Core Laboratories Inc (CLB) 2013 Q3 法說會逐字稿

Good morning my name is Calia and I will be your conference operator today. At this time, I would like to welcome everyone to the Core Lab Q3 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 like to turn the call over to our host, David Demshur. You may begin your conference.

Well thanks, Calia. I'd like to say good morning to everybody in North America, good afternoon in Europe, and good evening in Asia-Pacific. We'd like to welcome all of our shareholders, analysts, and most importantly our employees, to Core Laboratories third-quarter 2013 earnings conference call. This morning I am joined by Dick Bergmark, Core's Executive Vice President and CFO. And also this morning we are again joined by Core's COO, Monty Davis, who will present the detailed operational review.

The call will be divided into five segments. Dick will start by making remarks regarding forward-looking statements. Then we will come back and give a brief investor update and highlight the three financial tenets by which Core's Executive Management team 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. Then Dick will follow with a detailed financial overview and additional comments regarding building shareholder value, Core's fourth-quarter 2013 outlook, and a general industry outlook as it pertains to 2014. This outlook confirms our confidence in the trends of increasing activities in the international theater, especially in deepwater activities tied to crude oil and large LNG developments. Unconventional tight oil reservoirs in North America and emerging plays in Russia, North Africa, and Australia will also play a role in 2014. Core also sees exceptional opportunities in the deepwater Gulf of Mexico, where the developments include the potentially prolific but technologically 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 that we believe will be disruptive and are tied to completing, stimulating, and producing horizontal wells. And then he will highlight some of Core's operations and major worldwide projects. Then we will open the call to Q&A.

I will turn it over to Dick for comments regarding forward-looking statements.

Thanks, David. Before we start the conference this morning I will 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 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 the other reports and registration statements filed with us by the SEC and the AFM.

Our comments include non-GAAP financial measures. Reconciliation to the most directly comparable GAAP measures is included in the press release announcing our third-quarter results. Those non-GAAP measures can also be found on our website. Now with that said, I will pass the discussion back to David.

Well thanks, Dick. I would 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 focus on international and deepwater activities in unconventional oil plays in response to seemingly high oil prices and dwindling global spare capacity. This was the fourth consecutive quarter that Core's produced all time quarterly highs for EPS, net income, and revenue. The focus on crude oil related projects continued to build as Core's revenue mix now is more than 80% tied to crude oil projects and less than 20% tied to 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 third-quarter results reveals that Core's growth strategy of progressively working in more and new established 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 the worldwide activity levels. Year-over-year quarterly revenue and operating profit growth for the third quarter of 2013 is testament to the validity and robustness of the Company's growth strategies, which are underpinned by operational excellence. We believe that trends to outperform market activity levels to hold for the balance of 2013 and we are becoming more optimistic for international growth trends to increase in 2014. Therefore, our growth strategies and the execution by our operating units continue to serve our clients, our employees, and our shareholders well.

Core's continued focus on higher return international crude oil related developments, especially those in 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 indicated by Core's recent introduction of FlowProfiler and our new Fracorater perforating systems. These disruptive technologies will be applied to increase daily oil production rates and increase the estimated ultimate recovery rates, not only in tight oil reservoirs but of conventional reservoirs worldwide.

Turning to the Core Lab performance. Core has always followed and will continue to follow three key investment tenets that have led to our industry-leading returns. These three important tenets, which usually only receive scant attention from the analysts in our oilfield sector, are number one, maximize free cash flow through fiscal discipline. Core follows strict discipline for allocating capital for investment in 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 third-quarter level of free cash flow of over $65 million. In fact, free cash flow exceeded net income in the quarter as Core converted $0.24 of every revenue dollar into free cash flow for the quarter.

Core's free cash to revenue conversion rate of 24% far exceeds pretax operating margins for all major oilfield service companies. Core will continue to demonstrate strict financial discipline through the rest of 2013 and now expects free cash flow to exceed $250 million for the year on less than a 46 million share base, which continues to shrink. Moreover, if Core (technical difficulty) free cash flow will exceed net income for the eighth year of the last 12. For 2014, Core expects free cash flow to approach $300 million, all of which is expected to be returned to our shareholders. As our top 20 shareholders who own 70% of the Core Labs shares say, free cash matters.

The second financial tenet is 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 producing a return on invested capital in the top decile for oilfield service. Core's Board believes that stock price performance over time is directly related to the return on invested capital. And 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. Also Core's ratio of return on invested capital to its weighted average cost of capital was the industry's highest.

