Core Laboratories Inc (CLB) 2014 Q2 法說會逐字稿

Good morning. My name is Kimberly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Core Labs Earnings Q2 2014 conference call.

(Operator Instructions)

Thank you. Mr. Demshur, you may begin your conference.

Thanks, Kimberly.

Good morning in North America, good afternoon in Europe, and good evening in Asia Pacific. We'd like to welcome all of shareholders, analysts and, most importantly, our employees to Core Laboratories second-quarter 2014 earnings conference call. This morning, I am joined by Dick Bergmark, Core's Executive Vice President and CFO; Core's COO, Monty Davis, who will present the detailed operational review; and Chris Hill, Core Labs' IR analyst.

The call will be divided into five segments. Chris will start by making remarks regarding forward-looking statements. Then we'll come back and give a brief investor update and highlight the three financial tenants by which Core's executive management team executes the Company's growth strategies.

We believe these three tenants have produced long-term 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 second-half 2014 outlook, and a general industry outlook as it pertains to Core Lab's growth prospects.

Then Monty Davis will go over Core's three operating segments, detailing our progress and discussing the continued successful introduction of new Core Lab technologies that are tied to the best practices in completing, stimulating, and producing horizontal wells. And then highlighting some of Core's operations and major projects worldwide. Then we'll open the phones for a Q&A session.

I'll turn it back to Chris for remarks regarding forward-looking statements. Chris?

Thanks, Dave.

Before we start the conference this morning, I'll mention that some of the statements that we make during this call may include projections, estimates, and other forward-looking information. This would include any discussion of the Company's business outlook. These types of forward-looking statements are subject to a number of risks and uncertainties relating to the oil and gas industry, business conditions, international markets, international political climate, and other factors, including those discussed in our [34-F] 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 specs from those projected in the forward-looking statements. We undertake no obligation to publicly update or revise any forwards-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 annual report on Form 10-K for the physical year ended December 31, 2013, as well as other reports and registration statements filed by us with the SEC and AFM.

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

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

Okay, Chris, thanks.

I'd like to give a brief investor update. Core's operations produced a solid quarter, with record second-quarter revenue and EPS. But these results were below our standards for performance, and we will do better. The second quarter of 2014 rolled out as expected per our May 12 conference call.

In last night's release, we provided EPS guidance for Q3 and Q4. Using the lower end of our revenue guidance range, coupled with incremental margin guidance, that produced a conservative outlook for the second half of 2014. Using the upper-revenue guidance range and historical incremental margins would bring projected EPS guidance to the top end of prior guidance that we gave on the May 12 call.

Looking forward, we remain an internationally-focused Company, concentrating on crude-oil-related developments, especially in deep and ultra deep water environments. And although reservoir description margins have been affected by recent low levels of activity in four of the last five quarters, we know that long term our deep water focus will lead to increasing the reservoir description margins and continue to benefit our long-term shareholders.

Core also will continue to innovate technologies to boost produce daily production, and maximize estimated ultimate recovery rates. As unconventional titlement plays mature in the US in their initial development stages, Core is diligently innovating enhanced oil recovery techniques that will be utilized by our most technologically-sophisticated clients.

We are currently looking at ways to boost recovery rates in the Bakken and in the Eagle Ford from high single digits to rates in the low teens. These new EOR techniques will be able to generate higher-margin revenues over the next decade plus.

Moreover, Core will continue to increase market penetration of our newly-introduced FLOWPROFILER and Kodiak-related technologies, which should generate record levels of production enhancement. And Company-wide revenue, operating income, and free cash flow in the second half of 2014. All of our operations are committed to posting future results that are equal to or greater than the Core Lab standard established over the past decade plus, and we will start doing that in quarter three.

Turning to Core's ongoing performance, Core has always followed and will continue to follow three key investment tenants that have led to long-term industry-leading returns. These three important tenants, which are now starting to receive attention from other companies and analysts in our oilfield services sector are, number one, maximizing free cash flow through fiscal discipline.

Core follows a strict discipline for allocating capital for investment in growing our businesses. Unless certain return on investment capital standards are met or exceeded, the capital expenditure is disallowed. This strict capital discipline produced quarterly levels of free cash flow of over $53 million.

In fact, Core converted over $0.20 of every revenue dollar into free cash. Core's free cash flow to revenue conversion rate of over 20% exceeds pretax operating margins of most other oilfield service companies, but we can do better.

For 2014, Core expects second-half free cash flow to exceed a $300 million run rate, all of which is expected to be returned to our shareholders. As our top 20 shareholders say, they own 70% of the shares; free cash flow matters.

