Core Laboratories Inc (CLB) 2013 Q1 法說會逐字稿

Good morning. My name is Keyla and I will be your conference operator today. At this time I would like to welcome everyone to the Core Lab Q1 2013 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you. I'll now turn the call over to David Demshur.

Well thanks, Keyla. Like to say good morning in North America, good afternoon in Europe and good evening in Asia-Pacific. Would like to welcome all of our shareholders, analysts and most importantly, our employees to Core Laboratory's first quarter 2013 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 shareholders' return 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 second and full year -- second-quarter and full-year 2013 outlook and a general industry outlook as it pertains to Core's continued growth prospects in 2013.

This outlook confirms our confidence in the trends of increasing activities in international and especially deepwater activities tied to crude oil and large LNG developments and unconventional tight oil reservoirs in North America. Core also sees exceptional opportunities in the deepwater Gulf of Mexico developments including the potentially prolific but technologically challenging Lower Tertiary fields. Then we'll turn to Monty and he'll go over Core's three operating segments, detailing our progress and discussing the continued successful introduction of new Core Lab technologies and then highlighting some of Core's operations in major projects worldwide. And then we'll open the phones for question-and-answer. I'll turn it over to Dick for remarks regarding forward-looking comments. Dick?

Thanks, David. Before we start the conference this morning, I'll mention that some of the statements that we may 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 climates 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 inaccurate or 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 on 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, 2012, as well as the other reports and registration statements filed by us with the SEC and the AFM. Our comments include non-GAAP financial measures. Reconciliation to the most directly comparable GAAP financial measures is included in the press release announcing our first-quarter results. These non-GAAP measures can also be found on our website. Now with that said, I'll pass the discussion back to David.

Okay well thank you, Dick. I'd like to give a brief investor update. Core's operations produced the Company's most profitable quarter ever as the Company continued to benefit from our continued focus on international and deepwater activities and unconventional oil plays in response to relatively high oil prices and dwindling global spare oil-producing capacity. The focus on crude oil related projects continue to build as Core's revenues mix now is slightly more than 80% oil and slightly less than 20% natural gas. Moreover, most of the natural gas related projects emanate from the international theater and are LNG related with major projects in the Eastern Mediterranean, East Africa and Western Australia.

Reviewing the Company's first-quarter results revealed that Core's growth strategy of progressively working in more established and new field developments while continuing to offer new technologies and services will lead to revenue growth of 200 to 400 basis points higher than the increase in worldwide activity levels. Year-over-year quarterly revenue and operating profit growth for the first quarter of 2013 is testament to the validity and the robustness of the Company's growth strategies and underpinned by our operational excellence. We believe these trends to outperform market activity levels to hold throughout 2013.

Therefore, our growth strategy and execution by our operating units continue to serve our clients, our employees and our shareholders well. Core continued to focus on high return international crude oil related developments especially those in deepwater environments, unconventional oil resource plays and the continued internal development of new technologies and services that has led to multiple years of sustained growth and increased profitability. We are not complacent on technological innovation as our recent breakthrough on high pressure miscible gas flood technology, which will lead to billions of barrels of additional recovery from deepwater fields worldwide, would be testament to.

Another such evident of this trend would be seen in our Reservoir Description segment which saw its year-over-year operating margins increase for its tenth consecutive quarter. While speaking about Reservoir Description, analyst should note and recognize that for the last 10 of 11 years, quarter one Revenue Description revenues go down sequentially from the prior fourth-quarter levels owing to seasonal variations. This is why we always stress the year-over-year comparison to gauge the project of our three business units. The reason for the sequential decline happens to be the lack of work that it emanates from the North Sea and northern parts of Europe during the first quarter of the year.

Turning to Core Lab performance, 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 oilfield services sector, are number one, maximizing free cash flow through fiscal discipline. Core follows a strict discipline for allocating capital for investment in our growing our business. Unless certain return on investment capital standards are met or exceeded, the capital expenditure is disallowed. This strict capital discipline produced a record first quarter level of free cash flow of approximately $60 million. In fact, Core converted almost one of every four revenue dollars into free cash for the quarter. That's $0.23 per revenue dollar, the highest in the oilfield service industry. Core will continue to demonstrate strict financial discipline throughout 2013 and expects to generate free cash flow around $230 million to $240 million.

The second financial tenant is to maximize return on invested capital. Core's Board has initiated a compensation program for Core's Executive and Senior Management teams based on Core producing an ROIC in the top decile for the oilfield service industry. Core's Board believes the stock performance over time is directly related to return on invested capital. Based on the most recent calculations available from Bloomberg, Core's return on invested capital was the highest of any company in the oilfield services comp group listed by Bloomberg and also Core's weighted average cost of capital was the lowest for that group as well.

Our third financial tenant would be to return excess capital to our shareholders. During the first quarter of 2013, Core returned over $62 million to our shareholders in forms of quarterly dividends and the repurchase of shares. Since October of 2002, Core's shareholder capital return program has returned over $1.42 billion or over $30 per diluted share to our owners. We will continue to follow these three key investment tenets throughout 2013 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.

