Core Laboratories Inc (CLB) 2013 Q2 法說會逐字稿

Good morning. My name is Keela, and I will be your conference operator today. At this time, I would like to welcome everyone to the Core Lab Q2 2013 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

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

Well, thanks, Keela. Good morning in North America, good afternoon in Europe, and good evening in Asia-Pacific. We would like to welcome all of our shareholders, analysts, and most importantly our employees, to Core Laboratories' second-quarter 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 shareholder returns, and returns on invested capital. We will also discuss Core's long-held philosophy of returning excess capital back to our shareholders.

Dick will then follow with a detailed financial overview, and additional comments regarding building shareholder value, and Core's third- and fourth-quarter 2013 outlook, and a general industry outlook as it pertains to Core's continued growth prospects into 2014. This outlook confirms our confidence in the trends of increasing activities internationally, especially those in deepwater, 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 prolific, but technically challenging, Lower Tertiary fields.

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 then highlighting some of Core's operations and major projects worldwide. And we do believe we have some disruptive technologies on the way. Then we will open the phones to a Q&A session.

Turn it back over to Dick for remarks regarding forward-looking statements. Dick?

Thanks, David. Before we start the conference this morning, I'll mention that some of the statements that we make during this call may include projections, estimates, and other forward-looking information. This would include any discussion of the Company's business outlook. These types of forward-looking statements are subject to a number of risks and uncertainties relating to the oil and gas industry, business conditions, international markets, international political climate, and other factors including those discussed in our '34 Act filings that may affect our outcome. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in the forward-looking statements.

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. For a more detailed discussion of some of the foregoing risks and uncertainties, see item 1A, Risk Factors, in our annual report on form 10-K for the fiscal year ended December 31, 2012, as well as other reports and registration statements filed by us with the SEC and the AFM.

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

With that said, I'll pass the discussion back to David.

Well, thanks, Dick. I'd like to go over 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 seemingly high oil prices and the dwindling global spare oil-producing capacity. This is the third consecutive quarter that Core Lab has produced all-time quarterly highs for revenue, net income, and EPS. The focus on crude-oil-related projects continue to build, as Core's revenue mix is now more than 80% oil and less than 20% related to natural gas. Moreover, most of the natural-gas-related projects emanate from the international theater and are LNG related, with major products in the eastern Mediterranean, east Africa, and off of western Australia.

Reviewing the Company's second-quarter results reveals that Core's growth strategy of progressively working in more established and new field developments continue to offer new technologies and services, will lead to revenue growth of 200 to 400 basis points higher than the increase in the worldwide activity levels. Year over year, quarterly revenue and operating profit growth for the second quarter of 2013 is testament to the validity and robustness of the Company's growth strategies, and are underpinned by our operational excellence. We continue to believe that these trends to outperform market activity levels to hold true for the balance of 2013 and into 2014. Therefore, our growth strategies and the execution by our operating units continue to serve our clients, our employees, and our shareholders well.

Of course, continued focus on higher-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, 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 injection technologies will lead to billions of barrels of additional recovery from deepwater fields worldwide. Also on the technology front, Monty will detail improvements in what we believe to be truly disruptive technologies associated with the effectiveness and efficiencies of perforating operations in unconventional reservoirs.

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 Oilfield Services, are -- number one, to maximize free cash flow through fiscal discipline. Core follows a strict discipline for allocating capital for investment in growing our Business. Unless certain return on invested capital standards are met or exceeded, the capital expenditure is disallowed.

This strict capital discipline produced a record second-quarter level of free cash flow of over $58 million. In fact, Core converted almost $0.23 of every revenue $1 into free cash flow for the quarter. This is the highest in the oilfield service industry. Our free-cash-flow-to-revenue conversion rate of 23% far exceeds pre-tax operating margins for all major oilfield service companies. Core will continue to demonstrate strict financial discipline throughout 2013, and now expects free cash flow to exceed $0.25 billion for the year on less than a 46-million-share base.

We guided up free cash flow over $20 million from the lower end of our prior guidance for the year, and only a few analysts had made note of the importance of this. Most never mentioned free cash flow in their upward guidance in their morning pieces. Moreover, if Core meets these projections, free cash flow in 2013 will exceed net income. And that will be the eighth time out of the last 11 years that our free cash flow has exceeded net income from the year.

So, turning to a word on valuation. As of last night, Core was trading at around 28 times present-year projected free cash, while most other major oilfield service companies were trading at 40 times or above their projected free cash flow for 2013. Some trade at Infinity, and haven't generated real free cash in years. While other oilfield service companies' free cash is valued more than Core's remains a mystery to us. If one examines Core's top 10 shareholders, they own 50% of Core Labs shares at under $50 per average share. If one examines Core's top 20 shareholders, they own almost 70% of the Company at under $60 per share. Most of these holders are not strict oilfield service investors, and screen Core Lab on free cash flow. So for us, free cash flow matters, and will continue to matter.