The second financial tenant 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 the oilfield service industry.

Core's Board believes that the stock price performance, over time, is directly related to its return on invested capital. Based on the most recent calculations available from Bloomberg, Core's return on invested capital was the highest of any company in the oilfield services group listed by Bloomberg Financial.

Also, Core's ratio of return on invested capital to our weighted average cost of capital was the industry's highest. As our top 20 shareholders say, high returns on invested capital matter.

Our third financial tenant, long-held, is to return excess capital to our shareholders. During the second quarter of 2014, Core returned over $100 million to our shareholders in the forms of quarterly dividends and the repurchases of shares, as we opportunistically took advantage of lower Core Lab stock prices. At the end of the quarter, Core's outstanding diluted share count fell below 45 million shares, levels not seen since the third quarter of 1997.

Collectively, during the quarter, Core returned over $2.20 per share to our shareholders. Since October of 2002, Core's shareholder capital return program has returned over $1.83 billion, or over $40 per diluted share, to our owners. We have lowered our share count by almost 39 million shares.

We will continue to follow these three financial tenants throughout 2014, which should enable Core to continue to produce industry-leading returns for our shareholders. As our top shareholders say, returning capital to our shareholders matter.

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

Dick?

Thank you, David.

If you look at the income statement, revenues are at the midpoint of our May 12th updated guidance. At $267.6 million in the second quarter, and that's versus $263.1 million in the second quarter of last year. This represents all-time second quarter record revenues.

Of these revenues, services for the quarter were $188.3 million up slightly when compared to $187.7 million last year. Product sales for the quarter were also higher, at $79.3 million compared to $75.5 million in last year's second quarter.

Now moving on to cost of services for the quarter. They are 59.3% of revenues, compared to 58.4% in last year's second quarter. And our cost-of-product sales is 71% of revenues, which is similar to last year's second quarter.

G&A for the quarter is $11.1 million, which is about 4.2% of revenues, which is also the same as last year. Depreciation and amortization for the quarter is $6.3 million, up from last year's second quarter. And we expect depreciation in 2014 to total approximately $27 million.

Other income this quarter is primarily foreign exchange gains of $1.3 million. The guidance we gave on our last call for this quarter specifically excluded the impact of any foreign exchange gains or losses. So accordingly, our discussion today excludes this foreign exchange gain.

So excluding those gains to conform to our guidance, EBIT for the quarter is $82.8 million. GAAP EBIT is $84.1 million. Interest expense is $2.8 million for the quarter, compared to $2.3 million in last year's second quarter, up due to borrowings to accelerate our share repurchase program.

Income tax expense in the quarter is $17.2 million, based on an effective tax rate of 21.2%. To conform to our guidance, which assumed a 24% effective tax rate, income tax expense would have been $19.2 million in the second quarter. We believe our effective tax rate for the second half of the year will be approximately 23.5%.

Net income for the quarter is $63.7 million, up from $59.7 million last year. While ex-items, it is $60.5 million.

Earnings-per-share for the quarter is $1.35 on the same basis that our guidance was given versus main street of $1.34. Our GAAP EPS is $1.42 per share, up by $0.13 or 10% over last year.

If we look at the balance sheet, cash is $29.5 million compared to the prior year-end balance of $25.1 million. Cash balances that are free cash flow during the quarter were used primarily to repurchase stock and to pay our dividends. Receivables stand at $201 million, down slightly from year end.

Our DSOs in the quarter remained at the 65 days experienced in all of 2013. Inventory, it's at $51.4 million, is up from the prior year-end of $46.8 million in anticipation of increasing product sales.

Other current assets are $40.3 million, up from the year-end balance of $30.6 million for the most part as a result of an increase in income tax receivables up $8.6 million. Reflecting the timing difference between when statutory tax payments are required to be made to the various tax offices, and the corresponding current tax provision recorded under GAAP rules for our financial statements.

BP&E is $143.9 million, up from the year-end balance of $138.8 million, due to our client-driven CapEx program. And there are no material changes in intangibles, good will, and deferred tax assets. Other long term assets at $43.4 million, up from the year-end balance, due to an increase of $3.5 million and the cash surrender value of life insurance.

And now, if we look at the liability side of the balance sheet, our accounts payable are $51.3 million, in line with prior year-end balance. Other current liabilities of $82.6 million are down from the last year-end balance of $85 million, primarily due to a slight decrease in discretionary benefit plan costs of $4.7 million.