Thanks, David. Looking at the income statement, revenues were $260.9 million in the first quarter versus $234.2 million in the first quarter of last year. So revenues were up 11.4% year-over-year. And as David mentioned, this represents record revenues for any first quarter. Of these revenues, services for the quarter were $182.5 million, up about 12% when compared to $162.7 million last year, or an increase of $19.8 million. Product sales for the quarter were $78.4 million, up almost 10% when compared to $71.5 million in last year's first quarter.

Moving on to cost of the services for the quarter, they were 60.4% of revenue which is similar to last year's first quarter. And our cost of product sales were 68% of revenues, which represent an improvement from the 71% reported in last year's first quarter. G&A for the quarter was $12.8 million similar to last quarter. The expense is about 4.9% of revenues, up slightly from last year. We expect G&A to be around $44 million in 2013. Depreciation and amortization for the quarter was $6 million, unchanged from last year's first quarter. And we expect depreciation in 2013 to total approximately $24 million.

Other income this quarter is only $590,000 when compared to $4.9 million a year ago in the same quarter due to a one-off nonoperational business interruption gain which we excluded from earnings at the time of that gain. EBIT for the quarter was $79 million, which was up $9.5 million or almost 14% when compared to the first quarter of 2012 if you exclude the business interruption gain we spoke about. GAAP EBIT for the quarter was up $5.1 million, or 6.9% year-over-year. Our first quarter EBIT margins were 30.3%, an increase by 60 basis points over the 29.7% margins earned in last year's first quarter ex-item. And this was in spite of the lower than expected activity levels in North America and internationally, and this EBIT represents a record for any first quarter.

Interest expense was $2.3 million in the quarter compared to $2.2 million last year, in the first. Income tax expense in the quarter was $20 million based upon an effective tax rate of 26.1% slightly higher than the expected 25%. We do continue to expect our full-year 2013 annual effective tax rate to be approximately 25%. Net income for the quarter was $56.5 million compared to $50.6 million ex-item an increase of almost 12% over last year's first quarter. GAAP income for the first quarter increased 5% from $54 million on a year-over-year basis.

Earnings per share for the quarter was $1.22. Our EPS is up over $0.16 or over 15% ex-item with our GAAP EPS up by $0.09 or 8%, this represents record EPS for any first quarter. Now if we go to the balance sheet, cash was $22.9 million compared to the prior year end balance of $19.2 million. Cash balances and our free cash flow during the quarter were used primarily to repurchase stock and to pay our dividends. Receivables stood at $200.1 million, up from $184.08 at year end primarily as a result of our increased revenues. Our DSOs in the quarter were 66 days, up just slightly from 65 days experienced in all of 2012.

Inventory was $50.8 million, it's up sightly from the year-end balance. But important to note though our inventory turns improved in the quarter compared to last year. Other current assets were $39 million, down from the year-end balance of 46 -- excuse me, of $43.6 million for the most part as a result of a decrease in income tax prepayments of $5.3 million. There were no material changes in PP&E, intangibles, goodwill and other long-term assets.

And now to the liability side of the balance sheet, our accounts payable were $54.1 million, down just slightly from the year-end balance. Other current liabilities of $96.7 million are up $11.3 million from last quarter primarily due to an increase in income tax payable. Our long-term debt stood at $241 million up from the year end and is comprised of $150 million in senior unsecured notes due in 2021 and 2023 with the blended fixed interest rate of 4.06%. And the remaining is $91 million drawn on our bank revolving credit facility. As of today, drawings under our credit facilities are $99 million.

Other long-term liabilities ended at $75.8 million, an increase of $1.7 million primarily from an increase in deferred comp. Shareholders' equity ended the quarter at $187.9 million, unchanged from year end. And that's primarily due to additions from earnings being offset by share repurchases and dividends. Using annualized net income for the first quarter, our return on equity was over 120% making it one of the highest returns earned in the industry.

Capital expenditures for the quarter were $8.4 million, up from $7.3 million in the first quarter of 2012. We expect our CapEx program in 2013 to be approximately $33 million as a result of an expected continued improvement in industry activity particularly internationally and in the deepwater 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 of the reasons why we have been able to generate our high returns on invested capital.

Looking at cash flow, cash flow from operating activities in the quarter was $68.3 million. And after paying for our $8.4 million in CapEx, our free cash flow was $59.8 million. In first quarter, we turned almost 23% of our revenues into free cash, one of the highest conversion rates in our industry. During the quarter we used our free cash flow and cash balances to pay $14.8 million in quarterly dividends and to repurchase 364,541 shares for $47.7 million. Through close of business yesterday, in the second quarter, we've repurchased a further 127,600 shares at an aggregate cost of $16.8 million. The outstanding indebtedness under revolver now stands at $99 million compared to $84 million at year end 2012. Our diluted share count now stands at 46.3 million shares.

