Core Laboratories Inc (CLB) 2013 Q4 法說會逐字稿

Good morning, my name is Keena, and I will be your conference operator today. At this time, I would like to welcome everyone to the Core Lab fourth quarter 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. Mr. Demshur, you may begin your conference.

Well, thanks Keena. I would 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' fourth quarter 2013 earnings conference call.

This morning I am joined by Dick Bergmark, Core's Executive Vice President and CFO; and Core's COO, Monty Davis, who will present the detailed operational review.

Also this morning I have the pleasure of introducing Chris Hill. He will be helping Dick and me with investor relations efforts. Chris has been with Core Labs for over seven years, most recently as our global corporate controller, located in the Netherlands. Prior to joining Core, he worked at Ernst & Young for eight years and Halliburton for six years. Many of you have already met Chris at our investor conferences, and I know he looks forward to working with you and meeting more of you in the future.

The call will be divided into five segments. Chris will start by making remarks regarding forward-looking statements. Then we will 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, Core's first-quarter and full-year 2014 outlook, and a general industry outlook as it pertains to Core's continued growth prospects.

This outlook confirms our confidence in the trends of increasing activities in the international theater, especially deep water activities tied to crude oil and large LNG developments, and also unconventional tight oil reservoirs, not only in North America, but emerging plays in Russia, North Africa, and Australia, amongst others. Core also sees exceptional opportunities in the deep water Gulf of Mexico, with developments in 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 highlighting some of Core's operations and major projects worldwide.

Then we will open the phones for a Q&A session. I'll turn it back to Chris for some remarks regarding forward-looking statements. Chris?

Thanks Dave. Before we start the conference this morning, I'll mention that some of the statements we make during the 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 our 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. Our comments include non-GAAP financial measures. Reconciliation to the most directly comparable GAAP financial measures is included in the press release announcing our fourth-quarter results. Those non-GAAP measures can also be found on our website. ¶ With that said, I will pass the discussion back to Dave.

Okay, thanks Chris. Core's operations produced the Company's most profitable quarter ever, as the Company continued to benefit from our continued focus on international and deep water activities, and unconventional oil plays in response to seemingly high oil prices and a dwindling global spark oil-producing capacity. This was our fifth consecutive quarter that Core has 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% oil, and less than 20% focused on 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, offshore east Africa, and offshore western Australia. Reviewing the Company's fourth-quarter results reveals Core's growth strategy of progressively working in more established and new field developments, while continuing to offer new technologies and services, will lead to revenue growth of 200 to 400 basis points higher than the increase in worldwide activity levels.

Year over year, quarterly revenue and operating profit growth for the fourth quarter of 2013 is testament to the validity and robustness of the Company's growth strategies, and our underpinned by our operational excellence. We believe these trends to out-perform market activity leads -- levels to hold, and are optimistic for North America and international growth trends for 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 high-return international crude-oil-related developments, especially those in the deep water 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 our flow profiler technologies. These technologies are applied to increase daily hydrocarbon production rates, and increase estimated ultimate recovery rates, not only in tight oil reservoirs, but in 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 industry-leading returns. These three important tenets, which are now starting to receive attention from other oil field service companies and analysts in our oil field services sector, are: Number one, maximizing free cash flow through fiscal discipline. Core follows a strict discipline of 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 record quarterly levels of free cash flow of nearly $80 million in the quarter. In fact, Core's free cash flow exceeded net income in the quarter, as Core converted $0.29 of every revenue dollar into free cash.

Core's free cash flow to revenue conversion rate of 29% far exceeds pre-tax operating margins for almost all major oil field service companies. Moreover, for all of 2013, free cash flow exceeded net income for the eighth year of our last 12 years. For 2014, Core expects free cash flow to exceed $300 million, all of which is expected to be returned to our shareholders, as our top 20 shareholders who own over almost 70% of Core Labs share say, free cash flow matters.

The second 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 producing a return on invested capital in the top decile for oil field service companies.

Core's Board believes that the stock price performance over time is directly related to the return on invested capital. Based on the most recent calculations available from Bloomberg, Core's return on invested capital was the highest of any oil field service company 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.

Core's annualized total shareholder return over the past 18 years exceeds 25%. As our top 20 shareholders say, high returns on invested capital matter.

Our third financial tenet, return excess capital back to our shareholders. During the fourth quarter, Core returned over $85 million to our shareholders in 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. Collectively, we have lowered our share count by over 38 million shares in the last 11 years.

During the quarter, Core returned $1.87 per share to our shareholders versus our EPS of $1.43 per share. Since October of 2002, Core's shareholder capital return program has returned over $1.66 billion, or approximately $36.60 per diluted share.

We will continue to follow these three key investment tenets into 2014, which should enable Core to continue to produce industry-leading returns for all of our shareholders. In fact, since Core's IPO in 1995, Core's total shareholder return would rank ninth of all companies listed in the S&P 500. Since going public in 1995, Core's annualized shareholder return is once again one of the tops. As our top shareholders say, returning capital matters.