Our third financial tenet is return excess capital to our shareholders. During the third quarter, Core returned over $70 million to our shareholders in the forms of quarterly dividends and the repurchase of shares. At the end of the quarter, Core's outstanding diluted share count fell below 46 million shares, levels not seen since the third quarter of 1997. During the quarter, Core returned $1.52 per share to our shareholders versus our EPS total of $1.36. Since October of 2002, Core shareholder capital return program has returned nearly $1.6 billion, or approximately $34.80 per share 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. In fact, since our IPO in 1995 Core's total shareholder return would rank ninth of the companies listed in the S&P 500. We are just ahead of a pretty good company called Apple. I will now turn it back to Dick for the detailed financial review.

Thanks David. If we look at the income statement, revenues were $273.2 million in the third quarter versus $245.4 million in the third quarter of last year. So revenues were up 11.3% year over year, again surpassing the global activity levels by more than 400 basis points. Our results reflect all-time quarterly record revenues. Of these revenues, services for the quarter, $194.3 million, up 11% when compared to $174.5 million last year, or an increase of $20 million. For product sales for the quarter, $78.9 million, also up over 11% when compared to $71 million in last year's third quarter.

Now moving on to cost of services. For the quarter they were 57% of revenue, an improvement from 59% in last year's third quarter. And our cost of products sales were 73% of revenues, slightly better than the 74% reported last year. Our operational results improved this quarter as measured by gross margin percent, which is gross margin divided by revenue. This measures the impact of the cost of services and the cost of sales we just discussed on operational results. Because this measure represents operational results prior to corporate G&A being allocated, it is a good reflection of how one's business operations are performing based on factors they control.

Gross margin in our two material segments improved again this quarter. In fact, operational results have continued to improve all year. Gross margins for Reservoir Description were 33.7%, up 60 basis points from last quarter, while Production Enhancement gross margin was 42%, up 260 basis points compared to last quarter. G&A for the quarter was $14.3 million, or about 5.3% of revenue, which is up from last year, primarily due to increases in compensation cost, including variable compensation. We expect G&A to be around $49 million in 2013. Depreciation and amortization for the quarter, $6.8 million, up slightly from last year's third quarter, and we expect depreciation for the full-year 2013 to total approximately $24 million.

Other income this quarter included foreign-exchange losses of $500,000. 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 $85.1 million, up $11.4 million or 15.4% year-over-year, which created margins of 31.2%, an increase of 120 basis points over the 30% margins earned in last year's third-quarter ex-items. This EBIT represents a record for any quarter. GAAP EBIT was $84.6 million, which is up $9.2 million or 12.2% year over year.

Interest expense was $2.3 million for the quarter, similar to last year. Income tax expense for the quarter was $20.5 million based upon an effective tax rate for the quarter of approximately 25%. Although our Q4 effective tax rate is expected to be approximately 24.5%, we continue to expect our full-year 2013 annual effective tax rate to be approximately 25%. Next year's tax rate is expected to be similar to our expected Q4 rate of 24.5%.

Net income ex-items for the quarter was $62.3 million compared to $53.5 million in last year's third quarter, an increase of over 16%. Earnings per share for the quarter was $1.36 on the same basis that our guidance was given by excluding FX. Our EPS is up year over year by $0.23, or 20% ex-items, with GAAP EPS up $0.21 or 18%. This represents record EPS for any quarter.

If we look at the balance sheet, cash was $22.2 million compared to year end of $19.2 million. Receivables stood at $205.1 million, up from $184.8 million at year end as a result of our increased revenues. While our investment in working capital has gone up, it has only increased to the extent of our revenue growth. So importantly, our DSOs in the quarter have not increased and continue to run at 65 days which is the same as all of 2012. Inventory at $53.6 million is up from the year end balance of $49.3 million in reflection of increasing product sales. Worthy of mention is that our inventory turns have improved this quarter again compared to last quarter and all of last year. So working capital management continues to be a focus for us as it is a positive contributor to our free cash flow. Other current assets were $26.9 million, down from the year-end balance of $43.6 million for the most part as a result of a decrease in current income tax receivable of $13.6 million. PP&E was $135 million, up from the year end balance due to our capital expenditures during the year. There were no material changes in intangibles, goodwill, and other long-term assets.

On the liability side of the balance sheet, there are no material changes in our accounts payable or other current liabilities. Our long-term debt stood at $256 million compared to $250 million last quarter, and is comprised of $150 million in senior unsecured notes, and $106 million drawn on our bank revolving credit facility. But as of today, drawings under our credit facilities are down to $101 million. Other long-term liabilities ended at $79.3 million, an increase of $5.3 million over the previous year end due to an increase in deferred compensation.