Okay now let's walk through our guidance. Our outlook for 2013 remains positive after reporting our best first quarter in our history. With continued support from robust Brent crude pricing and the expected delivery of additional deepwater drilling rigs and drill ships, we believe that we will continue to work increasingly in more established fields as well as new developments in field projects. In addition, as we have consistently done in the past decade, we will -- we plan to enter into new fields where we currently do not have operations and to offer new technologies and additional services in 2013. These new technologies and services will be focused on increasing daily production and ultimate hydrocarbon recovery rates from deepwater fields and liquids related unconventional reservoir developments worldwide.

Specific technological developments currently underway are designed to increase the hydrocarbon recovery rates in undersaturated reservoirs similar to the Lower Tertiary reservoirs in the deepwater Gulf of Mexico and several pre-salt fields in the Santos Basin offshore Brazil. Consequently, we believe that our business model, whose goal is to achieve a revenue growth rate of 200 basis points to 400 basis points above the increase in worldwide activity directed towards producing fields, does remain intact with incremental margins positively impacting operating margins.

We expect 2013 free cash flow to range between $230 million to [$240 million] (technical difficulty)[7%] yielding a worldwide activity increase of approximately 5%. We expect our revenue to grow at a rate faster than our anticipated change in worldwide industry activity by approximately 200 basis points to 400 basis points. However, as was the case during the first quarter, if worldwide activity levels exceed our anticipated level of activity, our revenue growth could be higher. Therefore for the second quarter 2013 we expect revenue of approximately $264 million to $269 million after taking into account seasonal effects. And we expect EPS to be in the $1.29 to $1.36 range.

For the full year, we expect revenue to range between $1.060 billion and $1.075 billion with operating margins averaging approximately 31% and incremental margins ranging from 35% to 45% for the full year. This operational guidance excludes any foreign currency translation and a 25% effective tax rate is assumed for the year. This would increase the midpoint EPS range to between $5.06 to $5.26 and the midpoint to $5.16. The midpoint of revenue guidance suggests revenue growth of approximately 9% but up to 10%. EPS guidance suggests earnings growth will be higher than previously guided and is now expected to be approximately 14% in a range up to 16% over full-year 2012 levels. Okay, now let's turn the call over to Monty for his operational review.

Thank you, Dick. Thanks to our 5,000 employees around the globe, Q1 2013 was again a record quarter. Revenue of $261 million and operating earnings of $79 million were both records and margins exceeded 30% for the quarter. These records were achieved by our employees providing industry-leading services and products that enable our clients to produce more hydrocarbons daily and over the life of their reservoirs. Thank you to all of our employees around the world.

Reservoir Description revenue of $125 million is a record for Q1 revenue and grew 8% over Q1 2012 revenue, which is almost three times the growth rate in the international rig count. As Dave mentioned in his opening remarks, Q1 was slightly lower than Q4 revenue due to the seasonal pattern that has held true in 10 of the last 11 years. Q1 operating margins of $34.9 million are our record and grew 9% over Q1 2012. Operating margins increased year-over-year for the tenth consecutive quarter to 28%.

Core Labs' advanced technology centers are advancing -- are currently analyzing core from over 40 different high-profile deepwater wells. These include wells from the Gulf of Mexico, Europe, Africa, South America and the Mediterranean. The analysis include routine rock properties, reservoir geology and a suite of advanced rock property [tests]. Information from these rocks is critical to the development plans and production techniques for these fields. Even more important are the reservoir fluids analysis being performed on deepwater wells to help oil companies optimize their engineering decisions in an environment of ever higher temperatures and pressures. Core Labs' reservoir fluid services group has been very active in evaluating Lower Tertiary prospects for a number of clients on multiple wells.

To fully optimize recoveries, all companies need to plan beyond primary recovery early in the lifecycle of their reservoirs. Core Labs' reservoir fluid services group not only provides all companies with the information that allows them to calculate the life and economics of their reservoirs from primary recovery, but is also able to assist them in determining the effectiveness of pressure maintenance and gas injection including miscibility in prolonging the life of their reservoirs and optimizing their total recovery of original oil in place. Foreseeing that a growing deepwater market will require more capacity and high-pressure capabilities to meet the urgent need for timely high quality data, Core Lab has put in place the largest most sophisticated reservoir fluid services capability in the world to service this market and ensure that it remains the premier provider of these services.

Production Enhancement revenues of $107 million set a new quarterly record for revenues growing 11% over Q1 2012. Operating earnings of $134 million were also a new record and grew 15% over Q1 2012. Operating margins of 32% were 120 basis points higher than Q1 2012. In a major West Texas oil play involving the drilling of 4,000- to 5,000-foot laterals followed by pumping 10 to 15 frac stages using the plug-and-perf completion technique and a combination of slick water and gel frac fluids, the operator came to Core Lab for help in optimizing their frac designs to maximize the all important SRV, stimulated reservoir volume.