Also in the fourth quarter, Core was officially added to the Philadelphia oil service sector index better known as the OSX. Core's inclusion in this index satisfies another long-term goal that the Company installed in 1995. In 2013, Core out-paced all index members, with a total shareholder return of approximately 75%, with the next-best performer in the OSX returning just over 50% for the year.

Core also entered two Euronext indices in the quarter, the Euronext Vigeo US 50, and the Euronext Vigeo World 120. Vigeo's indices select companies that are leaders in environmental, social, and government issues, and Core is proud to be selected to join these august industries -- indices. Now I'll turn it back over to Dick for a detailed financial review.

Thanks David. If we look at the income statement, revenues were $276.3 million in the fourth quarter, versus $254.5 million in the fourth quarter of last year, representing an 8.6% increase year over year. Of note, though, this increase was driven by our international non-North American activity, causing those revenues to increase by 17% year over year.

For the full year revenues were $1.1 billion, up $92.4 million, or about 9.4%. Of these revenues, services for the quarter, $201 million, up 11% when compared to $181 million last year, or an increase of $20 million. For the full year, services were up 10.3%, $765.4 million versus $693.9 million in the prior year.

Product sales for the quarter were $75.3 million, up 2.5% from $73.4 million year over year. For the full year, product sales were $308.1 million, compared to $287.2 million in the prior year, representing a 7.3% increase.

Moving on to cost of services for the quarter, 57.2%, which was better than the 59.8% of revenue in the fourth quarter the prior year, and the full-year 58.1% was better than 59.5% in the full year 2012. Cost of sales in the fourth quarter and for the full year there was 70.8%, which was better than the 71.8% of revenue in the fourth quarter of 2002, and 72.7% for the prior year. All good improvements.

G&A for the quarter $13.7 million, down sequentially, but up from $12.3 million in last year's fourth quarter. For the full year 2013, G&A was $52 million, and that represents about 4.8% of revenues for the year. We expect G&A to be around $53 million in 2014.

Depreciation and amortization for the quarter $6.7 million, up from that incurred in last year's fourth quarter. For the full year it's $25.5 million, compared to $22.9 million in the prior year, and we expect for 2014 the depreciation and amortization will be about $27 million.

Other income of $400,000 this quarter includes two items that are considered ex items to be considered -- consistent with our guidance given last quarter. The first is an FX loss in the amount of $1.3 million, and secondly a gain from an insurance settlement in the amount of $700,000.

EBIT ex those items for the quarter was $88.5 million, which is up $12.6 billion, or about 17% year over year. Our fourth-quarter EBIT represents margins of 32%, a fourth-quarter high for the Company. Full-year 2013 EBIT was approximately $336.1 million, which is up $40.6 million, or almost 14%, compared to $295.7 million earned in 2012.

Margins are up year over year by a full percentage point to 31.3%. Interest expense was similar to last fourth quarter. Income tax expense, ex items noted earlier, in the quarter was $21.1 million, at an effective tax rate of 24.5%.

Our full-year annual effective tax rate was 25%, and our income tax expense for the full year was $81.6 million. We expect our effective tax rate in the first quarter of 2014 and for the full year to be approximately 24%.

Net income ex items for the quarter was $64.9 million, up 18.5% compared to $54.8 million in last year's fourth quarter. For the full year 2013 it was up 14%, at $244.9 million. For the quarter, EPS earnings per diluted share, ex items noted, was $1.43, up from our prior guidance of $1.39 to $1.40 per share, and up from Bloomberg's unrevised MainStreet of $1.40 per share.

Sequential EPS of $1.43 is up from $1.36 last quarter, and is up 22.2% from the $1.17 in last year's fourth quarter. EPS for the full year was $5.32, up 18% when compared to the prior year. GAAP EPS in 2013 was $5.28, up 16.3% from 2012 GAAP EPS.

Now if we look at the balance sheet, cash was $25.1 million, compared to the prior year-end balance of $19.2 million. Receivables stood at $201.3 million, up from the prior year and due to higher sales. DSOs at 64 improved sequentially. Inventory, down year over year to $46.8 million from $49.3 million, indicating a nice improvement in inventory turns, considering its sales were up.

Our other current assets were $30.6 million, down from $43.6 million at last year end, primarily due to a decrease in current income tax pre-payments of $12.7 million, just reflecting the timing difference between statutory tax payments are required to be made to various tax offices internationally, and a corresponding current tax provision recorded under GAAP rules for our financial statements.

We had a $13.4-million year over year increase in PP&E due to our continuing investment in our business assets. There are virtually no changes in intangibles, goodwill, and other long-term assets.