Shareholders' equity ended the quarter at $184.3 million, down slightly from year end, primarily due to additions from earnings being offset by share repurchases and dividends. Using annualized net income for the third quarter, our return on equity was over 135%, making it one of the highest returns earned in the industry. Capital expenditures for the quarter were $9.1 million, year to date, our CapEx has been $27 million. We expect our CapEx program in 2013 to be approximately $33 million, as we continue to address the 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 reason 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 $74.1 million, and after paying for our $9.1 million of CapEx, our free cash flow was $65.1 million. In the quarter we turned 24% of our revenues into free cash flow. Certainly one of the highest cash conversion rates in our history, and in our industry. Of note, as it happened in 7 out of the last 11 years, our free cash flow this quarter exceeded our net income. During the quarter we used our free cash flow and cash balances to pay $14.6 million in quarterly dividends and to repurchase 362,776 shares for $55.9 million. Through close of business yesterday, in the fourth quarter we repurchased a further 13,996 shares at an average price of $174.33 per share for an aggregate cost of $2.4 million. The outstanding indebtedness in our revolver now stands at $101 million compared to $84 million at the end of the year. Our diluted share count now stands at 45.7 million shares.

Okay, let's discuss our guidance and our outlook. We anticipate that fourth-quarter 2013 North American activity levels will remain similar to third-quarter levels, while international activity should continue with moderate increases. Therefore, we expect fourth-quarter 2013 revenue to range between $278 million and $281 million, with EPS in the range of $1.39 to $1.40. Free cash flow for the quarter is expected to be approximately $70 million or greater, once again, exceeding net income for the period. This operational guidance excludes any foreign currency translations or any shares that may be repurchased in the quarter, other than those previously disclosed. A 24.5% effective tax rate is assumed for the fourth quarter. This fourth-quarter guidance reflects our ability to continue to grow year-over-year revenues above the increase in worldwide activity levels. This was evident in the third-quarter results, where all three of our operating segments increased year-over-year quarterly revenue totals with Reservoir Description and Production Enhancement operations posting all-time high quarterly revenues.

Our outlook for 2014 remains positive. With continued support from robust Brent crude pricing and the expected delivery of additional deepwater drilling rigs, we believe that we will have expanding opportunities in increasingly more established fields, as well as new field development projects. In addition, as we have consistently done in the past decade, we plan to enter new fields where we currently do not have operations, as well as offer new technologies and additional services in 2014. These new technologies and services, such as the FlowProfiler and our Fracorating System technologies featured in our release will be targeted at increasing the daily productivity and ultimate hydrocarbon recovery rates from liquids-related unconventional and conventional reservoir developments worldwide.

Consequently, we do believe our business model goal of achieving revenue growth rate of 200 to 400 basis points above the increase in worldwide activity levels does remain intact, with incremental margins between 35% and 45% positively impacting operating margins. We also expect our free cash flow to approach $300 million in 2014 with our client-directed CapEx program to be similar to that of 2013. Remember at Core Lab free cash flow is straight off our reported financials from our statement of cash flows, which is comprised of net income followed by changes in working capital. Our free cash flow estimate for 2014 is being provided today in support of our positive outlook. We will provide EPS guidance on our next call.

Also we believe that good companies do raise their dividends over time and would expect that we would increase our quarterly dividend in 2014 while continuing our share repurchases, all with the intent of expanding our shareholder capital return program once again. Okay, with that being said, I will turn the conversation over to Monty.

Thanks, Dick. The third-quarter revenue of $273 million is growth of 11.3% over Q3 2012. Operating earnings excluding a small FX loss grew 15.4% over the third quarter of 2012. Operating margins improved 120 basis points to 31.2% for the quarter. We want to congratulate our 5,000 employees on the best quarterly performance ever for Core Lab.

I will now highlight just a few of the things our employees are doing to provide industry-leading services and products for our clients. Reservoir Description revenue of $131.5 million grew 5.9% over Q3 2012, yielding operating margins of 28%. Scientists in our Aberdeen, Scotland ATC are evaluating reservoir fluid samples for our client who's bringing five wells from a North Sea field to first oil production. The reservoir is complex and variations across the five wells are expected. Full analysis on uncontaminated PVT samples will enable reservoir engineers to model reservoir behavior and to optimize flowing well production.

Our Aberdeen reservoir fluids team is conducting a detailed enhanced oil recovery study for our UK client on a field in Brazil. The study will determine the effectiveness of a synthetic injection gas mixture in producing incremental amounts of crude oil. Our reservoir fluid service lab in Broussard is seeing activity growth in the Utica Shale. We are performing sampling in all reservoirs, liquid rich condensate reservoirs, as well as lean condensate reservoirs. We are performing PV studies on these samples to help our clients discover the exact nature of the reservoir, build reservoir models, and improve reserve calculations.

