter, as well. Since October 2002, Core has returned over $1.2 billion or almost $24 per diluted share to our owners. We will continue to follow these three key 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 overview. Dick?

Thanks, David. I'd like to start by mentioning that we are excluding two items from our operational earnings that occurred in the quarter that were gains -- meaning there were items that increased our reported GAAP earnings. We are excluding those from operational earnings for discussion purposes because they were either a one-off item like an insurance recovery, or an item that was specifically excluded from our prior guidance, like the financial impact caused by changes in foreign exchange rates.

We have discussed in prior quarters the fire in a supplier's steel mill that resulted in an interruption to our Production Enhancement manufacturing business last year. As a result, we filed a claim under our business interruption insurance policy for $5 million. In the first quarter, we received notification from the insurer that they agreed to pay $3.4 million of the claim, and will continue reviewing the remainder of our claim. We have received the initial payment amount, and expect their review of the remaining amount to be completed in the second quarter. We are excluding this $3.4 million pretax gain from our operational results, as it is not indicative of the ongoing results of the Company. It equals approximately $0.05 on EPS. We are also removing from our operational results a $0.02 per share after tax gain as a result of the effects of changes in foreign exchange rates given that our prior guidance also excluded the impact of foreign exchange.

Okay, now, let's look at the income statement. Revenues were $234.2 million in the first quarter, and were almost midpoint of our guidance of $230 million to $240 million. Revenues in the last year's first quarter were $206.7 million, so year-over-year revenues are up 13.3%. Interestingly, over the last decade, our revenues on a compounded average annual basis are also up 13%. And we did experience a couple business cycles over that time period. While the [OSX] was up just 11%, which is a good way to show our secular growth in a cyclical industry. Of these revenues, services for the quarter, $162.7 million, up 15% when compared to $141.5 million last year, or an increase of $21.2 million. Product sales for the quarter were $71.5 million, up 9.6% compared to last year's first quarter.

Moving on to cost of services, for the quarter, 60.3% of revenue, an improvement when compared to 65.5% in last year's first quarter, and 63.6% for all of 2011. In the first quarter, our cost of product sales increased to 71.5% of revenues, compared to 69.3% for all of last year, as a result of inventory costs being impacted by the cost of the replacement steel as a result of the fire at our supplier.

G&A for the quarter, $10.2 million, which is 4.3% of revenue. It was down sequentially from $10.7 million, but up slightly from $9.5 million in last year's first quarter. We expect G&A to be around $42 million in 2012. Depreciation and amortization for the quarter at $5.9 million, unchanged from last year. We expect depreciation in 2012 to total approximately $24 million.

Other income this quarter is $4.9 million. This amount is comprised of, among other things, the FX gain of $1 million, and a $3.5 million gain on the insurance recovery mentioned earlier. EBIT for the quarter, excluding the gains from the two items, was $69.5 million, which was up $13.5 million, or 24.2% year-over-year. Our first-quarter EBIT represents EBIT margins of 30%, well above the 27% margins earned a year ago.

Interest expense was $2.2 million for the quarter, compared to $2.4 million in last year's first quarter. Income tax expense in the quarter was $17.8 million, and that was based on an effective tax rate of 24.8%. We expect our full-year 2012 annual effective tax rate to be approximately 25%. Net income for the quarter excluding the two items, was $50.7 million, compared to $37.8 million in last year's first quarter. So, net income in the first quarter increased almost 34% on a year-over-year basis. GAAP net income for the first quarter was $54 million, compared to $46.3 million last year.

Earnings per share for the quarter, adjusted to exclude the gain relating to the two items, was $1.06, which rose to the top end of our prior guidance of $1.01 to $1.06 per share. And compares to the $1.06 reported as Bloomberg's mean street estimate. Putting this into perspective, the mean street for Core Lab went up as the quarter progressed, unlike most OSX members whose estimates went down as the quarter progressed. Our adjusted EPS is up year-over-year by $0.29, or 37.7%. GAAP EPS stood at $1.13 for the quarter.