The second key financial tenet is to maximize return on invested capital. Core's Board has initiated an incentive compensation program for Core's executive and senior management teams based on the Company's producing an ROIC in the top decile for all oilfield service companies. Core believes that the stock price performance over time is directly related to its return on invested capital. Based on the most recent calculations available from Bloomberg, Core's return on invested capital was the highest of any company in the Oilfield Services comp group listed by Bloomberg Financial. And also, Core's weighted average cost of capital was the lowest.

Our third financial tenet is to return excess capital back to our shareholders. During the second quarter of 2013, Core returned over $67 million to our shareholders in forms of quarterly dividends and the repurchase of shares. At the end of the quarter, Core's outstanding share count fell below 46 million shares, levels not seen since the third quarter of 1997. During the quarter, Core returned over $1.45 per share to our shareholders, versus our EPS of $1.32 per share. And since October of 2002, Core's shareholder capital return program has returned nearly $1.5 billion, or over $32 per diluted shares, to our owners. We will continue to follow these three key financial tenets for the balance of 2013 and into 2014, which should enable Core to continue to produce industry-leading returns for all of our shareholders.

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

Okay. Thank you, David. Looking at the income statement, our revenues once again grew at a rate in excess of 400 basis points greater than the global industry activity, and that activity was on the order of 2% through the first half. Industry activity in North America was flat at best, while international grew at about a 4% rate. Our revenues were up 6.5% year over year to $263.1 million in the second quarter, versus $247 million in the second quarter of last year. This represents all-time quarterly record revenues. Of these revenues, services for the quarter, $187.7 million, up about 7% when compared to $175.7 million last year, which was an increase of $12 million. Product sales for the quarter were $75.5 million, up almost 6% when compared to $71.3 million in the prior year.

Moving on to cost of services for the quarter, they were 58.4% of revenues, slightly better than 59.1% in last year's second quarter. Our cost of product sales were 71% of revenues, an improvement from 74%. G&A for the quarter was $11.2 million, about 4.2% of revenues, slightly up from last year, but down from 4.9% last quarter. We expect G&A to be around $45 million in 2013.

Depreciation and amortization for the quarter, $6 million, up from last year's second quarter. We expect depreciation for the full-year 2013 to total approximately $24 million. Other expense this quarter is primarily foreign exchange losses of $1.6 million. The guidance we gave on our last call for this quarter specifically excluded the impact of any FX gains or losses, so accordingly, our discussion today excludes the impact of this FX translation.

Excluding those FX losses to conform to our guidance places EBIT for the quarter at $83.5 million, up $7.5 million, or almost 10% year over year, which created margins of 31.7%, an increase of almost 100 basis points over the 30.8% margins earned in last year's second quarter, ex-items. In spite of the lower-than-expected activity levels in North America and internationally, this EBIT represents a record for any quarter. GAAP EBIT was $81.9 million, which is up $9.7 million, or 13.5%, year over year.

Interest expense was $2.3 million for the quarter, compared to $2.2 million a year ago. Income tax expense in the quarter was $20 million based upon an effective tax rate for the quarter of approximately 25%. We continue to expect our full-year 2013 annual effective tax rate to be approximately 25%.

Net income ex-items for the quarter was $60.9 million, compared to $55.4 million over last year's second quarter, an increase of almost 10%. Earnings per share for the quarter was $1.32 on the same basis that our guidance was given, by excluding FX. Our EPS is up year over year by $0.16, or almost 14%, ex-items, with GAAP EPS of $1.29, which is up $0.18 or 16%, and this represents record EPS for any quarter.

Now, over to the balance sheet. Cash was $23.2 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 $190.9 million, up from $184.8 million at year end, and that's primarily as a result of our increased revenues. Importantly, our DSOs in the quarter were 63 days, down from 65 days experienced in all of 2012. Inventory was at $54.8 million, and it's up from the year-end balance of $49.3 million in reflection of increasing product sales.

Other current assets were $39.8 million, down from the year-end balance of $43.6 million, for the most part as a result of a decrease in income tax prepayments. PP&E was $130.8 million, up from the year-end balance of $125.4 million, just due to our capital expenditure program throughout the year. There are no material changes in intangibles, goodwill, and other long-term assets.

On the liability side of the balance sheet, there are also no material changes from year end to our accounts payable or other current liabilities. Our long-term debt stood at $250 million, compared to $241 million last quarter, and is comprised of $150 million in senior unsecured notes and $100 million drawn on our bank revolving credit facility. As of today, drawings under our credit facility remain at $100 million. Other long-term liabilities ended at $76.7 million, an increase of $2.6 million over the previous year end, in part due to an increase in deferred compensation.

Shareholders' equity ended the quarter at $187.5 million, which is unchanged from the year-end balance, primarily due to additions from earnings, being offset by share repurchases and dividends. Using annualized net income for the second quarter, our return on equity was over 129%, making it one of the highest returns earned in the industry.

Capital expenditures for the quarter were $9.5 million, up from $7.6 million in the second quarter of last year. 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 directed for the most part by our clients, 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.