Our long term debt stands at $333 million, compared to $279 million last quarter. And is comprised of $150 million in senior unsecured notes, and $183 million drawn on our bank revolving credit facility. The increase in borrowings came as a result of our increased share buy back program. As of today, drawings under our credit facility remain at $183 million.

Other long-term liabilities ended at $85.9 million, down from last year's balance of $88.8 million. Primarily due to a decrease of $5.6 million in deferred tax liabilities.

Shareholders equity ended the quarter at $136.3 million, down from the year-end balance of $169.4 million. Primarily due to share repurchases and dividends since the end of the year. Utilizing annualized net income for the second quarter, our return on equity is over 185%, making it one of the highest returns earned in the industry.

Capital expenditures for the quarter are $12.1 million, up from $9.5 million in the second quarter of 2013. We elected to accelerate our CapEx program to front load this year in order to gain the impact from those investments sooner, with a view towards improving results in the second half. We expect our CapEx program in 2014 to be approximately $37 million.

Our CapEx growth is client-directed for the most part, meaning that we will increase our capacity for locations or for increases in technologies on the basis of discussions with clients about their specific needs. Which is one of the reasons why we've been able to generate our high returns on invested capital.

Looking at cash flow. Cash flow from operating activities in the quarter is $65.6 million. And after paying for our $12.1 million in CapEx, our free cash flow is $53.5 million.

In the second quarter, we turned, as David said, almost 20% of our revenues into free cash flow. Certainly one of the highest cash conversion rates in our industry.

During the quarter, we used our free cash flow, cash balances, and bank borrowings to pay $22.4 million in quarterly dividends, and to repurchase 455,219 shares for $78.5 million. In essence, we gave back $100 million to our shareholders in the second quarter. This use of cash continues to be designed to enhance shareholder value.

Now, if we look at the guidance for the remainder of the year. We anticipate that North American activity will continue to increase for emerging unconventional oil plays, while activity will remain at reduced yet stable levels and established unconventional [tight] oil and gas plays.

We also anticipate higher numbers of deep water coring programs, especially in the deep water Gulf of Mexico. The volume of high pressure/high temperature reservoir fluid phase behavior projects is also expected to remain at high levels.

Internationally, in response to a very supportive rent crude price, we expect modest growth through the end of 2014, and expect higher levels of activity entering 2015. Therefore, for the third quarter of 2014, we expect revenue of approximately $280 million to $290 million. And EPS to range between $1.49 and $1.52, up sequentially by approximately 11%.

Within those ranges, operating margins are expected to be approximately 32%, with year-over-year incremental margins as high as 60%. A 23% effective tax rate is assumed for the third quarter of 2014. If one does the math using these revenue ranges, EBIT margins, and incremental margins, one can mathematically arrive at EPS levels in excess of our guidance and that previously given on May 12th.

Consequently, from our perspective, we are reaffirming our guidance that was previously given on May 12th. Free cash flow is expected to be between $77 million and $81 million. For the fourth quarter of 2014, we expect revenue of $285 million to $295 million, with EPS ranging between $1.56 and $1.61.

Within those ranges, operating margins in the quarter are expected to be approximately 33%, while exiting the year at 34%, with year-over-year incremental margins as high as 60%. A 24% effective tax rate is assumed for the fourth quarter of 2014, as a result of operational activity expected in higher tax rate jurisdictions.

And the same observation regarding the mathematical potential, applies to our Q4 guidance as well. Free cash flow in the quarter is expected to range between $81 million and $85 million. All operational guidance excludes any foreign currency translation, and any shares that may be repurchased, other than those already discussed.

So with that, let's pass the discussion over to Monty for an operational review.

Thanks, Dick.

Q2 2014 was our highest revenue second quarter in Company history, and generated 31% margins and our highest Q2 EPS ever. I thank our employees for all of their hard work in producing these results, and providing our clients with excellent service and products.

Reservoir description revenues were $131 million in Q2, generating operating margins of 27%. Which were at the top of our expectations, even with the reduced activity levels we discussed earlier.

We are seeing fewer cores taken in more mature unconventional plays in the US, and a large market decline in the Canadian oil sands. All affecting reservoir description Q2 revenues.

We are providing high-pressure enhanced oil recovery for ultra deep water Gulf of Mexico projects at pressures up to 21,500 PSI. Which includes determination of minimum miscibility pressures, physical measurements of fluids after they are contacted with the injection gases, and thermal dynamic testing for reservoir simulation models.

These fluids are also tested using Core Labs' proprietary Pressurized Fluid Imaging System to ensure production, deposition, and formation damage does not occur. Providing complete high-pressure EOR, and flow assurance testing.