Now, if we look at the balance sheet, cash was $23.5 million, compared to the prior year-end balance of $29.3 million. Cash balances in our free cash flow were used primarily to repurchase stock, pay our dividends, and reduce borrowings on our revolver. Receivables stood at $171.7 million, virtually the same as year-end. Our DSOs improved in the quarter to 66 days, an improvement from the 68 days in all of 2011, and 70 days for all of 2010. Inventory increased from $53.2 million at year-end, to $58.2 million in the first quarter, as we received raw materials purchased from multiple vendors in connection with the supplier disruption into finished goods. Inventory turns were 3.8 in the first quarter, compared to 4.2 for the full-year 2011, although we do expect turns to continue to improve throughout 2012.

Other current assets were $31 million, up slightly from the year-end balance of $27.5 million, as a result, for the most part, from increases in various prepaid accounts. There were no material changes in PP&E, intangibles, goodwill or other long-term assets.

On the liability side of the balance sheet, accounts payable were $48.2 million, down from the year-end balance of $57.6 million, and that's primarily due to the timing of vendor payments. Other current liabilities of $82 million are up $4.5 million from the prior year-end balance of $77.5 million due to a variety of reasons, including, in part, to an increase in unearned revenue of $6.6 million for certain consortium studies. Our long-term debt stood at $198.1 million, comprised of $150 million in senior unsecured notes due in 2021 and 2023, with a blended fixed interest rate of 4.06%, while the remaining $48.1 million was drawn on our bank revolving credit facility. Other long-term liabilities ended at $66.7 million, an increase of $3.7 million over the year-end balance.

Shareholders' equity ended the quarter at $214.3 million, up from the prior year-end balance of $181.7 million primarily due to additions from earnings offset by share repurchases and dividends. Using annualized net income for the first quarter, our return on equity was approximately 101%, and certainly this is one of the highest returns earned in the industry.

Capital expenditures for the quarter were $7.3 million, up from $4.4 million in the prior year, as we continue to address opportunities created by the strong growth being experienced in our business. 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 CapEx growth 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 have been 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 products and services.

Looking at cash flow, cash from operating activities in the quarter was $53.8 million, and after paying for our $7.3 million in CapEx, our free cash flow was $46.5 million. As David mentioned, in the first quarter, we turned almost 20% of our revenues into free cash flow, which is one of the highest cash conversion rates in our industry. During the quarter, we used our free cash flow and cash balances to pay $13.3 million in quarterly dividends, repurchased $12.8 million worth of our shares, and repaid $25 million on our bank revolver.

Now, let's talk about our industry outlook. The dual listing process of the Euronext Amsterdam Stock Exchange requires that we file a prospectus with the Dutch financial regulatory body known as the AFM. They have similar duties and responsibilities as the SEC has over US-listed companies. Although we are not issuing any new shares in connection with the listing, we are required nonetheless to file a prospectus for the AFM's approval. And we have filed that prospectus with the AFM, but we have not yet concluded the process, although we do expect to by mid-May.

Given that the listing is not yet approved, only with certain stringent requirements would we be allowed to issue specific guidance prior to the listing becoming effective. Consequently, we are not providing strict numerical guidance this quarter, but we are able to provide qualitative guidance. Once our shares begin trading on the Amsterdam Exchange, which we think will occur in the mid-May timeframe, we will be able to return to providing our usual quarterly and annual guidance. While not consistent with prior practice, this is what we can do for the moment.

So, for the second quarter and remainder of 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 the Kwanza basin, offshore Angola, should increase significantly throughout 2012. These prior observations have been supported by the recent announcement of pre-salt discoveries by Maersk Oil and Cobalt in the Kwanza basin. Other international areas include the Middle East, specifically Iraq, and Asia Pacific, should see activity levels remain brisk with the support of higher international commodity prices.

In addition, we believe that we should benefit from increasing activities in the deep water Gulf of Mexico, which is projected to approach the highs of early 2008, by late 2012. We should also benefit from increasing activities in unconventional oil shale reservoirs, not only in North America, but also in South America and North Africa. We assume that worldwide activity levels will increase by 10%, and possibly more, with sustained higher commodity prices. For comparison purposes with Q1 results, versus the mean street for the first quarter, we believe that the mean street estimate for Q2, just as it was for Q1, would be at the top of our range. We do look forward to providing our customary guidance next quarter.