Now looking at cash flow, cash from operating activities in the quarter was $68.2 million, and after paying for our $9.5 million in CapEx, our free cash flow was $58.8 million. In the first half, as David said, we turned 23% of our revenues into free cash flow, one of the highest cash conversion rates in the industry. During the quarter, we used our free cash flow and cash balances to pay $14.7 million in quarterly dividends, and repurchased 377,969 shares for $52.7 million.

Now, looking at our views and guidance for the remainder of the year, after reporting the most profitable quarter in our history, our outlook for the balance of 2013 remains positive. With continued support from robust Brent crude pricing and the expected delivery of additional deepwater drilling rigs, we believe we will continue to increase revenue in more established fields, as well as in new field development projects. Consistent with our operating history over the past decade, we plan to enter new fields where we currently do not have operations, and 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 hydrocarbon recovery rates in under-saturated reservoirs similar to Lower Tertiary reservoirs in the deepwater Gulf of Mexico and several pre-salt fields in the Santos Basins offshore Brazil.

Therefore, we believe that our business model with a stated goal to achieve revenue growth of 200 to 400 basis points above the increase in worldwide industry activity directed towards producing fields does remain intact, with incremental margins positively impacting operating margins. We expect 2013 free cash flow to be higher than previously guided, and is now expected to exceed $250 million, with our client-directed capital expenditures to equal or be slightly greater than that of 2012. And as you know, we increased our quarterly dividend in the first quarter 2013, while further increasing our shareholder capital return program. While we are currently trading at a multiple of approximately 26 to 28 times free cash, most of the world's largest oil service companies trade on average, as David mentioned, in excess of 40 times their free cash flow.

For the remainder of 2013, we continue to anticipate North American activity levels to stabilize at second-quarter levels, and international activity levels to increase approximately 7%, yielding an aggregate worldwide activity increase of approximately 5%. We expect our revenue to grow at a rate faster than its anticipated change in worldwide industry activity by approximately 200 to 400 basis points. That being said, if worldwide activity exceeds our anticipated level of industry activity, our revenue growth could be higher. Therefore, for the third quarter of 2013, we expect revenue of approximately $263 million to $268 million, and EPS in the $1.33 to $1.34 range. That revenue would be up 8% over the prior year, while EPS would be up over 18%. For the fourth quarter of 2013, we expect revenue to range from $268 million to $270 million, and EPS of $1.37 to $1.38. This operations guidance excludes any foreign currency gains or loss, and a 25% tax rate is assumed for the year. This would increase the midpoint of full-year EPS guidance by $0.09 to $5.25, an increase of 16% over 2012 full-year results.

Now, let's hand this over to Monty for his operational review.

Thanks, Dick. Second-quarter revenue of $263 million as an all-time quarterly high, represents revenue growth year over year of 7%. Operating earnings, excluding losses from foreign currency translations, increased to a quarterly record $84 million, with operating margins of 32%, the highest ever recorded in a quarter. Operating margins improved 90 basis points over Q2 2012, as Core continued to focus on value-creating technologies and services for our clients. We commend our nearly 5,000 employees around the globe for another record performance.

Reservoir Description revenue grew to a record quarterly high of $129 million, generating operating earnings of $37.6 million and operating margins of 29%. It was the second-best quarter in history for Reservoir Description, only outpaced by the tremendous quarter posted by Reservoir Description a year ago. Operating income levels and margins were affected by a number of second-quarter transitory issues, including the second most difficult seasonal breakup in Canada over the last 10 years, coupled with rain-related issues in the Bakken area. In addition, drilling-related issues in evaluating unconventional shale reservoirs in Australia pushed out additional revenue originally expected in the second quarter to later periods. The Company believes that without these transitory issues, that Reservoir Description would have posted its most profitable quarter in Company history in the second quarter of 2013.

Our Reservoir Description offers the powerful combination of Core studies with reservoir fluids for reservoir optimization. Today, I want to highlight our fluids labs working on many enhanced oil recovery studies in the Gulf of Mexico and the Middle East. These involve viability studies for injections of miscible gas, nitrogen, carbon dioxide, and sour hydrocarbon gas. These studies are performed on reservoir fluid and include packed column displacement, solubility, swelling, and viscosity reduction studies combined with flow assurance studies, as many of these gases will destabilize asphaltenes, leading to potential injection and/or production issues as a function of secondary and tertiary recovery processes.

Many of the current oil discoveries in the deepwater Gulf of Mexico are highly undersaturated in natural gases. Some of the reservoir fluids are so undersaturated that only a small fraction of the oil in place will be able to be recovered without -- through primary depletion or using conventional, secondary techniques, for example, water injection. The major oil companies exploring in the Gulf of Mexico are now seriously looking at high-pressure gas injection as a likely secondary or tertiary recovery technique to maximize oil recovery from field development planning to a revitalization technique for an existing deepwater asset.