We signed our highest revenue reservoir description contract in Company history in Q2. This five-year contract is with the Kuwait Oil Company. Core Laboratories continued to support KOC with numerous reservoir condition projects, projects from the south rack to field, which contains highly viscous fluids with low solution gas.

These projects are typical reservoir condition studies, with the addition of measurements at high temperature, in this case 325-degree F, to help understand how fluids characteristics and production will change if enhanced oil recovery methods, such as steam floods, are introduced. To date, approximately 300 wells have been analyzed. And based on the current information, a large number of studies are expected during the new contract period.

An EOR project was recently completed on samples collected from the [lingadish] field. During this project, it was observed that fluid properties differed based on where they were collected within the field.

This suggested that the reservoir may include a fault or a compartment, which was something that KOC had previously not considered. KOC is planning to apply various improved oil recovery techniques to maintain reservoir pressures, as well as improve production from several North Kuwait fields.

Core Laboratories performed displacement tests under simulated reservoir conditions utilizing our high tech fluid systems to investigate various scenarios. These tests included lower [Bergen] relative permeability method comparison, plus water alternating gas and miscible gas versus residual oil saturation content.

Enhanced oil recovery tests, which indicated that the miscible gas had a slightly higher recovery and residual oil saturation content after miscible gas injection. These results will guide KOC in deciding what type of displacement fluid to inject into their reservoir.

Production enhancements revenues generated operating margins of 34% in Q2. North America revenues were up nicely, but this was largely offset by declines in revenues in Latin America and other international markets.

Our patented FLOWPROFILER revenue was up significantly in the second quarter, as we continue its introduction into the market. This service is helping operators in liquid rich plays to evaluate and optimize the effectiveness of their completion and development strategies.

FLOWPROFILER tracers are being used to identify communication between frac stages, from the treatment well to surrounding offset wells. Enabling the operator to make informed decisions on lateral and vertical horizontal well spacing.

FLOWPROFILER is being combined with Core's other diagnostic services to provide a comprehensive understanding of the completion and identify opportunities to increase recovery. The addition of new FLOWPROFILER oil tracers are being introduced in July and are expected to make an impact on revenues in the third and fourth quarters and beyond.

The addition of several new SpectraChem tracers in the second quarter has already started making an impact on activity levels. The additional tracers are allowing operators to more discretely evaluate the growing number of frac stages in horizontal wells.

The strategic move to add regional engineering advisors over the last year is helping the growth of the Company's business by shifting from sales on a well basis to big multi-well longer-term projects. The regional engineering advisors were put in place to meet the demands from customers to access Core's industry-recognized experts.

This team has been successful in helping our clients across North America to increase production through changes in completion designs and development strategies. June activity for all well stimulation diagnostic services was up substantially, and this trend is continuing into the third quarter.

Core's Kodiak perforating system helped an independent operator with multiple shallow oil wells in the Texas/Oklahoma border area. These wells, like most, over time are depleting, and in need of restimulation.

In the past, this operator has used acid. But with the escalating costs of this option, wanted an alternative solution. These shallow wells were too costly to frack, so Kodiak enhanced perforating was introduced.

This system provides reperforation with our HERO charges and propellant stimulation with Kodiak at the same time. Rather than the multiple down-hole runs required with other propellant systems.

Computer modeling was able to illustrate what the Kodak Enhanced Perforating System would do for this well. The operator reported that well production had tripled following the restimulation using Core's Kodiak system.

Most of our perforating systems are proprietary best-in-class systems. A smaller segment for Core Lab is the basic technology product subject to pricing pressures from competitors.

Some perforating companies continue to purchase these basic technology products from us. We sell these when we can get a reasonable return on them. The pricing on these items has stabilized late in the second quarter.

Reservoir management revenue growth for Q2 was 10%, generating operating margins of 37% for the quarter. Reservoir management continues to expand our geoengineering projects in the Permian Basin that are focused on improving oil recovery factors from the multiple horizons being exploited by operators.

The Delaware Basin project has focused on the Avalon Shale, Bone Spring Sands, and Wolfcamp source rocks, with the play expanding into the Southern Delaware Basin. 24 companies are members of the project, and have contributed core, well logs, and completion and production data for 38 wells that are being analyzed and evaluated by our team. The project is on target to include over 72 wells.

The Midland Basin project has focused on the Wolfcamp, Cline, Sprayberry, and Dean. And has been recently expanded to include the Barnett and Woodford sections. A total of 48 member companies are now participating, with membership continuing to increase.