Okay, with that, I'd like now to pass the discussion to Monty for a detailed operational review.

Thanks, Dick. The first quarter of 2012 was our best first quarter ever, with revenue of $234 million, and operating earnings, excluding the FX gains and one-time gain from business interruption insurance, increased to $69.5 million. With operating margins of 30%. Revenue growth year-over-year was 13%, and operating margins improved 300 basis points over Q1 2011. We commend our five -- nearly 5,000 employees around the globe, for another excellent performance.

Reservoir Description revenue grew 8% over Q1 2011, and operating earnings grew 22% over Q1 2011, with operating margins improving by 400 basis points to 28%. We continue to receive a huge volume of work from Africa in reservoir fluid analysis, well-sat services, routine core analysis, and more advanced rock property analysis. This activity truly spans the continent with projects from Tanzania, Mozambique, Uganda, Sierra Leone, Ghana, Ivory Coast, Gabon and Egypt. We expect this area to continue to be very active through the year. Scientific laboratory analysis of the reservoir fluids and formation rock from these reservoirs is critical to our clients to understand and optimally produce these reservoirs.

Production Enhancement revenue grew 18% over Q1 2011, and operating margins improved 300 basis points over Q1 2011 to 31%. Demand for our stimulation diagnostics technologies is very strong. SpectraFlood technology is helping operators in the Middle East, Africa, North America, Europe and South America better understand the performance of their flood projects. This information is critical for optimizing flood sweeps of complex reservoirs for maximum recovery. Core's proprietary fracture diagnostics are helping oil companies optimize fracture stimulations in the Midland Basin, Eagleford, Bakken, Niobrara, Utica, and other shale reservoirs across North America.

Demand for our perforating completion systems was at an all-time high for the first quarter of the year. The HTD-Blast perforating gun systems, and premium High Efficiency Reservoir Optimization, HERO, perforating systems, continue to be in high demand in horizontal well completions. The HTD-Blast has proven very effective for completing the difficult toe-in of horizontal wells with optimal efficiency. Our SuperHERO Plus charges use a patented ultra-low-debris perforating technology for best in industry performance.

Reservoir Management revenue grew 25% over Q1 2011. And produced operating margins of 37%. Our consortium projects combined analysis from Reservoir Description and Production Enhancement to provide consortium members with a better understanding of their reservoirs. Core Labs project Tight Oil reservoirs of the Midland Basin now has 22 member companies. This project is directed at reservoir characterization and production enhancement of the Spraberry, Wolfcamp, and other intervals down to the Mississippi lime section. All of these intervals are potentially productive across the basin.

Recent results of horizontal wells in the Wolfcamp Shales have been very encouraging, with initial production rates of up to 100 to 1,000 barrel oil equivalent per day. The project is helping operators determine which intervals are the most prospective, and to optimize their stimulations for maximum oil production. The play now rivals the Eagleford in terms of drilling activity.

The discovery of first oil in Kenya, and additional gas discoveries in Tanzania, have maintained a high-level interest in our East African studies. The Ugandan government has approved a joint consortia study of the Albertine Graben by Core Lab. We anticipate initiating this study in Q2 2012.

In West Africa, the Core Lab Namibia South Africa, North Orange Basin consortium study, has been initiated. Recent deep water acreage awards in both countries have been awarded in the last six months, leading to increased activity in this part of the South Atlantic.

In the Asia Pacific area, our emphasis has been an expanding our shale reservoir data sets with ongoing projects in Indonesia, and a recently announced shale reservoirs of Australia study. Currently, four basins are being evaluated in Australia to support the increased activity in shales.

We also initiated our Mississippi lime project with 12 companies in Q1. Oil production is from horizontal wells through this complicated reservoir. The area of focus is Oklahoma, Kansas, and Texas.

Erika, we'll now open the call for questions.

(Operator Instructions)

James West.

David, Schlumberger recently made an announcement that they were opening a new core analysis center in Houston. It seems like they are making a push towards your business. I know that Weatherford previously had bought up all of the competition you had out there. Are you seeing, at this point, increased competition? Or, is this just because the market is growing so rapidly and customers are demanding this that it's going to pull in the bigger guys into your business?