Core Labs' reservoir fluids laboratories are at the leading edge of enhanced oil recovery, or EOR, by performing high-pressure, enhanced oil recovery testing for miscible gas displacement. Our patented and proprietary high-pressure techniques are being utilized for feasibility studies to investigate whether plentiful nitrogen gas or cheap, lean hydrocarbon gas is a viable solution to boost the recovery reserves in these highly undersaturated reservoirs. Our advanced fluid labs are using proprietary EOR technology to determine minimum miscibility pressure and thermodynamic testing for reservoir simulation models. As a consequence of the type of high-pressure, gas injection formation damage and production deposition may occur. Our labs are innovating new technologies to mitigate these issues, and keep the oil flowing to the surface. We are the industry leader in high-pressure enhanced oil recovery testing, and we are developing new and improved technologies to add yet more incremental barrels to the bottom line.

Production Enhancement, posting its best quarter ever in spite of a year-over-year rig decline of 10% in North America, grew revenue 11% over Q2 2012 to $110 million. Operating earnings rose to $38 million, and operating margins improved a blistering 410 basis points over Q2 2012 to 34%. Production Enhancement continued to innovate new, high-impact disruptive technologies, and the Company has been rewarded with premium pricing.

Our fracture diagnostic services lead the way in Q2, with demand for our patented and proprietary technologies at record levels. Clients are using our SpectraChem Plus tracer technologies, including our SpectraChem Express, to verify flow assurance, and to identify fracture communications between adjoining wells. Our SpectraStim and SpectraScan technologies are ensuring that all intended zones have been fracture stimulated and completed for optimized production from each well. Our new FlowProfiler oil-based tracer technology, when combined with our SpectraChem Plus tracer technologies, verify for oil companies that the completion fluid has cleaned up, and which stages are producing oil. This information can allow clients to restimulate stages with more effective stimulations in order to optimize their production.

Our HTD-Blast system was used to perforate the total of 28% of all horizontal wells perforated in Q2. This is a 31% increase in HTD-Blast activity versus quarter-two 2012, despite a decline in the number of horizontal wells perforated year over year. Several of our HERO line of charges have recently been certified by API as the deepest penetrating perforating charges in the industry. Specifically, Core's 39-gram charge in a 4.5-inch perforating gun is certified by API as the deepest penetrating perforating charge on record. This perforating system is getting wide acceptance in North America, and is the preferred system in the international market.

Reservoir Management revenue grew 13% over Q2 2012 to $23.7 million, generating operating earnings of $7.6 million and producing operating margins of 32%. Reservoir Management continues its successful implementation of west Africa projects, with the deepwater extension of [Cote d'Ivoire] study. This study will focus on deepwater petroleum system, which includes reservoir quality, stratigraphy, petrophysical properties, seals, and fluids. Reservoir Management has also expanded our east Africa projects with a Phase II to our offshore Tanzania study.

Reservoir Management had additional companies joining our Eagle Ford, Delaware Basin, Pearsall Shale, and Midland Basin projects during the second quarter. These projects focus on reservoir characterization, fracture stimulation optimization, and optimal production practices to maximize liquids recovery factors. We also initiated a new project for nine E&P companies, exploring for and exploiting the tight oil Missourian sandstones in the Anadarko Basin. Initial production results from these sandstones have been excellent, with rates between 2,000 and 5,000 barrels of oil per day from the Hogshooter sands.

We will now open the call for questions.

(Operator Instructions)

The first question comes from the line of Jim Crandell of Cowen.

Good morning.

Good morning, Jim.

David, HT-Blast and HT-Blast XL as a percentage of production enhancement revenues, where are you now, and how do you see the growth prospects for these two products? And perhaps you could elaborate a little bit on the potential and the drivers there.

Jim, good question. Right now, we see that as a revenue stream of about $30 million. We see the potential in that of being $60 million. But I think more interesting is the combination of HTD-Blast and HTD-Blast XL with some of these horizontal orienting technologies coupled with our Kodiak development of a charge associated with a potassium perchlorate pellet, which essentially gives you a, as Monty quoted, the deepest penetrating perforating charge, followed by a pulse of ultra hot gases. That number one, clean up the perforating tunnel, and then also initiate a mini frac around, which subsequent pressure pumpers can maximize the effectiveness of that frac.

So when we look at HTD-Blast and HTD-Blast XL, right now, a $30 million revenue base. We think this that can go to $60 million revenue base, but more importantly, the disruptive part of this is to add the horizontal -- or the horizontal orienting technologies along with the Kodiak disruptive perforating technologies. So right now --

So either how --

We don't know what the size of that market is, as we are just introducing the combination of these technologies into the marketplace.

Okay. Good. Good answer. And either how much of that or how much of the growth potential of that product is internationally?

Well, as Monty mentioned, the combination of those and unconventional plays will be pronounced here in North America. But Monty mentioned the specific 4.5 inch guns. Those are guns used more internationally than here in the US because here in North America, we tend to use smaller well bores. So a different profile for both of those. So the combinations of the technologies, better growth story here; for deeper penetrating charges by themselves, more of an international story.