This particular reservoir has low matrix permeabilities, and the only chance of making economically viable wells is to fracture stimulate as much of the targeted reservoir as possible. By injecting ZeroWash proppant tracers with the proppant pumped in each frac stage and deploying our SpectraScan logging tool to log the well after all frac stages are pumped, so as to identify the location and extent of treatment placement across the six groups or clusters of perforation in each of the 10 to 15 frac intervals. It soon became apparent that a significant number of the perforation clusters were not been effectively stimulated with trace proppant. For every unstimulated perforation cluster there was a potential for as much as 125 feet of reservoir that was being left unstimulated and thus nonproductive.

Working with the operators completions engineers, Core Lab began systematically proposing individual completion procedural changes designed to decrease the number of unstimulated perforation clusters, thus increasing the stimulated reservoir volume. Early on the SpectraScan logs identified approximately 15% unstimulated perforation clusters across the length of the horizontal wells. After modifying the frac rate to increase the rate per perf and in the process taking advantage of limited entry diversion of the treatment across the perforation clusters, the percentage of unstimulated perforations dropped to 10%. Another round of changes involving the redistribution of perforations across each frac interval further lowered the percentage of unstimulated perforation clusters to a targeted 5% level.

In the process of making these completion design changes and using our ZeroWash proppant tracers and our SpectraScan logging tool to help identify the extent of treatment coverage across these 4,000- to 5,000-foot horizontal laterals, the amount of potentially unstimulated reservoir declined from as much as 750 feet per lateral down to as little as 250 feet per lateral. This represented a potential 10% to 15% increase in lateral coverage for each horizontal well. As a result of these improvements and treatment, coverage across the laterals and the resulting increase in stimulated reservoir volumes, the operator opted to continue to utilize our ZeroWash proppant tracers and our SpectraScan logging tool to help ensure optimal reservoir coverage and minimal unstimulated reservoir volume.

Core's HTD-Blast continues to see enthusiastic client acceptance with our best quarter to date in Q1 2013. 27% of horizontal wells completed in Q1 used the HTD-Blast or HTD-Blast XL to perforate the toe end of the well. We are helping an operator recomplete wells using our HTD-Blast XL to perforate previously unstimulated zones that were not fracked due to the spacing claim. The operator has decided to restimulate these wells in the intervals that were previously bypassed by fracking the wells after the wells are perforated with our HTD-Blast XL. The HTD-Blast XL allowed the operator to perforate these well as efficiently and without requiring a rig on site to run in the perforating system. The operator has seen more than double production and improved reservoir exploitation.

Reservoir Management revenues of $28 million were a new record and grew 32% over Q1 2012. Operating earnings of $10 million grew 25% over the previous year and yielded operating margins of 35%. In Q1, Core Lab instrumented two large SAGD projects in Northern Alberta oil sands. The patented CT-MORE Coil Tubing Systems utilized likely the highest pressure rated pressure center in the world -- highest temperature rated pressure sensor in the world was installed in numerous wells. Our customers have seen the value in pressure and temperature data being collected on a real-time basis to assist them in maximizing production and optimizing steamed to oil ratios.

Core Lab also initiated the new joint industry project for the emerging Pearsall shale play in South Texas. Several operators are evaluating this liquids play below the up-dip Eagle Ford oil window with conventional cores from pilot wells and production test results from horizontals. Initial production results are encouraging with IPs of 4 million to 6 million feet of gas per day and 450 to 750 barrels equivalent of oil per day from relatively short horizontals. The project will focus on reservoir characterization, fracture stimulation, optimization and optimal production practices to maximize liquids recovery factors.

Core Lab completed our pre-salt West Africa carbonate reservoir joint industry project. This developing new play is attracting both major and independent companies to the region looking to emulate success on the Brazilian margin. This new rock based study will enable companies to better understand these complex reservoirs and controls upon both reservoir quality and productivity. Core Lab has also been awarded a very large proprietary project to evaluate new play in areas in the Permian Basin for a major operator there. The project consists of evaluating a number of new wells to be drilled over the next year. We will now open the call for questions.

Keyla, we can go ahead and open the lines for questions.

(Operator Instructions)

Jeff Spittel, Global Hunter Securities.

If I recall correctly from the last call, you guys were one of the few Management teams professing that we'd see a flattish North American activity run rate. Sounds like you're sticking to that prognostication. I guess the more important question as it pertains to Core is with the market penetration that you're starting to see and the uplift in this philosophy of more stage intensity, how much does that flat activity run rate really matter in terms of your growth profile this year?

Yes I think Production Enhancement that's where we really see the impact of that and as we saw the year over year, the rig count was down significantly. We saw total well completions though up 6% year over year and the number of stages increase year over year, resulting in production enhancement revenue growth in the double-digit range. Jeff, we think that if our -- if we do see this flattish North American activity level continue on that we can get low double-digit growth with increasing margins in our Production Enhancement segment owing to the penetration of the HTD, HTD-Blast and then the ultra high-pressure high-temperature perforating systems that will be deployed later this year in the ultra-deep shelf and ultra-deep water Lower Tertiary play. So I would look for low-double digit -- continued low double-digit gains for production for Production Enhancement.