If we look at the liability side of the balance sheet, our accounts payables were $50.8 million, down slightly from the prior year end. Other current liabilities of $84.9 million are also down slightly from the prior-year imbalance.

Long-term debt at year end was $267 million, comprised of our senior notes at $150 million, as well as our bank revolving credit facility, whose outstanding balance was $117 million. This compares to long-term debt at the prior-year end of $234 million. Other long-term liabilities ended the year at $88.9 million, up from $74.1 million at the end of last year, primarily due to an increase of $9.9 million in deferred compensation.

Shareholders equity ended the year at $169.4 million, down from the prior year-end balance, primarily due to additions from earnings offset by share repurchases and dividends. Using annualized net income for the fourth quarter, our return on equity for the year was approximately 153%, up more than 30% above last year's ROE, and that's certainly one of the highest earned in the industry.

Capital expenditures for the quarter were $8.4 million, and for the full year they were $35.4 million, up from $31.2 million in the prior year, as we addressed opportunities created by our continued growth in our business in 2013. We expect our CapEx program in 2014 to be approximately $37 million, as a result of an expected continued improvement in industry activity, particularly in the markets in which we operate.

Now if we look at our cash flow in the fourth quarter, cash flow from operating activities was $87.5 million, and after paying for our $8.4 million in CapEx, our free cash flow in Q4 was $79.1 million. In the quarter, we used our cash to pay approximately $14.5 million in cash dividends, and repurchase approximately 376,912 shares at an average price of $1.8823 per share.

For the full year 2013, cash flow from operating activities was $298.1 million, while free cash flow after paying for our CapEx program was $262.7 million. For the full year, we used our free cash flow and other resources to pay $58.6 million in dividends and to repurchase $227.2 million worth of our shares.

Our conversion ratio that David spoke of, which is free cash flow divided by net income, continues to be one of the highest in the industry, ending the year at 107%. We continue to believe that this is an important metric for shareholders when comparing companies' financial results, particularly for those shareholders who utilize discounted cash flow models to assess valuation. 2013, as David said, 8 of the last 12 years our free cash flow was higher than our net income.

Our use of cash continues to be designed to enhance shareholder value. Free-cash-flow generation such as this gives companies like Core Labs significant opportunities to enhance that value. A great example, we just increased our quarterly dividend by more than 56% for our first quarter dividend to be paid in 2014, which puts our three-year dividend growth rate in excess of 27%.

This increase raises our dividend to $2 per share if paid for each of the four quarters in 2014, and represents a yield of about 1%, which when compared to OSX is relatively high, as it is above the median yield for the members of the OSX. Our pay-out ratio of the annualized dividend compared to our guided net income for 2014 is about 30%, which is about mean payout for members of the OSX who pay a dividend.

Another way we have enhanced shareholder value is through our longstanding share buy-back program. As of this call, our diluted share count is 45.351 million, which is near a 16-year low. We have reduced our diluted share count by more than 46% from its peak. Clearly, you can see that our buy-back program is not designed merely to offset dilution from equity compensation, like other companies in our space. Our program has been executed over a 12-year period, providing the company with an overall VWAP below $33 per share.

Okay, now let's look at our outlook and guidance. We anticipate that first quarter 2014 North America activity levels will ramp up slightly from fourth quarter 2013, while international activity will continue to experience moderate increases. Therefore we expect first quarter 2014 to range between $280 million and $286 million.

Using the mid-point of revenue guidance and applying year over year quarterly incremental margins of 40% to 45%, first-quarter EPS guidance would range from $1.43 to $1.45 per share, which would be up about 18% over last year's first-quarter results. 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 forward foreign currency translation for any shares that may be repurchased in the first quarter, other than those previously disclosed. A 24% effective tax rate is assumed for the quarter.

This first quarter guidance reflects our expected ability to continue to grow year over year revenues above the increase in worldwide activity levels. This is evident in our fourth-quarter results, when all three of our operating segments increased year over year quarterly revenue totals, with reservoir description and production enhancement posting all-time high quarterly revenue totals.

Our outlook for 2014 remains positive, as we project increases in worldwide activity that should support revenue growth of up to 10%, and EPS growth of up to 17%. Assuming continued support from robust crude oil prices that we are seeing today, we believe that we should have expanding opportunities, increasingly more established fields, newer field development projects, as well as unconventional tight plays.

Consistent with our historical efforts to expand revenue beyond our clients' spending levels, we do plan to enter fields where we currently do not have operations, and to offer new technologies and additional services in 2014. These new technologies and services, such as the FlowProfiler and the Kodiak technologies discussed today, will be focused on increasing the daily production and ultimate hydrocarbon recovery rates from liquids related unconventional and conventional reservoir developments worldwide.