And Dave, one question about the Reservoir Description business. Are the percentage of jobs that you either don't pursue or you turn down because you either -- they either don't have the level of margin you require or you just can't meet the turn-around time the client requires, is this increasing or showing much change in the market?

Well, I would say no change, Jim. We do look at our pricing standards, and so there are jobs that we just don't want to do because we can't meet our margin goal or return hurdles. So -- but I would say that those have remained the same.

Good. Okay. Thank you, Dave.

Okay, Jim.

The next question comes from Ryan Fitzgibbon of Global Hunter Securities.

Good morning, guys.

Good morning, Ryan.

I'll start off with the Reservoir Description side of the business. Dave, again, you talked about the fluid analysis work that you've been doing. Can you help us with a couple of things? First, talk about the trend you're seeing from customers with respect how often they're coming back to you for that work. And then two, how do the margins for that business compare to the -- call it Core analysis work that you do?

Excellent question, Ryan. As you pointed out, and has been our theme for our past several earnings release, our clients are seeing now the importance of understanding the phase behavior relationships of the three reservoir fluids, that being crude oil and natural gas and water. There is only so much we can do to the rock, huh? We can frac it. We can acid wash it. But the reservoir fluids, the [dynacism] that is associated with these fluids, we can change them by what we inject, what we don't inject, increasing pressures, decreasing pressures in the reservoir, so the reservoir fluids are the real key in going forward.

And currently, within Core Laboratories, the emphasis is on reservoir fluids and the impact on reservoir fluids technology is going to have. And yes, this is an area of the science that Core Laboratories owns, and so margins on that side of the business is better. And actually, deepwater work and the expansion of our fluids technology has led to the increase in -- the dramatic increase in the margins over the last 11 quarters, as you've seen. The fluids are slightly higher in margin. As we come out with new technologies, we will continue to try to increase the margins on those fluid technologies.

Okay. That's helpful. Then my seconds question is, really with respect to that business in the back half of the year, I believe you're adding some capacity on the fluids analysis side. Can you give us maybe a sense of magnitude as to how much revenues the additional capacity you're bringing on can derive, and then secondly --

Go ahead.

And then secondly, I believe generally, we see a sequential decline in revenues Q3 versus Q2 in this business due to the oil sands work. Did the lost revenues in Q2, will that mitigate some of that sequential decline in your opinion?

Yes, that is a very good point. As you pointed out, four of the last five years, in Q3, we've seen a sequential decrease in Reservoir Description. This caused great alarm last year on the conference call, but I'm glad you pointed that out for this year because we are going to put that in our third quarter release. And yes, because the amount of work out of the oil sands was so incredibly high last year and has been tempered this year, we will see a decrease in that delta between what those revenue rates are for Reservoir Description. With respect to additional revenues from the mobile units that are going to be added to our fleet, especially throughout the Middle East, it will be an incremental gain, and that is in our guidance, Ryan, for Q3 and Q4. And again, if activity levels are higher than we think, certainly, there can be some upside there.

Okay. And real quickly, to follow up on the oil sands comment, would you expect Reservoir Description revenues and margins to be up sequentially with the work for the oil sands down on a year-over-year basis?

Oil sands certainly will be down on a year-over-year basis. When we look at Reservoir Description, we right now would project that to be flattish, maybe up.

Okay. Thanks, guys. Appreciate it.

Okay, Ryan.

The next question is from the line of Doug Becker of Bank of America.

Thanks. A lot of talk of disruptive technologies. Is it fair to say that the potential impact from these new technologies is higher than we've seen in the past? I know it's probably something difficult to quantify, but it seems like there's a lot of things going on, new introductions. Certainly, the Production Enhancement margins look very good. Is it higher than it's been in the past?

It all depends how far we look back, Doug. We think that the introduction of the High Efficiency Reservoir Optimization technologies, or HERO charges, was a disruptive technology and has led to increasingly higher margins over the last four to five years. Again, a little bit too early to tell, but some of the early results just from a scientific basis and early results of field tested basis suggest that these could be as high as the HERO technologies introduction was several years ago.

And so as we start thinking about incremental margins, something -- we've seen in periods of new technology introductions, incrementals above 40%. Is that something that's reasonable as we start thinking going forward?

47% this quarter, Doug.

And as you point out, Doug, we have gotten incremental margins up in the mid to high 50%s. A little too early days to project those, so we will sit here with our 35% to 45% incremental margin guidance.

And then, it looks like the revenue guidance was down just a hair. The EPS guidance was higher, so the implication would be the margin guidance a little bit higher. Maybe just a little color on the moving parts there.

Yes. We believe with $108 Brent and almost $107 WTI, that we ought to see activity levels sooner or later increase, not only in the US, but certainly in the international theater. Dick pointed out that when we look at the movement in the international theater, this is now the third quarter in a row the activity levels have only been up 4% year-over-year. This is surprising to us. So we are optimistic that, that will be higher, but our guidance is based on what we've seen in the past. So we're a bunch of guys from Missouri, so until you show us, we will guide to a little bit lower levels hoping that we are wrong.