We recently delivered the results of a year-long proprietary multi-well study of upper Paleozoic strata in the Permian basin. The project included evaluation of all available data including both new and existing cored wells. Thousands of feet of freshly obtained core were included in this program. Using the resources of both our Reservoir Management and Reservoir Description divisions, a combination of well-site services, routine rock properties, advanced rock properties, petrophysical modeling, and geological studies were employed to identify conventional and unconventional hydrocarbon opportunities for our client. Our work highlighted a number of stratigraphic sweet spots across the formation in question. We generated a core based regional petrophysical model that will allow for improved evaluation of both existing and future wells. The geologic and petrophysical models will also help our client better identify acreage opportunity. In addition, we have set the existing completion practices, integrated rock mechanics and formation sensitivity data generated in our Houston ATC will allow us to determine drilling and completion practices that will optimize reservoir performance.

Production Enhancement revenue of $119.5 million grew 18.5% over Q3 2012. Operating earnings grew 38% and operating margins improved 500 basis points. With the introduction of several new technologies, Production Enhancement operations have clearly become the largest profit center for Core Lab. Our fracture diagnostics engineers have developed our new FlowProfiler service, coupled with SpectraChem service to help our clients better understand frac fluid cleanup and hydrocarbon production over time. The FlowProfiler service involves both a unique chemical frac tracer in the fluid phase of each frac stage and a unique oil frac tracer at the beginning of the proppant segment of each frac stage. The combined knowledge of both the front zonal water and oil profiles provide unique data sets to accurately understand the total after-frac flow profile for evaluating individual stage production and making critical next decisions for future wells.

Our perforating ballistics engineers have developed the next family of high-efficiency reservoir optimizing perforating charges for hard rock. The HERO HR are the deepest penetrating perforating charges on the market and use our ultra-low degree liner technology for optimizing fracking and production flow. We also introduced a new system for perforating horizontal wells. Our Fracorating System brings together the appropriate HERO perforating charges with our horizontal oriented perforating guns boosted by our Kodiak solid propellant, and utilizing our HTD-Blast delivery system when completing the toe end of the well. This system is a significant advance in the perforating of horizontal wells. Using our Fracorating System better prepares the wells for fracking with less horsepower thus reducing the cost of the fracking operation and benefiting our clients. Orienting the perforating in the direction of the formation maximum stress and boosting the perforation with our Kodiak enhanced perforating system helped to break down the formation in advance of the frac job, which leads to better initial well production and increased ultimate hydrocarbon recovery.

Integrated Reservoir Management revenue grew 8.4% over Q3. Operating earnings grew 9% and operating margins were 29% for the Q3 2013. Reservoir Management initiated two new joint industry projects in the third quarter. The first was a project in the Williston basin, targeting the tight oil of the entire Three Forks section, which is charged from the overlying Bakken. The project's focus is on the reservoir characterization of this difficult to evaluate reservoir, and where to land the horizontal wells to maximize well performance and recovery factors.

The second project is a study in the Appalachian basin of the emerging upper Devonian shale in the liquids window. This project is a follow-on to our highly successful Marcellus and Utica Point Pleasant projects in the basin. Targeted shale intervals include the Rhinestreet, Geneseo, Burkett, and others. Our UK based Reservoir Management scientists are completing our petroleum system study of offshore Namibia and the North Orange basin of West Africa. This project is focused on the geology, petrophysics, reservoir quality, seals, and regional stratography, or stratigraphy, for delineating favorable areas for deepwater reservoir prospects. It is a complementary to our other West Africa and Brazil projects which remain a focus for Reservoir Management. Calia, we will now open the call for questions.

(Operator Instructions)

Ryan Fitzgibbon, Houston Texas.

Good morning Ryan.

Dave, maybe I will start with you for the first one. We've heard quite a bit of talk from the [impetus] this quarter about using more intensive completion techniques. I know you guys played an important role in those studies. Can you help us maybe understand the revenue opportunity per well? How that changes with the new Fracorating System versus what you could offer maybe 12 to 24 months ago?

Yes, Ryan. If we just look at the number of wells completed year over year, third quarter that was about 6%. But the real critical factor here is the increased use of stages that are shorter and closer together. And also longer laterals. If we look at the number of wells drilled year over year, it's actually down a little bit. But the percentage of footage of wells drilled is up year over year by about 9%. So when you look at each individual stage, that becomes a revenue event for Core Lab especially tied to the Fracorater System. So when we go from 20 stages to 26 stages in a well you can see there is certainly an uptick on revenue opportunities for us.