Over 80 wells containing core are being contributed, with some wells represented by over 1,000 feet of core. The project will eventually have well over 130 cored pilot wells. Similar to the Delaware Basin project, the scope of the project includes reservoir characterization, fracture stimulation optimization, and production best practices for oil recovery.

During the quarter, reservoir management also initiated a new project directed at expanding the Woodford oil play in Oklahoma. Recent successes in the SCOOP and Stack areas of the Anadarko Basin are driving possible expansion of the play to include other areas. A total of nine operators have joined the project to date.

Internationally, reservoir management has continued increasing our portfolio of West Africa and East Africa deepwater projects. Regional petroleum system studies are being performed in cooperation with national oil and gas ministries in Cote d'Ivoire, Senegal, Tanzania, and Mozambique.

Kimberly, we will now open the call for questions.

Your first question is from the line of Blake Hutchinson.

Good morning, guys.

Morning, Blake.

Just, first of all, just within the production enhancement segment. Dick, I think you gave a product sales number that was above both first quarter and last year. Help us square the total top line growth with the fact that product is going up, but that's where the major weakness is identified.

Was the detriment of exiting Venezuela and Argentina a little more impactful, or would you suggest that some of the higher growth services just had maybe taken a pause as well? I guess it's just surprising to see the product growth, given that you had called out a low end charge suite as the major pressure point.

Yes. If you look at the broader market, at the number of directional wells drilled compared to this revenue growth, the difference are the things you just mentioned. Clearly, Argentina was in our numbers a year ago, but not in our numbers today because we've closed that operation. Venezuela as well.

And then certainly pressure on the lower end. And that's why Monty talked about the benefits of some of the Kodiak charges and the more higher end charges are beginning to show these improved results year-over-year.

And, Blake, if you look at the roll out for production enhancement. Our June numbers were the best month ever recorded by production enhancement, and that has continued up through yesterday morning for production enhancement into the third quarter.

And just to be clear, I guess I took the exits from Argentina and Venezuela as you would still do some business there. But clearly, even that's been a more profound effect, or are you just -- you're avoiding those countries due to currency risk, et cetera?

Yes, currency risk. And I would say we could foresee those sales in both countries going to zero, and they almost all are at zero now.

Okay. Great. Thank you. And then just with your risking of the deep water coring programs has stayed more or less the same, what visibility can you give us in terms of timing?

Understanding that these can take almost a full quarter to pull -- the cores to be pulled and analyzed. Are some of these projects actually underway? Or given your margin guidance that gets higher as th year progresses, do we picture these all kicking off at the same and we'll see what actually hits the tape by year end?

We -- Blake, this is Monty. We have projects underway right now where we're out capturing the core on deep-water wells that does take -- the analysis of that is over time. It will be both in the third and fourth quarter, even though cores are being taken right now.

And then, it goes beyond that, and some of it will go to 2015. As we do analysis over a period of time, more analysis is recommended of a more specific nature. Some specialized core analysis techniques.

And so these wells, because of the science being applied, the analysis will go over a longer period of time. As I said, we're taking some now. We expect to capture more cores throughout the third and fourth quarter.

It's not all at once. It's spaced out, depending on the drilling programs of the operators.

So, Blake, right now, it's rolling out as scheduled, and as planned.

Okay, great. That was very helpful. Thanks, Monty.

Your next question is from the line of Veny Aleksandrov.

Good morning.

Good morning, Veny.

My first question is on the guidance. And you mentioned a little bit about it, being giving conservative guidance for the year. What's it going to take to go to the upper end of the previous guidance to the [sixth hours]? Is it more off shore projects being started than the five that you [risk], or more work on the production (inaudible)? How can we think about it?

Well when you think about the big drivers for this Company, think of international, think of deep-water, and certainly improvements in the unconventional. So if we get improvements in any of those areas, Veny, I think that's what pushes us through those levels.

And clearly internationally, if you used international rig count as a measure of activity, I think everyone's been pretty disappointed with that. But if we do see that begin to improve, and we get incremental work, we've seen our incremental margins drive upward of 60%. And that can clearly help drive that EPS range as well.

And to follow up on this question, with the geopolitical situation, how is it affecting your business right now? And do you see any direct impact?

Well it's interesting. In Europe, we have actually seen an increase in our activity level in looking at unconventional plays. We've done some work here just in the quarter in Germany, revisited some work in Poland.

So I think that the geopolitical climate may be precipitating a relook at some of these unconventional plays, especially those tied to natural gas. So early days for that, but we do have some indication that some of the operating companies are looking at that pretty hard again.