Good, very helpful. And I guess staying on the subject of Production Enhancement, you highlighted the Gulf of Mexico, the Lower Tertiary and the ultra-deep being a positive contributor in the first quarter. Can you give us a general order of magnitude of how much of the segment does the Gulf of Mexico comprise and obviously it sounds like that's growing fairly quickly.

Well it was 3% of the total Company revenue. That has probably gone up to around 5%. So again it's nothing that's going to be revolutionary or a needle mover. For us again it's adding the incremental revenue that drives the incremental margin that drives our underlying margin. And if we just look back over Production Enhancement in the last six quarters, you'll see how that plays nicely.

Sure thing. Congrats on a great quarter, guys, appreciate it.

Yes thanks, Jeff.

James West, Barclays.

Good morning, Dave, Dick and Monty and congrats on the quarter as well.

Yes, thanks, James.

Want to follow up on the North America comments about a flattish market. We've seen good permit data 1Q versus 4Q, well completions as you highlighted are improving. We're getting some help on E&P cash flows from higher gas prices, [not admittedly] the gas activity, but certainly helps out cash flow. So thinking about a flattish environment from the first quarter level, is that really -- is it based on you being conservative because we're still early days here in North America or is there something you see in the market that suggests that we're not going to see really any growth in activity?

Yes, we hope we're wrong on this, James, but our view is that when we look at a lot of the unconventional plays, you've got now WTI that has slipped below $90. For us, that's a benchmark for we feel outside of the sweet spots in the Balkan, in the Eagle Ford and then the Niobrara, it's very difficult to reach a reasonable return on investment for our clients. And so once we have WTI elevate above $90, okay maybe we are a little bit conservative. But with this dip down into the $80's, even in West Texas, it does give us some pause that we still will see a flattish stable level activity from Q1 hoping that we do get a rebound in WTI.

Okay, that's pretty interesting given your view that $90 is the threshold level would suggest that WTI is not going to stay there very long, or below not very long.

Yes well I don't know how long it's going to stay there, but the $90 WTI at the level that is necessary for reasonable return is not our view, it's our clients view.

Right, got you. Okay.

And again that's off the sweet spot.

Right, got you, okay.

If you've got clients that have acreage located on the sweet spot, yes indeed, they can get returned. So when we look for incremental rig ads outside of those sweet spots, it's where the $90 becomes pretty important.

Okay thanks, that's very helpful. One last follow up for me. Deepwater is obviously a big driver this quarter, what percentage of sales or EBIT is deepwater now?

With respect to our business, 30% of all oil is produced offshore. Slightly more than 40% of our revenue emanates from offshore. Slightly more than 7% of all oil is produced from deepwater, slightly more than 20% of our revenue now emanates from deepwater. So it's a very important component.

Great, thanks, Dave.

Jim Crandell, Cowen.

David, I want to follow up on the deepwater issue. If we look at what's happened with the number of deepwater rigs and deepwater well completions, I mean it's grown dramatically and I think today we have something like 85 ultra-deep water rigs under construction. How does your revenue trend with deepwater fields that have been on for where you've done work for a significant amount of time versus relatively new completions and fields that are just coming on, will you get a big push from these rigs that are coming on and most of them making discoveries and will you -- would you immediately expect it to work in a lot of these reservoirs?

Probably not immediately, Jim. When we see these new deepwater assets coming on, remember the first wells and discoveries have to be drilled, those wells are not usually core. We do see incremental revenues though from the fluid side. And as you can tell from the theme of the release, we talked about the importance of reservoir fluids and the evolution of our technology in reservoir fluids. If we look at the ways that we enhanced oil production, you can do two things.

You can alter the rock. But in deepwater we cannot alter the rock that much because we're probably not going to hydraulically fracture it that much. We may gravel pack it to change it, but really, the big delta is in dealing with the reservoir fluids. So we can change the properties of those fluids. So we do get incremental revenue straight away from reservoir fluid analysis. And actually reservoir fluids, as we all know, is becoming a more and more important driver for Core Lab.

So once the discoveries are made, somewhere around wells three to five, they think about putting the Core barrel down because ultimately they are going to need those rocks to run dynamic flow tests to determine what's going to be the most effective and efficient way to recover the most oil from those reservoirs. Those tests are ongoing right now in some of the Lower Tertiary fields in the Gulf of Mexico. So when we look at the impact, the full impact for Core Lab on these deepwater assets that will come out let's say over the next nine months, probably will be in next year's numbers when we look at the impact from both fluids and cores from those fields. Now as Monty said, we are active right now on 39 -- or over 40 deepwater wells worldwide. So we will see that increase as we go later this year and into next year.

Hello?

Jim, did we lose you?

Yes you did momentarily. Good, did you finish, Dave?

Yes, I've completed the answer to that question.

Good, I appreciate it. My phone line went dead for a second. I had a follow-up question, Dave for you or Monty, is how do you see in a flattish environment let's say for US rig activity over the rest of this year or maybe a modestly improving one, how would you see the demand for the HTD-Blast product that you have? And how would you -- how many systems would you anticipate adding given what you see for the demand?