So it is tied directly to the number of stages year over year that are going to increase. And we see those increasing somewhere on the order of 10% to 15%. And you can see it directly in our Production Enhancement revenue that was up even further than that. You see that we are creating market for this new Fracorater System and able to combine three entities or three technologies from Core as Monty mentioned, our perforating charges, the Kodiak which is the energetic charge that uses HERO technology along with the potassium perchlorate solid rocket fuel, if you will, propellant, coupled with our horizontal orienting shot system to directly perforate the reservoir in the direction of maximum stress and that is delivered by our HTD-Blast. I think that is why you've seen such a robust quarter for Production Enhancement because the introduction of those technologies we think will be disruptive and will change the way horizontal wells are going to be completed, stimulated, and produced going forward.

That being said, we do not think it is limited to unconventional plays around the world. We believe that we will see horizontal well technology being utilized in places like Southern Iraq and the Rumaila field where you have severe damage occurring in these reservoirs. Or in some of the reservoirs in Kurdistan that are under-saturated in natural gas. Also throughout the Middle East in not only unconventional plays, but conventional plays. So when we look at the number of stages that increase year over year, we feel that we can leverage that and actually probably grow that revenue 200 to 400 basis points more than the increase in the activity.

Okay. That is helpful. I appreciate that Dave. And then second one, maybe for you Dick, the $300 million free cash flow comment for 2014, understanding free cash is generally above net income. Can you help us maybe with what you're working cap assumption is for next year? I am assuming that can offset share base comp.

Yes, we have three main components of working capital at Core Lab because we have a fairly simple balance sheet. We focus on our receivables. That is why we talk about DSOs. It is important that they improve over time. So that is a contributor.

Or our inventory balances. Certainly inventory turns are important to you us and that is why we focus on that and give you updates virtually every quarter on how we are doing. So that is a contributor as well. And of course on the payable side, we do not want to pay our vendors any faster than we get paid. I think if you look at those three components are the big contributors in addition to net income.

Okay. Maybe, just to expand on that. Would it be safe to assume with the way you're growing the business right now, working cap should be a use of cash next year rather than a source?

It's going to be as our revenues grow we will certainly have a higher investment. The key though is to have better efficiency in the use of that working capital and that is what drives the increase in free cash over net income.

Okay. Thanks for the time guys, appreciate it.

Okay, Ryan.

James West.

Good morning Dave.

Good morning James.

First question for me Dave to follow-up on the new completion techniques and the technologies that you guys have introduced. How many wells or how many stages has this full package, the Fracorating System, been used on today?

It has been used on really a couple of handfuls. So it was just introduced as a combo technology package last quarter. We will monitor the increases in that usage. And as we put a couple of more quarters behind us James, we will be able to give you a better feel for what percentages of all horizontal wells that these completion techniques are being used in. We are seeing more and more SPE papers come out and talking about perforating in the direction of maximum reservoir stress. There is a good SPE paper written by an engineer from Conoco, where he talked about perforating at 0 degrees and 180 degrees give or take a couple of degrees in horizontal wells, and the reduction of skin or the increase in flow characteristics you get from that technique. So as we go forward, we will give you a better handle on the number of wells that it is employed in.

Okay, that's helpful. So far it is just been North American-based, is that correct?

That is correct.

Okay, but the ability is worldwide. I got that part. And then a follow up for me on your earlier comments and Dave's other comments on international and deepwater growth as we go through 2014, obviously you guys are pretty optimistic about your continuation of the new growth that we have had this year. Do you think in 2014 we are looking at more of the same as this year, which I think that [EMP] stated at least in our numbers is going to be up low-double digits internationally? Or it is it acceleration, a deceleration? How are you guys thinking about the overall growth number?

A little bit too early to tell because we have got our guys on the ground right now trying to figure out what that year over year activity rate is going to be up. But I think a positive characteristics over the next several years we are going to have 98 new floaters deepwater and ultradeep water coming out. That we can't but help think that that is a very positive metric for us and the increase in deepwater activities. So if you say low-double digits, I think that is reasonable now. We will put a better handle on that on our next update.

Okay, great. Sounds good, thanks Dave.

Thanks James.

Blake Hutchinson.

Good morning guys.

Good morning Blake.

Almost just following on to that deepwater commentary, despite the fact that a lot of the conversation in the Reservoir Description business has been around deepwater and also some of the miscible flood projects in the Middle East. You kind of led this quarter off with some US-based activity and Monty's comments and kind of redelineating and studying the Bakken and Three Forks and some land-based projects that look to be pretty promising in Australia. Can you just talk about, is deepwater really the prime driver or are you seeing an acceleration or reinvigoration of US land and the land-based business internationally and how that rank as we look at the revenue drivers through '14?