Thank you. Appreciate it. Okay, Veny.

Your next question is from the line of Brandon Dobell.

Thanks. Good morning, guys.

Morning, Brandon.

Maybe a little color on comparing I guess old technology versus new technology and production enhancement in the established plays, versus some of the newer plays. I guess I'm just trying to figure out at what point some of these newer unconventional plays get big enough either from a production enhancement perspective or just a service perspective to offset the weakness or flat revenues in the established plays?

Yes. A couple fold there Brandon. Number one, with the emerging plays, we are seeing more and more coring and reservoir fluid activity from those. They clearly haven't offset the volumes that we got out of the major established plays.

But one of the things that we see going forward and we're concentrating on is, going to look at enhanced oil recovery techniques in these established plays. For instance, these techniques could utilize light hydrocarbon gas floods.

Where some of the, for instance, some of the flaring going on right now in the Bakken could be utilized I think very effectively for some light hydrocarbon gas floods. So, flooding from methane all the way through butane, injecting that back in the field to lift recovery rates.

Also, there's a project ongoing right now, small in scope, but they're actually trucking CO2 to a field and looking at a miscible gas flood. Again, very small scale. But if the economics work as we believe, you might see more exotic gases as opposed to going in by pipeline being trucked in.

And then thirdly, looking at alternating steam and gases for enhanced oil recovery, both in the Bakken and in the Eagle Ford. So a couple of positives.

We are seeing more corn fluids out of the emerging plays. We believe that all of the work from the established plays does get -- all the routine work and initial work does ultimately get replaced by looking at EOR techniques. Three, of which I've mentioned that day we're working on currently.

Any sense for, I guess let's call it a time frame, for when that or when you guys expect that to happen? I'm just trying to get a better hand on revenue dollars an revenue growth from newer things versus the older things. Is that a 2014 to 2015, or is it going to stretch out longer when those newer dollars start to replace the old dollars?

Good question. We are seeing some of the newer dollars now, but those are from our most technologically sophisticated clients. Once they usually indicate that these are working on their public company conference calls, we see other companies coming to answer that bell already.

So it is already a 2014 event. If that's successful, as we think, we see more of it in the fourth quarter and then certainly more of it in 2015.

Okay. And then a final one for me. In description, you guys called out the pipeline of international work. Maybe any sense of scale from a growth rate basis, a sequential growth rate basis. It sounded there's a lot of interest in projects, but are we talking things that will make a notable difference this year in that segment? Or is that more about work that's going to show up in 2015.

Currently, through QT, second quarter, our read is international up 1% or 2%, so not very exciting at all. As we mentioned on our May 12, call we are seeing some additional projects being commissioned. So we do expect some additional international dollars in the second half of 2014, really nothing to get excited about, but again that building in the year 2015.

Okay. Great. Thanks a lot.

All right Brandon.

Your next question is from the line of Philip Lindsey.

Yes. Morning, gentlemen.

Morning, Philip.

Two questions please. First of all, on the base perf gun situation. Your main competitor, I was talking to them recently, we're talking about record months through the Spring. And you just posted a record month in June.

So, that suggests to me that the industry is in pretty good shape, albeit with some competitive nuances. So perhaps you can discuss further the outlook for this particular industry in terms of demand and supply. And maybe you can add a geographical dimension to your answer.

Well certainly, North America is going to be playing a key role in that, as we see more lateral footage being drilled and more stages being shot. And we expect that trend to continue. You're going to see more perforating gun systems being used.

We see a very competitive advantage, as Monty already mentioned, with our Kodiak charges. Not only in the initial completion and stimulation of some of these horizontal well bores, but the recompletion and restimulation of those well bores.

Right now, less than 20% of our production enhancement revenues are tied to this basic technology. We project that going below 10% by this time next year. And I'll turn it over to Monty for some additional comments.

We think that we will see a lot of application of our advanced technologies. We can demonstrate better results to the operators from using the Kodiak and the HERO charges, versus a basic technology charge that might be available to them. So we have that competitive advantage.

We're working on some new technologies that we'll be talking about in the next conference call that will also enhance the recompletions, or the even new completions. We think that the increase in horizontal drilling, in particular, will benefit the production enhancement segment of the business.

That's where the growth is, is in the horizontal drillings. And that's going to be good for production enhancement, both the simulation diagnostics and the perforating business of course.

Okay, thanks. And then an unrelated question if I could.