We believe our business model goal of achieving a revenue growth rate of 200 to 400 basis points above the increase in the worldwide activity level remains intact, with incremental margins now between 40% and 45%, positively impacting operating margins. Based on anticipated increases in worldwide activity levels, we believe that full-year 2014 revenue will range between approximately $1.16 billion and $1.181 billion, with full-year EPS ranging from approximately $6 to $6.25, by applying either a 40% incremental margin to the lower-end projected revenue level, or by applying a 45% incremental margin to the higher-end projected level.

Operating income margins are expected to expand to 32%, increasing approximately 100 basis points over 2013 levels. We now expect free cash flow totals to exceed rather than just approach $300 million in 2014, with our client-directed CapEx program being slightly greater than in 2013, and to be more than offset by continued improvements in working capital efficiencies. With the financial review and outlook comments finished, I will now turn the comments over to Monty.

Thanks, Dick. Fourth-quarter revenue of $276 million is growth of 9% over Q4 2012. Operating earnings of $88 million, excluding FX losses and an insurance gain grew 17% over Q4 2012, and operating margins improved 220 basis points to 32% for the quarter. We thank our 5,000 employees for a record quarter and a record year.

A major customer was recently kind enough to e-mail me to include the following statement about our employees. Quote, I just want to let you know the respect I have for your Company. Your people set Core Lab apart. Trust me, as I think I've seen enough to be an expert on the subject. End quote. We feel the same way about our employees, and it's nice to hear this from a client.

Reservoir description revenue of $136 million grew 6% over Q4 2012, yielding operating margins of 28%, a 60-basis-point improvement over Q3 2013. Core lab experts gave a seminar on reservoir characterization of horizontal wells, and our tight gas sand and then shale reservoir techniques and expertise in Brisbane, Australia, to acquaint clients with our newest lab.

We began an in-depth study on the South Georgian Basin hydrocarbon potential for our client on their shale reservoir. Another client has us evaluating shale from six different formations in the Cooper Basin for gas production. We are also evaluating the hydrocarbon potential of a number of sand formations for oil accumulation and production. Our scientists have gotten our Brisbane lab off to a great start.

Petronas Research and Scientific Services engaged Core Labs in a collaborative research project into the applicability of EOR processes to their fields in Malaysia. Petronas staff have been assigned to our lab in Houston to participate in the running of the test while Core Lab was building equipment to establish the capability in their research facility in Malaysia. This is part of a multi-billion-dollar project to boost production and extend the life of declining fields in Malaysia.

We have ongoing training to help Petronas develop in-house laboratory capabilities and staff. Petronas staff have benefited from an immersive, hands-on technical development experience, conducted at Core Lab's Houston Advanced Technology Center. The program covers a wide range of core analysis topics, with focus on sophisticated live-oil reservoir condition, advanced rock properties laboratory testing.

In addition to comprehensive classroom instruction, the students are actively involved in designing analytical programs, running high-temperature, high-pressure laboratory testing, calculating data, and evaluating results. This training runs in parallel with the sale of the research laboratory measurement systems designed and built by Core Lab for Petronas. Because of our laboratory testing and instrument manufacturing areas of expertise, Core Lab is uniquely capable of providing programs of this type.

Production-enhancement revenue of $115 million grew 8% over Q4 2012. Operating earnings of $42 million grew 31% over Q4 2012, and operating margins improved 490 basis points to 36%. Core Labs' FlowProfiler service has dramatically changed how the industry evaluates multi-stage hydraulically stimulated completions.

The FlowProfiler utilizes unique oil or gas tracers, pumped in conjunction with our established SpectraCam water tracers, to provide a detailed after-frac flow profile that compares individual segment hydrocarbon recoveries to frac fluid recoveries. Analysis of this kind enables the operator to optimize future completions by quantifying zone predictability. This information can then be used to determine the optimal target for horizontal drilling, as well as evaluating potential loading problems.

Additionally, FlowProfiler has proven invaluable as a tool to help determine the optimum well spacing. By evaluating and quantifying the inter-well communication of both the water and hydrocarbon tracers, distances between wells or frac volumes can be modified to maximize reserve recovery. Many operators currently have projects under way that will employ this service to confirm specific drainage patterns.

During 2013, a significant number of operators utilized the FlowProfiler service as one of their primary completion diagnostic tools. Work has been done in almost every major basin in North America. For example, several operators in west Texas have used the FlowProfiler to determine the most viable formations for horizontal development, and operators in the Rockies are using the FlowProfiler to determine how much vertical communication is occurring between the Bakken and Three Forks, and between the Niobrara and Caudal formations.

Our Kodiak enhanced perforating system is being used to boost perforating performance in various situations. One operator used the Kodiak in a well that was closely bounded by a water zone. The operator did not want to risk fracking into the wet zone, so Kodiak was used to create more total penetration into the target zone, resulting in an 80% increase in production. Two more wells are planned for this treatment in Q1.

Kodiak has also been used successfully in a field where conventional perforating techniques have not been successful due to specific formation characteristics that create near well bore restrictions, and perforating tunnel plugging. Kodiak's added pressure pulse created better penetration into the formation's national fracture network, resulting -- resolving the previous formation difficulty.