Certainly Blake, deepwater remains probably our biggest driver. But with the introduction of the new technology and the quarter that Production Enhancement had, we wanted to give them their due and certainly the application of that technology in North America ties directly to a lot of the unconventional plays that we spoke of. So for next year to tee it up, deepwater, and we look at the Golden Triangle, all you have to do is look to the deepwater Gulf of Mexico where we are going to add perhaps a dozen or more deepwater assets there. That probably will lead the way in revenue gains for next year and also margin expansion. Closely followed by North American unconventional activity spreading to the developments of some world-class plays, as we mentioned the Bazhenov in Russia, the Silurian Gotlandian of North Africa, and several potential oil and natural gas plays in the Cooper and Canning basins of Australia.

Great. And as you introduce seemingly every quarter a new kind of the suite of technologies that are in an early phase, can you give us an idea, I know this is embedded kind of divisionally, but where you are or where you have been recently in terms of your R&D efforts? And is that something that has actually been weighing on margins more than historically and what will that look like in terms of its impact going forward here?

Blake, just mechanically so you understand how are R&D costs are absorbed within the Company. Our actual R&D that's developed by our business units falls into those segments, they are responsible for the development of the technologies based on discussions with their clients. And as they develop that new technology, the cost goes against their P&L. It is not a corporate charge. So it is not part of corporate G&A. So when you see their EBIT and EBIT margins or their gross margins, that includes their technology development. So that is what is impressive about their continuing expansion of gross margin as they continue to develop new technologies.

Are you able to monitor where that is versus historical levels and have we actually been achieving these margins despite a higher overall R&D spend?

I think -- if you just look at the progression that we have had, and again year over year Company margins were up over 100 basis points. I think as we have said over the last several years, our pipeline for new technology is pretty rich and it continues to be so. I think we see more of the same going forward. As Dick mentioned, incremental margins, we are comfortable with the 35% to 45% range, 41% this quarter. So I think those incremental margins continue to drive our underlying margins. And as Dick mentioned, the cost for technology development is absorbed within those operating margins of our three operational units.

Got it. Thanks for the help, I will turn it back.

John Daniel, Simmons & Company International.

Good quarter.

Thanks John. Good morning.

Just a couple. Dave for some time now you have highlighted the benefits of more proppant per well. In the release though, you note that it works in certain tight oil basins. I am just curious was the use of the word certain in the description, was that intentional? If so, can you walk us through as you look at all the various basins out there, how many truly do benefit from it versus those that don't?

I would say the majority indeed do benefit from that, John. However, we do find certain formations in certain basins that that technology or that methodology does not apply. That is why it is important when E&P companies look at the amount of coring that they are taking, if they believe that all of the shales in those reservoirs are homogeneous, we can clearly show them that they are not. That is why it is important that they continue their coring program and reservoir fluids program to understand that reservoir. So the use of the word certain was put in there for a strong reason. That being is that shales across these reservoirs are not homogeneous.

Okay. Obviously it referenced tight oil and no one really seems to care anymore about gas. But would it also apply to gas formations as well, the proppant?

Yes, absolutely correct. What we are trying to do is drain, if we think about the number of stages and the distances between those stages, for instance I think the average stage length in the Bakken was 500 foot about a year ago, and I think that is now down to 350 feet. So essentially between each stage you have to drain 175 feet of reservoir rock. I think our studies would show that the stages need to be tighter to effectively drain that block unit that is 350 feet across. So we would still suggest that we need even tighter spacing on stages.

Fair enough. Okay. Dave, one for you. When we look at the impressive topline growth in Production Enhancement this quarter, how much of that was driven by the new technology offerings? And assuming that it is driven by new technologies, is it reasonable to assume that we see similar revenue growth in future quarters as this technology is deployed?

I think as David mentioned on an early question these are relatively new technologies that are just being put out commercially with great success. So I would say it is a smaller component, but again, like all of our technologies, incremental in nature, which drives that incremental margin. I would expect to see a continuation.

Okay. Just last one for me Dave. In the past you've provided a view on drilling activity at both domestically and globally and I guess importantly, you have been more right than wrong. So based on what you see today, what is the prediction for your US rig count growth next year?

Right now, again it is early days for us because we have people on the ground trying to determine this. But I would say we are going to see the number of rigs up year over year next year, maybe by 100. And internationally we will probably see an uptick in the activity levels. Again owing to additional deepwater and ultra deepwater assets coming out. And also we will see the final designs, redesigns of some of these production units that have caused some of the delays in the activities in the deepwater.