Makes sense. (laughter) And then just on the returning capital to shareholders, it's been in excess of free cash flow. Is that reasonable to expect going forward for the next couple of quarters?

Our program is opportunistic in nature, so can't commit one way or the other, but your observation is correct. Our revolver is a $300 million facility. Only $100 million is drawn, so conceptually, we could use that to buy in excess of our free cash flow if we chose to.

And if you look at the first quarter, we thought we had some great opportunities there to have a large level of share repurchase, and we thought there were opportunities in the second quarter as well. Whether those opportunities avail themselves to us in the third quarter are to be seen. But certainly, if the stock does go down because of market activities or perceived shortness in our earnings announcement, yes, those are great opportunities for us. So if that indeed was the case, Doug, yes, it could exceed our free cash flow for the quarter or several more quarters.

Makes sense. Thank you very much.

The next question is from Veny Aleksandrov of FIG partners.

Good morning, guys.

Hello, Veny.

My first question is about the Reservoir Description in Australia. You talked about the oil sands work, but how about Australia? Did the drilling-related issues -- have they been resolved? And has work started already?

They -- Veny, what happened in Australia is we were pretty excited about shale activity. We've been awarded contracts. The oil or gas companies had some issues with the drilling of those horizontal wells. You've got to remember this is the first -- Australia is just starting into the shale [reservoirs]. So what happened is, the work didn't materialize for us due to those drilling activities. That's been delayed and is going to probably happen late this year or in 2014 before they get those cores drilled, and then that activity will be where we thought it would be. We think it's got a lot of potential. There's of LNG activity already in Australia, and this would be a good supply for those facilitates, so we think that will come in the future. It is just delayed because of their newness to the process.

So knowing that you guys are conservative, it's probably not in your guidance for 2013, but you think it is going to start in 2014. Is this correct?

That is correct. That is correct.

Okay. Thank you. And then my seconds question, you're talking about new services in fields that you already operate in and new fields that you are looking at. Can you elaborate a little bit on the new fields? Is there anything new and exciting that we have not heard about so far? New deepwater drilling anywhere around the world?

Well, I would say around -- looking around the world, certainly, the deepwater provinces that are being explored now, certainly Angola remains very interesting. Some of these wells that are now being drilled off of Namibia continue to look very interesting. Some of the drilling that is taking place in the northern North Sea, some off of Norway, we find to be exciting. So from deepwater, those would be areas that we are certainly keeping our eyes on. But getting back to some of the areas that we think interest will increase will be, for instance, the Middle East. The amount of EOR work that is going to be requested there over the next couple of quarters is surprising to us. And that includes fields from Oman, all the way up through Saudi, the Emirates, Kuwait, up into Iraq and the northern climes of Iraq up in Kurdistan.

So this could be an interesting area and might be an indication that the national oil companies there now realize that their reservoirs are not exempt from the laws of physics and thermodynamics and they need to start concentrating on enhanced oil recovery projects to indeed keep their production levels where they are at today. It's interesting to note that this quarter versus average of last quarter, Iraqi production declined for the first time in three years. This is interesting to note to see if this trend continues. Right now, they're producing about 3.1 million barrels a day. Last quarter, it was around 3.2. So that will be an interesting view to take.

We also have seen now some of the original field operators in the south that are working with the Southern Iraqi Oil Company are now asking for production targets to be reduced and reduced significantly. There are several fields where they've been asked to cut -- they've asked the Southern Iraqi Oil Company and the government to cut their production targets, and in one case, from 1.2 million barrels a day -- which we never felt was realistic, down now to below 800,000 barrels a day. Mind you that, that field today only produces 200,000 barrels a day. So a lot of challenges there in the Middle East, but good opportunities for EOR projects, as Monty mentioned, in some of these mobile facilities that will add to our fleet. So the Middle East, pretty exciting for us.

Thank you so much.

Okay, Veny.

The next question comes from John Daniel of Simmons & Company.

Hello, guys. A question on the FlowProfiler.

Good morning, John.

Good morning. Can you give us a sense as to how many times the technology has been used? And do you have evidence at this point that customers actually are going back and restimulating the stages if at first they failed?

Say that again, John?

On the FlowProfiler --

Oh, yes, just introduced this quarter. And so right now, very early days for that. A side comment away from the oil -- the Profiler, we are seeing more and more recompletion activities using the HTD-Blast. Remember, in our last conference call, we talked about some recompletions in the Woodford. Where, again, the new operator of those acreages there are going back and using additional stages and over pumping proppant in those stages, and we've seen production increase 2 or 3 fold over what the original initial production was. And remember, these were acreages that were owned by a company that had cracked the code in the Woodford. Obviously, that code has still not been cracked, and the new operator is producing 2 to 3 times the amount from those. So that's good news for HTD-Blast.