Yes, as has been the case here, I think a good reflection of that Jim would be to the activity level that we saw in Q1, which was rather flattish where we did -- or from a rig standpoint. But we did see the number of well completions up 6% year over year and we saw the number of stages increase. That all fed into increased penetration for HTD-Blast and more importantly now, HTD-Blast XL.

The example that Monty gave on the recompletions up in the Woodford, up in Oklahoma, is a classic case of the original operator treating completions in the Woodford in the horizontal zones there as a manufacturing operation or a factory. Now that we are -- the new major operating Company which has taken over this acreage is applying science and using HTD-Blast XL and Core Lab's fracture diagnostics technologies, he's getting three X of these wells. So the end -- the major independent that originally had these wells was leaving a lot of production behind by treating this as a manufacturing type process without applying science. So I think we'll see increased penetration of that because we'll see more and more of these testimonials coming out that these are not manufacturing processes and it's not a factory where they frac the code that we will continue to need additional science and technology that Core Lab can provide.

Okay, interesting, Dave. And one final question is the biggest upside surprise to me versus what you reported was in the Reservoir Management factor. It certainly seems like some very good things are going on there, to what extent are your first-quarter results sustainable or perhaps even could be improved on over the balance of the year?

Yes Jim, we've always said that segment is lumpy and so we had a number of sales take place on projects that had been completed where you do get a lot of EBIT that feeds to the bottom line, expanding those incremental margins. Probably not sustainable, but we still think with their concentration on now 14 major projects in the Golden Triangle area most recently as Monty referenced was the carbonate play pre-salt West Africa where we've had the cobalt discovery, the [merse] discovery, we've got a BP Cobalt well that is going to be getting down to test those zones here within several months. We think Reservoir Management will have a good year, Q1 probably not sustainable as that is a lumpy business. But it will give good contributions through the year.

Okay, great. Great quarter and thank you very much, Dave.

Okay, Jim, thank you.

Veny Aleksandrov, FIG Partners.

Good morning, guys, and a great quarter.

Good morning, Veny.

My first question is on the high-pressure (inaudible) recovery technology. You had great results in the Gulf of Mexico and now you're talking about Brazil. Is this the next target market for this technology and how are you approaching this?

Yes Veny, it's interesting, Petrobras remains our largest international oil company client. A lot of the work that we do for them revolves around fluids. And in a recent presentation in New York, Petrobras did say that they do realize that the productivity of the pre-salt fields would be below the average recovery factor worldwide of around 40%. So they referenced somewhere in the mid-30% and they are studying miscible gas projects which we find highly encouraging. And so that certainly is a market where that technology will be applied over the next several years.

Now turning to other markets, we do see this technology going to be applicable in some of the fields off of West Africa and in some fields in Asia-Pacific. So it is not just specific for the under-saturated fields in the Lower Tertiary of the Gulf of Mexico, we see this technology as being applicable worldwide. Another example would be some of the fields up in Kurdistan where we've had large in-place discoveries of crude. I think Gulf Keystone, several billions and billions of barrels of oil in place. The problem is they lack a drive mechanism. These are significantly under-saturated in natural gas and high-pressure miscible gas injection technology will improve those recovery rates as well.

So there's a lot of exciting areas where we can apply this technology. And it's a good question because most people concentrate on the rocks and remember there's only so much we can do to the rocks. We can fracture the rocks and that's about all we can do. On the fluid side, we've got a whole spectrum of cocktails and technologies that we can add to get out additional recovery. It will be a critical -- mission critical technology heading forward and Core Lab's concentration on this in increasing this technology over the last five years is unprecedented in the industry.

Thank you so much, that sounds great. And my next question on the Reservoir Management side, again you had a great quarter and you talked about the largest proprietary project that you signed during the first quarter. Can we expect more proprietary projects going just entering these fields from now on? So far it was more it was more joint industry projects.

We do -- Veny, this is Monty, we do proprietary projects all the time. It's an ongoing business for us, has been for a long time. The project we highlighted is the largest project we have, proprietary project to date. It comes on the heel of the last largest which was just last year. So we do these proprietary projects, sometimes they're a small field, sometimes they're a large field, sometimes they have a wide scope, sometimes they are very focused. But that's an ongoing business. We don't talk about it a whole lot because it is proprietary to that client, and of course we'll never mention the client or what we're doing. Our joint industry projects we talk about a lot more because they are -- have a lot of clients involvement and it's something we can talk about more openly. So the proprietary market is a good market, it's been going from a long time and will continue to be strong.

Understood, thank you so much.

Blake Hutchinson, Howard Weil.

I was intrigued but the commentary in the release, coming back into the release about high potential unconventional crude and natural gas opportunities internationally. Through the consortium studies and different studies where you've gotten to the point where you saw some promise in unconventionals internationally, but not necessarily anything that was ripe for increases in activity? Has that stance changed and geographically where would you highlight the opportunity for Core Lab here as the year unfolds?