Yes. Looking at, we did see that announcement of their facility, it was about 30,000 square-foot facility. We didn't see it as a logical extension of their purchase of Terratec, which was about a decade ago. The emphasis from Schlumberger's standpoint, remember, their focus, they are, and often say exploration oriented company.

Sure.

Where we are a development and production oriented company, so a little different focus on the facility. 30,000 square-foot lab here in Houston, compared to what we are adding right now over 40,000 square feet, to total 300,000 square feet here in Houston alone.

Okay.

So, yes, we understand that they are in the business, as of yet can't we have not seen any increase in competition. We think it's a little bit of a different market focus.

Okay. Fair enough. Just one other question from me. The Production Enhancement margins for 1Q were below what we were expecting. Is this a one-time blip or should we that think that margins should be in this lower 30% range going forward.

James, we tend to look at margins on a year-over-year basis.

Sure.

Because of the typical seasonal patterns that do occur. We did see a nice increase in margins year-over-year.

Right, sure.

Yes, sequentially they were down but so were revenues. That was expected. If we have our fixed cost structure in place with lower revenues naturally on a sequential basis as you go from Q4 to Q1, you will experience lower margins. That's why we tend to look at year-over-year, to make sure that we continue to execute on that fixed cost structure. Clearly, year-over-year shows that we did because margins were up, year-over-year.

Sure, so should we think about the rest of this year as revenue comes back that, that 200 to 300 basis point increases year-over-year are achievable?

Yes.

Okay. Great. Thanks, Dick. Thanks, David.

Rob McKenzie.

Good morning. Question, David, for you. A little bit of a crystal ball type question, there's starting to become a lot of chatter among some E&Ps in our space about the real alternate potential of the Permian basin here, and some real big reserve numbers are being thrown about. Would you guys care to share your thoughts on how much oil might be recoverable from the Permian over time and what that means for Core's business.

Yes. As Monty detailed, just looking at our tight sand reservoir study of the Midland basin, Permian basin, collectively, we think that there is good potential there. Our new annual report, entitled New Oil from Old Places, goes in great detail talking about the potential for the additional production that come from the Midland basin. If you think about it, three years ago, production touched about 700,000 barrels a day. That is now nearing 1 million barrels a day from all this increased activity. If you just look at our facility in Midland, we have a 40,000 square-foot facility. Much was not in use a decade ago. We continue to expand that operation now. Rob, we will put a lot of poker chips into the Permian basin. Not only in Reservoir Management, but also for Reservoir Description and Production Enhancement. We think it's going to be a big winner over the next couple of years.

Okay. Thanks. That basin peaked at roughly 2 million per day in the early 70s?

Yes, I think it was about 2.1, correct.

If and when does it exceed that, in your mind?

We need to drill a lot more wells before we can made that kind of projection. That crystal ball is too cloudy for us.

Okay. Thanks. Coming back to your guidance, I understand your inability to give numbers, but it sounds like from your qualitative comments that you guys are more bullish now than you were a quarter ago, for this year? Does that sound like a fair characterization?

Yes, Rob, this is Dick. I think that's correct. We are starting to see the activity levels of the clients internationally focused on oil. We are starting to see that improvement. That is why we mentioned on our prepared comments that we are comfortable with the upper end of what we are seeing from the analysts, particularly the mean street level.

So the change is really an international one, versus any moving parts in North America?

Yes. We would see North America, on the continent being rather static. The pickup we see, Rob, would be deep water Gulf of Mexico, which we think by the end of this year will return to pre-moratorium levels. We do sit some uptick there. But mostly the focus, internationally, is where we expect that will carry the day for us in earnings going forward.

So, Rob, when you think about Q1 at $1.06, I think the street mean is $1.15. That is just an observation of what mean street is published at. That does suggest that we would have some upside opportunity.

Right. Got it. Okay, and then in terms of what you're seeing from your international customers that's adding to your bullishness, is that mostly Reservoir Description, is that more traction in Production Enhancement? Can you give us a feel for where it's coming from?