You go no further than the deepwater Gulf of Mexico and the BP Mad Dog development where cost escalations precipitated a redesign of that production facility. As that redesign comes into being, of course, then we will see that activity level pick up. And of course there were redesigns on other units around the globe as well. I think that was some of the delaying that we have seen over the last year or year and a half. And some of those redesigns will be put into practice in 2014 going into 2015.

Okay. Thank you guys. I will turn it over.

Okay John.

Philip Lindsay.

Hello guys.

Hey Phillip.

A couple of questions. First of all, a competitive environment in Production Enhancement. I just want to get a feel for how that is shaping up. Your performance there suggests that you are gaining share. Perhaps you could just comment on whether you are gaining share in the US or are you seeing greater international penetration. It would also be good to hear your comment on pricing environment for your product lines in Production Enhancement, your ability to push prices now, say relative to one or two years ago. Thank you.

If we look at the applications of new technology in Production Enhancement, we believe we are creating a market there because a lot of these services for instance, if we look at our Fracorating System, there just isn't another one out there. We believe that we are creating a market there. When you look at the introduction of this technology, it is only right now in North America and certainly we are going to take that internationally. So with respect to competition on the -- when we look the Fracorater System, there isn't just any competition out there. It is a brand-new technology that is protected by trade secrets here at Core Lab. With respect to pricing, we will let the incremental margins speak for the pricing and the competition that we see in the marketplace.

Okay, fine. And then I want to move on to your optimism around 2014 and your indications of what is going to be another good year in terms of the top line growth as well as margin expansion, and I know that also the deepwater story seems to underpin that. And you seem more competent on the US market as well. I just wanted in terms of your conversations with your customers, and the way they are behaving in terms of their propensity to spend and make decisions. Has anything really changed in recent quarters?

I think if you just look at the deepwater drilling schedule in the deepwater Gulf of Mexico, that is going to suggest activity levels are going to be pretty robust there next year. We're going from the something like 33 deepwater assets to the end of next year getting up into the high 40s, might touch 50. That would suggest that we are going to see a robust activity pick up certainly in the deepwater Gulf of Mexico, and if you just look at the deepwater pre-salt offshore Angola we've had a couple of deepwater discoveries there. Another one up off of Gabon pre-salt. Again those developments will start in earnest next year and go into 2015. So I think if we just look at the drilling plans that are out there it would suggest that we are going to have another pretty good year next year.

That is useful. Thanks.

Brandon Dobell.

Good morning guys.

Morning Brandon.

Wondering if you could quantify some of the things that you talked about last quarter, some of the puts and takes around oil sands, some revenues that moved back and forth in Australia. How much that may have impacted Q3, and if there was anything that was pushed from Q3 into Q4 as well.

The shale work in Australia is definitely delayed. Everything is pushed back to 2014. The horizontal drilling, they have had some problems. It is a process that in the US we are very far along with. We have got great technologies amongst all the service providers.

But in Australia they are still on the learning curve. So it is going to be delayed. It started but it is delayed into 2014 and we will be going forward sometime in 2014. We have opened a new laboratory in Brisbane to be positioned and are working with our clients there now to be in position to take advantage and to service our clients as they go forward with it, but the major activity pushed until 2014.

Okay. And then maybe taking the growth curve aspect one step further. In the past, you guys have talked about 200 to 400 basis points above kind of overall spending levels as the sweet spot for your growth rates. Given how some of these new technologies are progressing from an adoption point of view, and given how broad the fluids opportunity out there is, what is the gating factor to get that 200 to 400 basis points to be 300 to 500 or 400 to 600 beyond what the CapEx numbers look like for the E&Ps?

The gating factor is the ability for our clients to do more work. When we work on a project there is a technical team for the oil company that is assigned to work with us, because these projects are -- these projects we need to have discussions with their technical team. And essentially right now every technical team for every oil company is assigned projects. So as the oil companies hire more technical teams, so for instance, more geologists and engineers, our ability to grow faster will increase.

We think that is probably still a couple of years out. If you look a decade ago, the petroleum engineering freshman class at Penn State had two new engineers. Now the entire petroleum engineering program has 450 kids in it. So I think we will see additional hiring start to occur and the formation of more technical teams that will up that growth rate above the 200 and 400 basis points which we are comfortable with right now.

Okay. Final one for me. Last quarter you talked about maybe some surprising strength in some of the EOR work or EOR work in the Middle East. Just given how much opportunity they have to take advantage of. Did some of that come to fruition? Do you still think that is a big potential upside surprise for revenue growth? And then more detailed, where should we see that if it does play out for you in a surprising way? Should we see that in a particular product line or a Production Enhancement, for example, or should be widespread across the businesses? Thanks.