Yes, good question, Blake, and actually you caught us. We thought we had -- we're putting too much in the release, but we were going to talk about unconventionals really tight oil internationally. We've just conducted a technical seminar in Russia and we got together another -- a number of the operating companies there both international and Russian-based and we talked about the Bazhenov Shale. This is a very large shale deposit over Western Siberia where even Exxon has talked about teaming with Luke Oil to drill some scientific holes down through the Bazhenov Shale. We think that has an opportunity to significantly increase activity levels throughout Russia over the next two to five years. So that would be one area of concentration for us.

The other area we're actually -- we're starting to see some movement now is in North Africa. We've talked about the Silurian Gothlandian Shale that underlies the main basins in Algeria, stretching over into Libya, the Ghadames Basin, the Illizi Basin and so we have some international oil activity led by E&I and Total that are looking at working with Sonatrach for starting to develop these tracks. Little bit more politically sensitive there but we are seeing some movement in those areas.

In the Middle East, more of a focus on unconventionals but right now related to natural gas generation. They would like to up the natural gas production throughout the Middle East to replace the 3 million so barrels of Crude Oil that is now used to generate power and run their desalinization plants. That would really free up an additional 3 million barrels of crude for export. So our Reservoir Management team has been busy there running some proprietary studies throughout the Middle East right now focusing on natural gas production from some of the unconventionals.

And then the other area we would mention, although not really interesting from Core Lab from a geopolitical standpoint, again would be the Vaca Muerta Shale in the Neuguen Basin in Argentina. We saw that there was recently a well drilled there that had a number of frac stages that was performed. It does appear to have the high potential that we talked about over the last year but we think the geopolitical risks there are too high, the lack of currency conversion, the lack of being able to get currency out of Argentina a hard currency and it's going to be tough to buy Core Lab stock back with those Argentine pesos. So those will be the areas internationally that we would highlight. But over the next year, you'll probably hear us talk about more.

Great, thanks, that's an in depth review. And then quickly Monty, I wanted to make sure that I'm not reading too much into this in terms of the differences and applications between the HTD and HTD XL. Once you have the product out in the field, are you finding that XL is becoming more of a recompletion refrac tool and that's where the market growth is or is that really reading too much into it and it's not necessarily as big an application from a new well standpoint?

I think it's applicable both. It depends on what the operator is trying to do and really comes into how many different perforation events he wants to put together into one run in the well. The HTD-Blast and HTD-Blast XL are run on coil tubing. So they're run into the well on the coil tubing and you can do a number of perforating events in one run into the well. It increases their efficiency, obviously that lowers their cost a lot, it lets them do this without a rig. So recompletion -- it enables the recompletion method that might not otherwise be available to them. So we're excited about that opportunity, but it's early days in that market.

And Monty brings up one good point there, Blake, on these recompletions being done on coil tubing. So again we're seeing more completions being done without a rig being present on site. So activity levels are going to be higher than what would be indicated by what the working rig count would be.

Great, I appreciate that. Thanks a lot and I'll turn it back.

Kurt Hallead, RBC Capital Markets.

I wanted to follow up actually on that question because I think that's a pretty significant leverage point and something that is very difficult to track on a regular basis. Obviously as you guys have indicated because there's no coil tubing rig count that we could track on a week on week or month on month or even annual type of basis and it's readily available. So on the same context, you guys provide some information about if you look at international overall spend or global spend you can grow your revenues 200 to 400 basis points higher than that spend. What kind of multiplier effect can we put on the rig count to try to adjust or adapt to this changing dynamic as it relates to recompletions with coil tubing? How would you guys think about that?

Don't have an answer to that yet, Kurt, but you're onto something there. Clearly in Q1 we saw some effect on Production Enhancement. Because if you look at the delta in the rig count, obviously there were other factors that were in there certainly as Monty mentioned, our activity up in the Woodford in these recompletions. I think once operators look back at completions that were done in this, they've cracked the code in this manufacturing factory mode they're going to find out that they've left a lot of production behind. So early days for that, but I think the testimonial is the fact that when we look at the number of wells that will be recompleted, we think that is one heck of an opportunity especially for HTD-Blast XL where right now we believe we can run a string of up to 25 stages on one coil tubing unit. So you look at the efficiency of the effectiveness of that plus the increase in the yield of hydrocarbons in this case this major oil company getting three times the production from the original completion that this independent at the time had talked up of being in the factory mode and having cracked the code. So that will be something to watch and will try to give you a barometer on that as the quarters increase through the year.

So it's obvious in your commentary that's in the early phases, but how would you characterize the saturation rate right now, 10%, 5%? Can you give us some indications here and in that same context, we're looking at 6% completion year on year, you've got to be thinking that's going to be accelerating as the year goes on, don't you think?

Yes, we would put the saturation rate on the recompletions for our HTD-Blast XL at about zero. So that's just out of the box.

So I want to come back around the comment you made a little bit earlier in that $90 oil works only if you're in the sweet spot, or sub $90 only works if you're in the sweet spot, you need something over $90 WTI if you're not in the sweet spots. So what's your prediction, where's oil going from here?