Reservoir management revenue of $25 million grew 30% over Q4 2012. Operating earnings grew 48% over Q4 2012, improving margins 390 basis points.

Reservoir management continues to have a high level of activity in our Permian basin projects, focused on both the Delaware and Midland basin. Four more companies have joined the project, bringing the total to 61. The project is concentrating on improving reservoir characterization, fracture stimulation, production practices, and production performance of liquids-rich reservoirs such as the Wolfcamp, Klein, Bone Spring, and other intervals. Reservoir management also completed a large proprietary project for a potential new play in North America.

Internationally, reservoir management has continued to focus on offshore and deep water reservoir studies along the Atlantic margins and east Africa. Recently completed petroleum system projects include pre-salt carbonates, post-salt west Africa reservoirs, Namibia, South Africa, and Uganda. Several new multi-client projects were initiated, and include Mozambique reservoirs and central West Africa, Senegal, and Guinea-Bissau.

Reservoir management has also increased our licensing to our potential reservoir properties database Rapid, and associated cloud technology. One major and two large independent oil and gas companies adopted the technology for their corporate software in the fourth quarter. This software and associated analytics allows the companies to access and analyze reservoir data across their systems worldwide.

Keena, we will now open the call for questions.

(Operator Instructions)

Rob MacKenzie, Iberia Capital.

A question for you, David, on your recently-announced investment in Kurdish, Iraq. I know you mentioned in your press release that it met your row of targets.

But how do you guys think about the political risk, geopolitical risk to that, given the unrest in the region there? How do you adjust your return metrics to account for that?

Yes, good question there, Rob. We're keeping a real close eye on that.

So far in that region we really haven't seen some of the political unrest that we have seen in the southern and western part of the country, especially in Anbar Province. We will keep a close eye on that.

We were originally going to make a move and starting to put assets in there in the first and second quarter. We probably will delay that a little bit and look at it maybe as a third-quarter entry to get operational there. That will give us another 12 to 15 weeks to look at that.

Still, risk-adjusted, which we have added a higher risk factor in calculating what our return will be, the returns still meet our investment hurdle. We think that in looking at these reservoirs, certainly there have been announcements of billions of barrels of oil that have been discovered there.

The challenge will be that these reservoirs, most of them, are in fractured carbonates; and these oils are undersaturated in natural gas, therefore taking away one of the major driving factors for the recovery of oil from these reservoirs.

Our goal will be to look at in trying to combine some of these under-saturated crude oils -- there's plenty of natural gas around -- and maybe gasify these reservoirs as opposed to producing and flaring this gas of an injecting it into some of these fields there.

Net-net, the investment there will be delayed a bit. But we still are comfortable with the returns that we'll get because of some of the technological challenges that confront operators in the region.

Great, thank you. You mentioned undersaturated reservoirs numerous times from just now to the lower tertiary and so on around the globe.

Is that something that is becoming a bigger problem than it used to be? If so, is that related to aging of reservoirs? Is it just what we are targeting now? What's behind that?

Yes, I think it's really the use from our clients of more and more reservoir fluids data. I think they are studying the natural gas, crude oil, and water elements of these reservoirs much more today than they ever have in the past.

It's interesting, when you look at Core Lab over the last 30-plus years, the Company used to be run by all the rocks guys. I happen to be a rocks guy, and I'm one of the dinosaurs left here.

But if we look at the Company now, more and more the fluids guys rule the roost. That being our clients are now asking for more and more sophisticated reservoir fluids data.

I think that's leading to the conclusion that a lot more reservoirs around the world are undersaturated in natural gas than we ever thought. But we have been doing a lot of work on trying to determine what fluids we can add to that reservoir to, in a sense, re-gasify that reservoir, adding an additional drive factor for the recovery of that crude oil.

As we look at the Company, we actually generate now more revenue from reservoir fluids than we do from analyzing the rocks. I think that is a major factor in understanding crude oils around the world, and undersaturated crude oils and natural gas being a primary culprit in lower recovery rates than some of these reservoirs that we now see.

Great, thanks. Coming back to the rock for a brief moment, if I may, with the growth in unconventional, how big a portion of your total core analysis would you say GRI is now versus more conventional core analysis?

Well, if we look at the Company, still right now about 25% of our revenue is generated from unconventional reservoirs. I think that will continue to increase.

We know that in looking at unconventional reservoirs that we are going to see longer laterals, and we know that we need additional stages to drain these reservoirs. Right now the average stage is separated by somewhere between 400 and 450 feet.

We know we are not draining those blocks effectively. So we're going to need additional stages, spaced more closely together.

Okay, my final question, if you'll bear with me, is exactly on that topic. We've heard a lot of folks, from the Marcellus to the Permian, talk about the success in stage length of 220 feet to -- let's call it 250 feet.