Yes. As Monty detailed, certainly Reservoir Description. It's interesting to note that a lot of it has to do with the fluid side of the business. A lot of pressure volume temperature testing, PVT, and oil studies. A lot of those related to looking at enhanced oil recovery projects. Missable flood projects, I know we talk about core analysis, but let's remember now that we generate over half of our revenue from reservoir fluids.

Without a solid reservoir fluids business to go hand-in-hand with core analysis, I think you kind of miss -- you miss the day by not fully describing the reservoir system. We can hold the rocks static, and we know the fluids are dynamic. They change every day that we do have production. The emphasis, internationally, is tilted towards Reservoir Description, but, within Reservoir Description, the reservoir fluid side of that business. Remember, Production Enhancement, revenues are about two thirds North America, one third international. That continues to increase internationally, as we are looking at activities that stimulate horizontal wells that are being drilled into some of these shale reservoirs worldwide. The uptick is going to be international fluids for Reservoir Description, and then Production Enhancement on the fracture diagnostic side and also on the HTD-Blast side, for Production Enhancement on the perforation side.

Great thank you very much for the answer. I'll turn it back.

Veny Aleksandrov.

Good morning. My first question is on the reservoir management segment. Great quarter and extremely strong margins. Was there anything quarter specific, or can you give us a read on the margins?

We've had a great quarter. And a strong robust business, they are. Africa, the studies that are taking off in Africa are very strong. But also, we mentioned, the tight oil in the Midland basin study. That has kicked off with 22 customers. We have had a real strong response cost throughout, our Marcellus continues to be a strong study for us. As does our Eagleford. We are doing very well in all the study areas.

Thank you. My second question is Argentina. I know from the press release that you are monitoring the situation and you might not go ahead with the facility if you decide to. Is there further negative implications on your operations if the situation over there keeps deteriorating?

We don't see negative, because it hadn't started yet.

Right. Okay.

It would be, certainly, we are disappointed in the most recent developments there. It would be really a lost opportunity for us. We have had discussions with several large active clients there. Certainly, they have asked us to build dedicated facilities for the development of the Vaca Muerta. As it stands right now, if events continue to go down the road where we have the government actions taking place that are appearing that they are going to take place -- we would have a large pause before going in there, knowing that our return on invested capital hurdles, probably could not be achieved with the amount of activity we think that would be depressed there by the confiscation of assets by the government. It won't have a negative application on our operations, it would be what we would see as a lost opportunity for us.

To ask the question differently. I didn't want to go there because of the guidance and the listing and everything, but was any of those Argentinian upsides baked in the previous guidance release?

No. Because it was just starting, it would be starting off rather small, Veny.

Okay.

Really, from the standpoint, it wouldn't be a needle mover for a couple of years.

Okay.

Again, it would just be a lost opportunity for us.

Right. Well, thank you so much.

Okay. Very good.

Blake Hutchinson.

Good morning. A lot of commentary, you've set the table for this over the last couple of years, but the deep water commentary really takes prominence in the current release. I'm trying to gauge, as we get engaged on deep water fields, is there a sort of a multiplier effect, versus initial engagement on a mature field in the Middle East that comes with being earlier in the exploratory process, and how would you couch that? It seems to me in the release you're saying maybe we get engaged on the less fields year-over-year this year, but the deep water content kind of has a multiplier effect. Can you kind of just of explore that theme?

Yes, interesting point, Blake. Certainly the comparison that we always like to give is when we look at, let's say, a 1000 foot core from a deep water offshore West Africa, that has got the potential to generate between $2 million and $3 million of revenue for us. You have a lot of these developments that are in the stage right now, where they are cutting core. For instance, we just received 1100 meters of core from East Africa. When you look at the amount of core that is being cut in these developments, especially in the deep water where these wells are going to cost $110 million, upwards to $150 million per well, they are going to use a lot of science.