Don't have a clue, my friend.

Come on.

I can tell you based on our long-held philosophy of being peak oil guys that we certainly on the longer term, we see both Brent and WTI going higher, actually much higher. On a more of a short notice, we can't help you there.

So in that context though, oil has been down for all about a week under $90, is that really going to change anything, my history would tell you --

Absolutely not. We need -- come on, we need months below that before you get any change in behavior. The buck and rig count has been down for five consecutive months. And so I think something is telling you there that once you're outside that sweet spot, the returns just aren't there. Interesting note, over the last five months we've added 52,000 barrels of additional Balkan production, that's over the last five months.

The seven months prior to that, we were adding somewhere on the order of 20,000 barrels a month. So the moderation in that rig count probably is going to lead to lower production, gross production gains within the Bakken keeping in mind that the decline rate first year Bakken production about 40%, second year about 25%. So we're going to have a large hurdle to make up outside of the sweet spot if we're going to continue to get significant production growth in the Bakken. And we've gone on record in saying that we'll take the under on 1.5 million barrels per day of Bakken production through 2014 and we're still a really solid on that prediction.

I want to be clear, you said over last five months in total Bakken production is 52,000 barrels, right?

That is correct.

Okay, great. I appreciate the--

That would be through the end of February. That might be a little too much information, but we were just doing some work on the Bakken over the last couple days.

That's really helpful and I appreciate that additional color. Thanks.

Travis Bartlett, Simmons & Company.

Getting pretty late into the conference call here so I thought I'd squeeze in one quick for you. But you guys highlighted in the earnings release again how Core Labs recommends tighter frac stages and increases in proppant volumes per stage. So I understand that this varies by geological formation, but broadly was wondering if you guys could frame for us how you think these increase over time given some of your recent studies?

Yes, again, too early in the process to tell and it is related specifically to the geology of the formation. I'll have you go back and look at the Cabot Oil & Gas release on the well they drilled in their area, the most prolific drilled in Pennsylvania where they had 35 frac stages and the well IP-ed at over 40 million a day. Sustained rate one month later was again the 35 million a day. If you look at that in comparison to some of their earlier completions, that might give you a handle on what we can find in that area of the Marcellus in Pennsylvania. I also turn to some of the comments made by Pioneer and EOG in the Eagle Ford and that might be able to give you a better handle. On a very generalized look at that, over the next year or two I think E&P companies will be getting more specific on what those numbers would be.

Okay, perfect. Well that's it for me. Thanks, guys.

Doug Becker, Bank of America.

Just a few housekeeping questions. How do you define activity? And I know it's a silly question, but should we really be thinking about is rig count, well count, spending?

For us internationally our -- we do a bottoms up analysis from our field operating guys. And they just look at projects that are in the queue that are going to take place. Read that a proxy internationally probably is a rig count. In North America, we don't think the rig count is really reflective of that, it would be well completions and number of stages done. I think that would be the best handle that we could give you.

Okay, that's very helpful. And you mentioned well completions up 6% year over year, do you have that figure handy on sequential?

You remember, Doug, we're year over year guys, we're not sequential guys.

At completion?

Yes.

Appreciate that. Where did activity levels in the US exceed -- or actually I guess you said globally, where did activity levels actually exceed your expectations the most in the first quarter?

Probably deepwater, Lower Tertiary, Gulf of Mexico. And to a lesser extent, Eagle Ford, West Texas, West Africa, East Africa and Iraq, I would say those were the areas that were strong performers for us.

Pretty broad based. That's all I had, thank you.

Yes and again, Russia was a serial disappointer as they always are. Our hopes are that in years down the road, that this Bazhenov Shale because of the technology needed, will uplift the technological content that we can offer into Russia. Right now it represents around 4% of our revenues, we would like to double that over the next couple of three years and maybe the Bazhenov Shale can do that. Because right now we look at that Russian market as one where it is driven by lower technology and lower technology services, really not a place for us. We maintain operations there in 4% of our revenues hoping that sooner or later the technology revolution will also reach Russia.

Sounds good. Thanks again.

Okay, we're going to close then and Keyla, so no additional questions. In summary, Core's operations posted another solid quarter, but we can do better. We have never been better positioned operationally, we're technologically to help our clients expand their existing production base. We remain uniquely focused and are the most technologically advanced reservoir optimization Company in the oilfield services sector. This positions Core well for the challenges in 2013 and ahead.

For 2013, we'll continue to be -- we continue to be encouraged by recent activity trends in internationally and especially deepwater activities. We're growing activity levels in the deepwater Gulf of Mexico especially in Lower Tertiary sequences and remain confident in activity levels associated with unconventional oil plays world wide. The Company remains committed to industry-leading levels of free cash generation, returns on invested capital with 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, and as Monty Davis has already mentioned, we'd like to give a special thanks to our 5,000 worldwide employees that have made these outstanding 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. Goodbye for now.

Thank you, this concludes the conference call. You may now disconnect.