How would you characterize where the industry is in accepting that approach? Is that still early stages, or are we approaching pretty full acceptance of that concept?

No, it's still early stages. You have some early adopters that are doing a great job -- companies like Pioneer, EOG, Cabot. These are great believers in additional stages, over-pumping profit to screen out, knowing that they need additional stages more closely together to drain those reservoirs effectively. That's all good news for a Company named Core Lab.

Great. Thank you, I'll turn it back.

James West, Barclays.

Dave, looking at your forecast for activity growth and revenue growth this year, there's a little bit of a disconnect between what the capital budgets are suggesting. I know you have seen our spending outlook and where we have global EP spending up 6% year over year 2014 versus 2013, but you're obviously adjusting at a higher number.

Could you talk about what is driving the disconnect between maybe our numbers and what you guys are actually seeing?

Actually, James, we're pretty much in sync. If you think that our view on our business model is to grow 200 to 400 basis points faster than that industry spend, you are showing 6%. We are saying --

You're still saying -- okay.

Correct. So we're pretty close.

Okay, that makes sense. Another question, maybe a broader question since you guys tend to be experts here on oil prices and global supply.

There's a lot of pushback, I think, from the market right now about the trajectory of oil prices or the direction really of oil prices -- most people expecting both WTI and Brent prices to fall, and some people expecting a dramatic fall.

Could you maybe highlight your thinking. As you are planning your business, you obviously have to be thinking about this and taking this into consideration.

But how are you guys thinking about both WTI and then of course international prices going forward?

Yes, well, we want to make it clear that we are not experts on oil prices. But, James, our assumptions are based on -- as you know, we are peak oil guys and that spare capacity still globally is rather limited.

We are encouraged by the amount of increase in consumption worldwide. Finally, year over year, we are seeing increases in the amount of gasoline that is being used here in the United States, which we think is a real positive.

Keeping that in mind, we still see rather high crude prices. And certainly Brent, anything over $100 a barrel can certainly fund major developments around the world, deep water developments around the world, while still allowing for a lot of these major oil companies to return excess capital back to their shareholders. We are seeing more and more of that.

Where we think the industry will be affected will be in the exploration dollars that are spent going forward. That is one of our key focuses in this Company that we look at.

And over 85% of our revenue is tied to production and developments of fields as opposed to the exploration side, which is less than 15% of our business.

We think that exploration budgets will be affected much more by the return of that capital. We won't be drilling those wells off of Greenland any more, but we will be looking at spending additional dollars in developing the fields.

Our outlook is that Brent's phase more of $100; and for 2014 going forward, spare capacity becomes less and less.

Got you. One last question for me.

Dave, you talked about the tight-oil plays opening up in Russia, North Africa, Australia. Could you discuss in a little detail the cadence of that activity, how quickly you think these can ramp up to be real significant parts of your business?

As you know, for years we have been very high on this organic-rich Silurian-age Gothlandian shale that underlies all of the fields in Lybia, in Tunisia, and to a lesser extent over into Egypt. It's a political consequence there why activity has not ramped more quickly.

Right now, you have ENI, you have Shell. You have big companies that are indeed drilling vertical wells into the sections, and we've done numerous work there on looking at vertical wells.

I think it will be up to the political climate there when that becomes a bigger part of the push for unconventional developments in North Africa.

Kurt Hallead, RBC.

The question I have for you guys is that you have indicated this morning, and then many times before, about the prospect of growing your revenue base 200 to 400 basis points higher or greater than the activity levels in general. You also referenced in your press release today new technology developments and continued technology developments, as well as entering new markets.

I am curious to get your perspective as to whether or not these new technologies and the entrance of these new markets could potentially lift that basis-point differential above activity; and if so, whether or not you think that can happen within the course of the next -- is that something that can happen within the course of the next 12 months, or is it something that can happen over the course of the next three-year period?

Yes, I think that's a good question, Kurt.

Actually, if you look at 2012 and 2013, actually that growth rate was more than 400 basis points higher than the gain in the worldwide activity level. We are still comfortable in using that algorithm because over the last decade it has turned out to be either that case or a little bit higher than that.

We're right now not comfortable in raising that. But if a continued trend does occur, where we are growing 500 to 600 basis points above worldwide activity, we would be willing to do that. There is potential upside to 2014 numbers.

All we've done is plugged in the 200 to 400 basis points that we have used over actually the last decade plus. When you are adding technologies like the FlowProfiler, as Monty spoke about, or the Kodiak perforating systems -- and we tend, as you know, to enter 40 to 50 new fields a year. There is the potential for that.

Okay, right. Actually, that was really my only question. Everything else pretty clear.

Veny Aleksandrov, FIG Partners.

My first question is on Q1. Strong [capitals], and usually it used to be a weak quarter seasonally. Did this change with the business model lately and your projects are getting longer and the seasonality does not affect Q1 so much?