If we look at a 1000 foot core that would be cut in a shale reservoir in North America, our revenue potential would probably be somewhere on the $200,000 to $300,000 level. You have got a multiplier of about 10 fold. That's why the concentration, and you picked up on the theme of the press release, certainly talking about the importance of deep water. When we look at developments offshore, West Africa, all the way from Ghana down now to the North Orange basin, that Monty mentioned, that the Reservoir Management guys are starting to work on, the potential and the timing for a lot of core to be cut is upon us. As it is in East Africa, and the same thing with the Eastern Mediterranean. The timing of this is very good for us, especially when we have the arrival coming on the scene later this year and in the early next year of a lot of these deep offshore rigs. That gives us additional foundation for our optimism of expanding our business internationally, along with margins, where as we look at North America, maybe as being more static, other than a pickup in the deep water Gulf of Mexico.

So, we should view those as you not only get an up front multiplier effect but you're still sticky for the life of the field. There's no, as long as we go ahead with development.

That is correct.

Okay.

Because if you look at just offshore Ghana, you've had some production from some of those fields now that is about 1 year, maybe a little bit more than a year into it and we're still looking at rock from those fields. Now we have engaged our Production Enhancement folks. They are in there and they are running some of their SpectraChem tracers because you have some water reinjection already going back in those fields for pressure maintenance purposes. Of course, they want to -- water reinjection is going down into the water leg of those reservoirs. They want to make sure that they are not producing any other water that they are rejecting. It's a very logical follow-on from Reservoir Description to Reservoir -- to Production Enhancement. And then if you look further south, some of the Reservoir Management projects that are going on. So, we tend to stay pretty sticky and because of the incrementals that those fields generate on the margin side, that is why you are seeing some margin improvement as well.

Would that, going back to your earlier comments on the EOR projects, and not to overlook those, as the business mix evolves towards that side as well, is that also a margin add?

Yes. Our margins on our fluids, on our high-pressure, high temperature fluid business, are probably the best that we have in the Company.

Great, and then just one quick question and I will cede the floor. You mentioned, and have been mentioning for some time here, that you have a couple of larger scale, or some possible large shale developments, stealth place here in North America. Is that something that is already running through, just to clarify? Your Reservoir Management business have consortium studies started on those?

They have not started as of yet. Because I think our specific wording is, we thought that there was one and possibly two large scale oil resource plays left in North America. Those plays are still in their infancy. Acreage positions are being taken, as we speak, by operators. So until those are released by the operators, I think we have probably said enough of what we can say, on the possibility of one being a definite and maybe as many as two.

Great. Thanks for the time, I'll turn it back.

Okay, Blake.

John Lawrence.

Good morning. Another quick one on HTD-Blast. You talked about its use on 3000 of 8000 horizontal oil wells. What is realistic as far as further penetration there? Is coil tubing still a bottleneck, or you starting to see more capacity there?

Good questions, John. We believe that we are addressing probably half the market right now for HTD-Blast. We think that that could easily go over 50% of all wells being drilled. We are seeing more coil tubing units out there so that is becoming less of a bottleneck as the utilization of those is becoming freer and more units are coming onto the market. I think look for HTD-Blast, have a very good year this year. That was originally developed to deliver eight perforating guns. In talking to our guys last week, we've had a system where we delivered up to 27 guns. That technology has worked very well for us.

Further penetration, I would assume?

That is correct.

And then a quick one for Dick. Dick, just curious how quickly you want to pay down the debt, just given how much cash you're throwing off.

Our primary uses of capital have always been share buyback, dividends, and then looking at the debt, particularly when the interest rate is so low. We think we get a very good return when we return it to our owners.

Okay. Great. Thanks a lot guys.

Okay, John.

(Operator Instructions)

Erika, we will take one more if it's out there.

There are no audio questions at this time.

Okay. Very good. In summary, Core's operations posted another solid quarter. We have never been better operationally or technologically positioned to help our clients expand their existing production base. We remain uniquely focused and are the most technologically advanced reservoir optimization company in the oil field services sector. This positions Core well for the challenges ahead in 2012 and beyond. For 2012 we continue to be encouraged by recent activity trends in international and especially deep water activities and the growing activity in the deep water levels of the 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 generation, returns on invested capital, with excess capital being returned to our shareholders.

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 Board of Core Laboratories would give a special thanks to our 5000 worldwide employees that have made these outstanding results possible. We are proud to be associated with their continuing achievements. Thanks for spending your morning with us. We look forward to our next update. Goodbye for now.

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