A little bit too early days for the oil profiler and what is going to mean for the efficiencies and effectiveness of getting all of these stages of flow because certainly our evidence now shows that 80% of these stages actually flow little or no hydrocarbons into the well bore. We think this oil profiler technology can really have a major impact over the next several years in the effectiveness and efficiencies of the amount of oil produced from these stages, which, by the way, will be needed to keep production rates in the United States where they are at today.

The question, then, is on, if less than 80% of the stages flow -- just to follow up. When we go back in and restimulate those, how does this big picture -- how does this impact your overall view on US oil crude production if people adopt (multiple speakers) --?

As we will see over the next couple of quarters, we will need every drop to maintain production levels of where we're at. If you just do a little bit of work in Bakken, we added in the year 2011, 196,000 barrels a day to production, and then we added another 234,000 barrels of production in 2012. If we are to keep pace with that level of production in the Bakken increase, we would need to add somewhere near 4,000 producing wells in the year 2013. The most we've ever added was 1,772 wells last year. Through April of this year, we have added 570 producers in the Bakken, and they've added 22,703 barrels of oil. So you can see there that the decline curve never sleeps, and the decline curve always wins. So it becomes more difficult. And that's just really an example of what we will see happen in the Eagle Ford and Niobrara as well.

Okay. The technology that basically identifies whether or not a fracture is successful -- and the next question is, if a stage doesn't flow oil or hydrocarbons after the fracture, at this point, is anyone held accountable for that, the service company, and what's the typical cause for the failure of that stage not flowing oil?

No service company is held responsible for that due to the heterogeneity of the reservoir. Hence, always our sales job to say is you got to take more Core to look at that rock. It could be a myriad of reasons for that, John. It could be that you've run into a more shale-y part of the reservoir where it's not as brittle and it doesn't break down. It might take a higher flow of pressure. The perf tunnel might not be as clean as needed. So you can run from one end, one edge of the spectrum to the other.

Okay. Last one for me, and I might be over thinking this, or maybe I just misread the press release. But I think you mentioned that North American activity levels should stabilize at the second quarter levels. With the Canadian rig count improving at Q3 and Q4 as we [merge] from breakup, are we to assume you can see the US land rig count dropping?

No, we have normalized for the Canadian rig count increases.

Got it. Thanks, guys.

Okay, John.

The next question is from Rob MacKenzie of Iberia Capital Partners.

Good morning, guys.

Good morning.

David or Monty, I wanted to dig in some more on the EOR efforts in the Lower Tertiary in the GOM. From last quarter to this quarter, you dropped what you thought the recovery rates were there from 10% to 15%, to 8% to 13% but still think your technology can drive that up to 20%. My question is in two parts. Number one, how is that technology affecting the operator's decisions on how they develop these fields at this point? Are they baking that into their development decision? And two, how material is it now? And over time, what is the potential there?

Yes, Rob, good chatting with you. The 8% to 13%, that is the industry outlook. And they're using economics based on those numbers to look at whether they're going to go ahead and develop, and obviously, they believe that there is still an economic return there. Some of the early work that we have done has shown that we can increase that and increase that significantly. It will be quarters, if not years, until we completely understand the phenomena of high-pressure miscible gas injection into those reservoirs.

But they're biasing their views to at least their upside of their original estimates on the recoverability. How is that changing their thinking? The planning of these wells is extensive. And when we look at a development well there, they're also looking at having that as a dual purpose well, a development well along with the potential to have that also be an injector. So as opposed to having to drill two wells for a producer and injector, we have the potential as a producer and also an injector in one well bore that goes down into the reservoir. So these wells are going to be very, very expensive, but if you can get a two-fer -- or a dual purpose well, ultimately, the costs will be less.

Great. And relevance to Core Lab in terms of revenues now versus upside?

Again, there will be incremental adds as fluids is becoming a more and more important business across our business lines. And again, there is only so many things we can do to the rocks, and there are just enormous amount we can do to change the fluid dynamics by what other cocktails we inject into that reservoir.

Okay. Thanks. And a follow-up question. Last quarter, you talked about your largest ever proprietary project in Reservoir Management focusing on the Wolfcamp and the Delaware -- Southern Delaware Basin, and at the same time, we've seen in some of those plays there, a greater incidence of horizontal wells versus the verticals. Without specifically talking about that customer, are you guys looking at things like that, things that might change the productivity, the recovery of that basin, and how disruptive or where do you think that those basins could go over time in terms of their productivity?

We've done extensive work with that client. And we won't be naming the client; you're right. We've done extensive work with them. It is high grading. Figuring out where to go, what's the best way to improve their properties, it is a pretty extensive study. We expect that they will see a huge benefit from what we have determined from them. It's still ongoing work. And I think that client in particular will see a huge economic benefit from what we've been able to tell them. It is hard for us to say too much more on that, being a proprietary study.

Well, maybe I could ask it this way. How much can you take from that proprietary study and learn and then apply to other customers and how you work for them?