Actually very good, Veny.

Yes, with our de-emphasis of our activity levels in Russia, which is highly affected by climate -- as you know, we have had two reductions in our asset base in Russia. Still have 400 employees there and a nice business. That has taken some of the seasonality out of our business.

Moreover, when we look at the North Sea, which is also seasonal, more of that work has now turn toward fluids work, which is collected from production platforms as opposed to new drilling. So when you add those two areas, yes, we are seeing less seasonality than we had, let's say, five years ago.

Okay, thank you.

My next question is the computer-based data port and the (inaudible) on a project that you were talking about in the press release. It's a great thing.

Is this the first time that you guys streamlined data, or you've had it before, just not with this technology?

This has to do with the Rapid system. I'm going to turn that over to Monty.

Veny, this is a system we have had for a number of years and have built up. Obviously, as in the software world, these things are expanding and improving.

This is a system we developed in house that we host that allows our clients to not only use our data from reservoir analysis, fluid analysis, core analysis, the production enhancement services, such as the FlowProfiler, but also their other data that they are bringing such as log and geophysical and bringing it all together.

It also is in a cloud environment. It makes it where their other people in different parts of the world, different parts of the Company even in Houston if they are in five or six offices, they can all be looking at the same data and working together on their projects.

It is a software that we developed initially for supplying the customers with our data and giving it, but we've expanded that out. We have a number of clients that use that as their main production database for formation information.

Thank you so much. Thank you, these are my questions.

Ole Slorer, Morgan Stanley.

I couldn't help but looking at your fourth-quarter revenues in the production announcement, down slightly, yet your -- well 3.5% -- yet your margins held in there. That's a little bit unique, I would say, even you're talking about incremental margins of the magnitude you do, they tend to go the other way too, and in this case they didn't.

Can you explain a little bit what is going on? Is it the new technologies? Is it the customer is a fairly mixed changed of some sort? Could you elaborate a little bit? Is it a one-off or is it a trend, really, in your organization?

Yes. Good question, Ole. When we look at the combination of revenues in production enhancement, we are getting more contribution from the FlowProfiler and things like the Kodiak Perforating System.

When we look at the contributions for those, those new technologies and services tend to be priced with an operating margin that has a four, sometimes a five in front of it. So those incremental margins that it is adding, when we compare year over year, you see the margins continue to go up.

Also, we had a very favorable comparison in Q3. If you look at production enhancement a year ago in Q3, that was a quarter that was a lot less than it was in the fourth quarter.

So you get a very favorable comparison there. When we look at fourth-quarter comparisons, it's a little bit tougher.

But with the contribution of those newer technologies that tend to be priced with EBIT margins with a four or a five in front of it, that's going to push the incremental margins.

Very clear. How big a penetration do you have compared to where it could go?

I realize this is a very opaque question, but could you give us some kind of sense of the maturity of penetration and the importance in overall revenues? In other words, how long could this trend continue to play out within your mix?

Yes, that batter, Ole, is in the on-deck circle. We have a long way to go in rolling that out, not only in North America, but globally -- so a lot of time left to run on that clock.

Byron Pope, Tudor Pickering.

Just one question here.

You guys have clearly messaged the importance of deep water to the Company's organic growth going forward. As I think about the 2014 revenue guidance, call it up 8% to 10% year over year, based on the work that you have on tap over the next 12 to 18 months, how should I think about the bigger beneficiary in terms of your business?

Is it going to be reservoir description or production enhancement? Just trying to gauge the growth, the deep water growth driver, for Core Labs in 2014.

Yes, great question. When we look internationally, certainly deep water is going to be more reservoir description. Where I think the deep water market is a little bit more mature, it is going to be contributions in the deep water Gulf of Mexico to both reservoir description and production enhancement.

When we look at the contribution of the deep water, I'll say it will be more to reservoir description because it's going to be a greater catchment area globally. Production enhancement will be more right now because of the maturity of the market looking at more of the deep water Gulf of Mexico, especially when we look at the exploitation that will occur over the next several years of these lower tertiary discoveries that we've had over the last three to four years.

Blake Hutchinson, Howard Weil.

I just wanted to stick with the deep-water theme, because that seems to be the most pressing matter, at least today. You laid out a scenario here, David, where you felt like $100 oil, $100 Brent should drive just about anything, any new project as economic in the deep water.

If that is the case, are we reaching here the culmination of your view that we are just so personnel-limited that the Company just actually can't prosecute much more in terms of projects of size than we're doing today, so this may be a multiple-year process of having a flat market and working through some of the major projects that are already in pipeline?

Absolutely correct. If we look at some of the deep water Gulf of Mexico projects that have been delayed, that is all personnel-related. When we look at some of these lower-tertiary developments, all of these platforms are right now being re-planned and re-developed to try to lower costs.