It is widespread across the businesses. Reservoir Description, Production Enhancement, and Reservoir Management to bring it all together, it is a driver for our business. Along with the new technologies. But EOR is a subject that is here to stay. How we are going to get the most out of these reservoirs over time and every day. So we think that are EOR business will just continue to grow. That is why I highlighted a couple of the projects we are doing in the EOR arena. That is going on everywhere from Europe, Africa, Middle East, and of course here in North America.

And really looking at the Middle East, I think a lot of our clients there now do realize that their reservoirs are not exempt from the laws of physics and thermodynamics and that they won't have a continuous oil flow into millennia. They are looking at their reservoirs and determining that maintenance CapEx has to be put to work. Read that, some enhanced oil recovery projects that we think will grow in size as they struggle to maintain their productive capacity.

So we should think about that much more as kind of 2015 driver as opposed to a 2014 driver for revenue growth?

Yes. You see some of that right now and it will go into 2014.

Okay. Great, thanks guys.

Stephen Gengaro.

Thank you guys. Good morning.

Good morning Stephen.

Just wanted to know, can you give us an update as we look at the three segments and even aggregate if you prefer, the allocation between US, international, deepwater, shale, et cetera. Can you break that down a little more to help us out as we still look forward here?

Yes, Stephen. Let's just look at the old Company. We look at revenue base outside of the US. That is about 70% of our work. So we look at reservoirs and or fluids that come from reservoirs outside of the US, it's about 70%. 80% of our work Company-wide is tied, a little bit over 80% is tied to crude oil.

When we look at deepwater, currently 30% of all oil is produced from offshore, 40% of our revenue comes from offshore. Currently 7% of our oil is produced in deepwater, 20% of our revenue comes from deepwater. About $200 million of our revenue is right now about tied to unconventional reservoir developments. I think that hopefully that gives you a round picture of the importance that those do play.

That is helpful. And as you think about it based on your knowledge of reservoirs and experience, what do you think the deepwater oil production looks like in five years? Do you think it is 10%, 12% of the world? How do you think it plays out?

Right now it is about 5. -- let's say 6 million barrels a day to keep it in round numbers. Over the next five years, you can indeed probably double that. So you will have a production growth somewhere between 13% and 15% over that time period. If you look at the developments that we talked about, and you bring those on in an orderly fashion, that is where that production goes.

Now saying that, we have seen long delays in the aspects of deepwater production. Offshore Brazil is a great example there. When you look at production profiles that they put out a number of years ago, sure Petrobras is very disappointed at that. If the normal schedule goes, Stephen, I'd say we see that double in five years.

That is very helpful color. Thank you.

Georg Venturatos.

Good morning guys.

Good morning George.

David, just wanted to revisit the longer-term revenue opportunity per well that we discussed earlier. Obviously in your prepared remarks you mentioned what you are recommending to operators, closer well spacing and longer laterals. Admittedly, you have a short-term cost increase there and a hurdle that you need to get over.

But just wanted to get a sense of the running room long-term. What inning do you think we're in in terms of operators willingness to accept what you are proposing today? And then in addition, with the understanding that all shales are not homogeneous, are there any specific plays where you think operators will adapt that strategy more quickly?

Yes, if you look at some of our most technologically sophisticated clients, they are employing the technology today. And they're some of the I think very progressive companies that have done a very good job on not just looking at well cost but looking at total return on their investment. And these companies, these best practices certainly should be followed by all companies across the spectrum. Whether they will or not, I would say probably not just from our experience. But a majority of them no doubt will.

What inning we are in, we are very early on in this baseball game. When we look at the way that we complete horizontal wells now, I think when we look back in five years we will see that that whole methodology will have change. And actually we believe that it is changing today with new technology being brought on like our Fracorater System. And then being able to profile each individual stage and its production contributions to the well bore. So I think as those technologies come on, we will have more and more adopters that do employ that and that the science really does work.

Okay, great. Last one real quick. I know your time is short. I apologize if I did not hear this one. Just in terms of HTD-Blast percentage of usage on completed wells in US, I know we had gotten an update last quarter, any percentage for Q3?

We did not mention that. We are up to approximately 25% utilization of HTD-Blast to complete the toe-end of horizontal wells drilled in North America. So that is a significant growth in that. And we are happy to see it. More clients continue to adopt that and find it very beneficial.

Perfect. I appreciate the answers guys.

Okay, so in summary, Core's operations posted another solid quarter but we know that we can do better. We have never been better positioned operationally and technologically to help our clients expand their 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.

So in closing we would like to thank all of our shareholders, the analysts that follow Core, and especially 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 ladies and gentlemen. That does conclude today's conference call. You may now disconnect.