A few of the European plays over the last week or so have been discussing how oil companies are becoming more contractual, or more legal in their approach to -- all as part of their approach to drive down cost in supply chain. Now clearly, you guys are not a contracting business. But I just wanted to get a sense of whether your own commercial discussions with oil companies have become more difficult of late?

Hey, Phil, this is, Dick. We haven't seen any change in that. I think of the type of service that we provide and are commodity-based. They're unique and [bespoke] project by project, so we haven't seen any change in the contracting methods of our clients.

All right. That's great. Thank you.

Your next question is from the line of Rob MacKenzie.

Morning, guys.

Hello, Rob.

I guess a lot of good questions so far. What I would like to try and see if you guys could do for us is, tie that together for us. Through the what uses are on FlowProfiler, and the other growth initiatives you guys have well in place here.

Any kind of stab at what kind of growth profile that might mean over a 1 to 3 year time frame? And it's clearly to the deceleration this year, partly impacted by exiting a couple markets. Are we still at the same growth profile, or do we have to adjust our thinking?

I think if you look at our forecast for going forward and thinking that most of that growth profile is going to come out of production enhancement, you'll see a little additional growth from some of these deep water cores, and some help from international. I don't basically see any change in the past growth profile going forward.

Great, thank you. I wanted to come back to FlowProfiler specifically. You guys have started highlighting that recently. It's basically being introduced as we speak.

Help us understand, if you will, what is the market potential for that technology? It's an unserved market niche, effectively a new technology to help optimize production there.

It would seem to me that it could be quite large, but I have no way to start quantifying that. Can you help us with that?

Hard to quantify, but we think it will be our largest product or largest service introduction in production enhancement ever. It all depends how many operators are going to use that in their horizontal well construction.

How big was the most recent largest one?

Well, you have HTD blast, which we went from about a $30 million opportunity, now to over $60 million in opportunity. We are projecting FlowProfiler, certainly, to be above that.

Great. Thanks very much. I'll turn it back.

Okay, Rob.

Your next question is from the line of Stephen Gengaro.

Thanks. Good morning, gentlemen.

Morning, Stephen.

I wanted to just follow up on, as we think about 2015 and beyond and your traditional perimeters of growth relative to worldwide activity levels. Do you think we resume that level next year?

And again, if Brent crude prices stay where they're at, it supports every major international development that we know of. And so, does the activity level follow that? We would expect to see that right now.

But sooner or later, we will see that happen. And that's why we continue our dedication and focus to deep water developments. Certainly, those projects are being recalibrated from a cost standpoint, but, Stephen, we see no reason why that shouldn't happen.

Okay. Thank you.

Okay, Stephen.

Your next question is from the line of Darren Gosfesia.

Hey, thanks, guys. I was curious, so as we go forward and you look at some your legacy on maturing unconventional plays, and you're saying that coring activity is slowing a little bit there. What is that saying about the life cycle of the plays, and how you guys sell into it?

What I'm hearing is, is that the initial delineation and coring work that was done up front is (technical difficulty), and now the enhanced recovery part of production enhancement is accelerating. Is there a different way to think about that? Are there nuances to the life cycle, as you guys look to sell products into these plays?

No. I think you've hit it right on the head. Most of those will not be products though. Most of those will be services associated with dynamic flow regimes in and around these shales.

The other thing, let me add to that, is on the reservoir description side. While there would be fewer cores, we will have fluid activity -- fluid testing that continues on, and actually probably grows as more drilling takes place in those plays.

Yes. And again, that being associated with delineating effective EOR projects.

So it's being agnostic to segment, so the slowing activity is a natural pause within the life cycle of the play that should reaccelerate. And that's what you're telling us for back half guidance flowing into 2015?

Correct.

Understood. Now separately, when you think about -- you're talking about work offshore. It strikes me that you guys do well in plays once you go into the development phase. Obviously, there's been a lot of debate about activity and off shore on the development side. Is your visibility such that development work should start to accelerate your work if some of these off shore projects, and that's embedded in what you're telling us?

Yes. As Monty said, we've already mobilized for projects in the deep water Gulf of Mexico. There are nine major coring projects scheduled there for the second half. We've mobilized on a number of those already. So, that's rolling out as planned.

Remember last year in the second half, there were five major coring programs scheduled for the deep water Gulf of Mexico. We had risked adjusted that to three. We actually got all five, and that's why you saw beats in Q3 and Q4 last, and that was that extra revenue that came along with us getting those two other jobs that came along with that.

Got you. So basically, so I gather that In line with guidance is, we obviously started the year on expectation set on a one trajectory. Given a couple of the factors we just discussed, that had to slow down for the first quarters. But it seems like you reaccelerate that trajectory into the second half and into 2015.