When we look at the amount of personnel, and we are very familiar with a major oil company that right now has delayed a lower-tertiary development now into their second, and probably will go into the third year, it's just a matter of being able to have enough engineering personnel for the redesign of that entire platform.

You are correct. We do see deep water continuing to be very important, although the development activity will be at a lesser pace owing to the shortage of qualified personnel.

I think there will be plenty of drilling assets available over the next two or three years. It's just the qualified personnel within the major and major independents are still a little short.

That being said, when we look at the petroleum engineering departments across this country and across the world, we now have them jammed with students that want to participate in this industry. ¶ I just go back 10 years and look at the petroleum engineering class at Penn State. We had two new freshman that year. Now we have over 100.

I think that is a trend that will over the next several years play out to the benefit of service companies and major oil companies and major independents alike.

As an extension, just trying to get some more specific color of how deep-water pause might actually impact your business, if we take a major client, like say a deep-water client like a Petrobras, you've seen peers come out and prognostications for the year are somewhere from flat to definitively down.

I take it from some of your commentary in the release that you still see that as a definitive growth market for Core Labs, even in this kind of pause environment?

Yes, that is correct. If you look at Petrobras, still our largest national oil company client around the globe -- remember, a lot of our revenue is generated when drilling rigs don't have to be running.

We do a lot of work on reservoir fluids. As we know, some of the reservoirs offshore, deep-water, pre-salt Brazil -- again, as Rob Mackenzie mentioned -- are undersaturated in natural gas.

A lot of the fluids work that we are now doing for Petrobras is tied to trying to come up with formulas to re-gasify those fields so we can increase the recovery rates. So don't think about revenue being tied directly to drilling rigs running.

A lot of our revenue is generated from fields, especially on the fluids side, when rigs don't have to be running. That's a benefit that we have here at Core Lab in looking at the way that we generate our revenue.

Quickly, Dick, the exit from Argentina that you cited in the release, I take it that is more an announcement that you will be servicing the market or taking assets out, rather than not doing business. And we need to make an adjustment in the model?

Yes, that is correct. We will continue to attempt to address the market profitably from other locations.

We will import in products, or we will do the -- for example, the analytical work in our Bogota, Columbia, facility, or in Houston. We're just saying the local infrastructure is going to be brought down to nil, and then we will service the market from outside.

Yes, Byron, we have rocks right now from the Vaca Muerta in this building. Again, we will service that market from here.

The operator is located here in Houston, and he brought his rocks back with him. And so we are working on that from Houston, Texas.

That's great. Thank you so much for the time.

We'll take one more question, Keena.

Brandon Dobell, William Blair.

One quick one. How do you guys view the opportunity to go back in and recomplete or fix some of the wells that were drilled four, five, six years ago?

I guess I'd ask that from two perspectives -- one on the product side for you, but also on the fluids side. Do you feel like you've got a big opportunity there the next two, three years; or it's a longer time frame for that?

Oh no, Brandon, I think you've hit the nail on the head. If you look at some of the completions in the Barnett shale, remember five years ago that a three-stage frac was a big thing.

I remember saying at that time, we are going to look back at that and say that these complex completions are going to look elementary in five or six years.

The work that we're doing today on some of these laterals that might be 8,000 feet or 9,000 feet in length in 30 stages, as we look forward, we're going to be looking at 15,000-foot laterals; and they may have 60, 70, 80, 90 stages in them. So yes, huge opportunities for some recompletions.

I think if you went back and looked at our Q2 release, we talked about the recompletions of some Woodford Shale wells up in Oklahoma, where a new operator took over that acreage, went back and re-completed. And I think some of the productions were double to triple what was the original completion in the Woodford Shale.

Good revenue opportunity for us, not only on the product side but also on the rocks and fluid side.

Is that the key trigger is going to be either a change in the owner that drives that kind of spending? If you're thinking about the buckets of spending in North America, where do people drag the money out to go recomplete? Or is it just going to be a new operator has the cash to do it because he feels there is production upside?

Or can your existing guys go back five, eight years later and say we have got to find ways to boost this production?

Yes, both. But what we find is a new operator is more apt to go in and do something to that field because he has bought those assets at a reduced price because it's based on the production at that time. If he can go back in there and boost, he's going to boost his return on invested capital.

The Permian is a great example of that.

Yes, over a million wells drilled in the Permian basin to date; and we have got over a million more to drill.

Okay. Thanks guys, appreciate it.

Okay, Brandon, thank you.

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.

We remain uniquely focused and are the most technologically-advanced reservoir optimization company in the oil field services sector. This positions Core well for the challenges ahead.

In closing, we would like to thank all of our shareholders and the analysts that follow Core. And as always 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. Thanks for spending your morning with us, and we look forward to our next update. Goodbye for now.

This concludes today's Core Labs fourth-quarter 2013 earnings conference call. You may now disconnect.