We certainly -- once you learn something, you've learned it, and that's in your knowledge base. We wouldn't use any of their proprietary information to guide another customer, but we would know how those reservoirs work, and that can be applied for other customers, any learnings we have there from that study. But we want to stress, proprietary data is proprietary. It is not used in any other way.

Okay. And I will just ask a big picture question for you, David. With a lot of what we've talked about with EORs, some of the -- what Monty was just talking about, have you changed your thinking at all on A, the productivity of the US in terms of some of the production targets I think you've been a little bearish on in the past? And B, global oil, peek oil production 88 million in '08, where do you stand on that now?

We continue to be reasonable in the US. I wouldn't say bearish, but just based on scientific fact, decline curves, recovery rates, we see the increase in the amount of oil production in the US start -- its increase starting to decrease and ultimately flattening out here over the next, if not several quarters, over the next six quarters. And globally, we still feel that we are at the plateau producing somewhere around 88 million barrels per day. That outlook has not changed.

All right. Thanks very much.

Okay, Rob. We can take one more question, Keela.

The next question is from Blake Hutchinson of Howard Weil.

Good morning, guys.

Good morning, Blake.

We've talked a bit about the high volume of reservoir fluid phase behavior studies here, deepwater, worldwide, really Golden Triangle. As we think about the franchise, this is somewhat of an incubator, and I was just trying to help recalibrate here, as we actually get into the development phase, is this more beneficial on a continuum basis for Reservoir Description itself, or should we be thinking more about the production enhancement division being as big a beneficiary of the actual development -- physical development phase? Just trying to get an idea because more and more, the releases are colored with either the benefits to the tracer technology franchise and the physical completion franchise as well.

Actually, very good question. With respect to reservoir fluids and Reservoir Description, that business is becoming more and more important because of the dynamic nature of the fluids. The rocks don't change. The fluids do. So as our clients continue to emphasize more and more and more about the fluids, in our business, the fluids become important, more important, and much more important as we go forward.

Yes, we will always do core analysis and advanced rock property testing and dynamic flow tests, but the future for this Company is headed towards reservoir fluids because of the dynamic nature of those. In combination with production enhancement and tracer technology, whether it be water-based or oil based. And our ability to increase the effectiveness and efficiency of those perforating charges is a triangle, fluids, tracer technology, perforating technology, is the future of this Company.

But will -- on a relatively basis, so the fluid phase studies will be ongoing throughout the life of a well, but does the actual financial impact from the tracer technologies and the completion technologies have the potential to rival that within production enhancement?

Oh, yes, absolutely correct. Because if we look at fluids, that is going to be a recurring business. We have now several clients to get their fluids evaluated in the field every quarter. In Aberdeen, we have a client that does it every week, so that's a nice recurring business space there. Whereas the rocks, okay, they are used, and then they might be pulled out for dynamic flow tests down the road. So in this Company, our philosophy over the last several years has been to concentrate more on the fluids technology and, of course, production enhancement technologies because our if our peak oil theory is correct, we are not going to be finding a lot of new oil. So the keys are, we got to get higher recovery factors, and higher recovery factors from a Reservoir Description standpoint and a production enhancement standpoint.

Great. And just an update, at the beginning of the year, in the US land business, you had spoken candidly about the need for the industry to adopt more stages, tighter spacing, more intensity per well, et cetera. Where do you think the industry as a whole, or maybe just in the major basins, is on the leading edge in terms of embracing that?

Early days. You have, we think, the dynamic, technically adept operators doing that. And you can see it in the results every quarter.

Great. And then, just if I could sneak (multiple speakers) -- go ahead.

They're willing to spend a little bit more money to get a higher initial production rate, but more importantly, a higher return on their investment over time in that well bore.

And then, just if I can sneak one in, up until now, I think you've -- as you look around the world, in terms of land-based unconventional oil plays, you have held out the Vaca Muerta as perhaps the most economic of what you've seen. Have you seen enough of the Bazhenov to say that, that rivals it or that there is as much promise there?

Haven't seen enough of it, but just its volume metric comparisons the Vaca Muerta will probably make it larger. So as we hope that we are going to be successful in implementing this, the largest study in the Bazhenov Shale here over the next several quarters, more of that to come. But just from a volume metric standpoint, it's got the Vaca Muerta beat hands down.

Great. That's it for me. Thanks a lot. You've been generous with your time.

Okay. Very good. So in summary, Core's operations posted another solid quarter, but we know we can do better. We have never been better operationally or technologically positioned to help our clients expand their existing production base. Would remain uniquely focused and are the most technologically advanced reservoir optimization company in the Oilfield Services sector. This positions Core well for the challenges ahead. The Company remains committed to industry-leading levels of free cash generation and returns on invested capital, with excess capital being returned to our shareholders.

So in closing, we would like to thank all of our shareholders and the analysts that follow Core. And as already mentioned by Monty Davis, the Executive Management and Board of Core Laboratories gives 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 talking to you on our next update. Goodbye for now.

Thank you. This concludes the conference call. You may now disconnect.