Yes, and that's what our guidance is. In the deep water Gulf of Mexico, essentially no deep water cores were cut in the first half of the year. So we did an 0 for there, and we're hoping five for nine in the second half. If we go six or seven for nine, yes, we'll be at the high end. A little less than that, maybe where our conservative guidance is at.

And you go nine for nine at some point in 2015?

We hope that's exactly right. Well, maybe we go five for nine, and then get the other four in 2015.

Yes, that's what I am saying. All right, well thank you. I appreciate the clarity and the color.

Okay Darren.

(Operator Instructions)

Your next question is from the line of John Daniel.

Hey, guys. Dave, I just have --

Morning, John.

Good morning. I've got two really macro questions for you. In the past, you've had a pretty good insight into rig activity. And as you probably know right now, we're seeing all of the land rig contractors accelerating their new build programs.

And simply extrapolating the current new build cadence for both the public and private guys, it seems probable that we're on a run rate to build close to 200 rigs in 2015. And so with that as a backdrop, do you see the US market being able to absorb that many rigs next year?

All depends on some of these emerging plays, so keep an eye on how the TMS, the SCOOP, the [Codell], how these other plays evolve. If they continued to evolve as they have, well with some of the expectation of some of the E&P companies that in there, the answer is probably yes. But I think it is very contingent on what the size and the development and the success in these emerging plays would be.

Now I'm saying that, going to pad drilling, I think that some of the older iron is probably going to get pushed out. So, does the new iron push out the old iron?

If it's 200 rigs, probably won't push all of them out. But if you get a little acceleration in some of these developing plays, some of the old iron gets pushed out. Yes, maybe those 200 rigs can go to work.

Last year, You guys accurately predicted the trend of more proppant per well. And clearly, that was a great call. At this point, are you guys seeing any signs by customers that given the shift or the likely shift of more or higher raw material costs, specifically with the sand and so forth, that they might find ways to shift back to using less proppant per well to save money?

John, we're still in the longer lateral. More stages, over pump proppant. If you look at the returns that you get, and you guys could easily run this and I think you guys have done some good work on this, if you look at some of the higher cost operators, their returns are higher as well.

You have operators out in the Permian Basin that on average spend $1 million more per well, but they're yielding an additional 400,000-barrels in ultimate estimated recovery. For me, that's a no brainer.

Okay. That's all I had. Thanks guys.

Okay, John.

There are no further questions.

I think Dick is going to make a comment.

I was just thinking about one of the earlier questions about some of the political event risks that are going on at the time. And we'd like to address our efforts that we've talked about on prior calls regarding Kurdistan. If you'll recall, prior calls we've talked about putting in a mobile facility there, and then finally upgrading that to a full fixed laboratory.

We have decided to put that on hold, because of the political risk events that are occurring now. And the equipment that we had acquired for that, are being put in other locations. It can drive revenue more currently.

So, we just wanted to update you on that. There's also been a variety of press reports about some of the conflicts between the different parts of the country. Of Iraq versus Kurdistan, and who controls oil rights, and who controls the ability of companies to operate. We've been named in some of that press, just as other companies have as well.

We see no impact on our business as a result of those discussions, because the one company that was reported to one of the Iraqi companies that was reported to control contracts, we really didn't do much business with in any case. So we don't see those events as a material change in our business in Iraq.

Any follow up comments on that, Monty?

No. I think most of that equipment is needed, and will be used in Kuwait. Not all of it, but most of it. As we've expanded that operation, and will be expanding that operation, obviously you never like for your plans to be disrupted by activities of war.

But we're happy to be able to redeploy that equipment, and in a very useful and productive way in Kuwait. We've hoped that some day we're back in Kurdistan, but there's no way to project when that might be.

To make clear, the projects that we're working there now in places like Abu Dhabi and up in Aberdeen, those continue on unabated. So from a political risk standpoint, we've taken some action, but work continues to come out of those locations.

So in closing, in summary, Core's operations posted another solid quarter. But we know we can do better, and we will. 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 oilfield service sector. This positions Core well for the challenges ahead. The Company remains committed to industry leading levels of free cash generation, returns on invested capital, and the return of excess capital to our shareholders.

So in closing, we'd like to thank all of our shareholders and the analysts that follow Core. And as already noticed by Monty Davis, the executive management and Board of Core Laboratories gives a special thanks to our 5,000 worldwide employees to making these results possible. We are proud to be associated with their continuing effort.

So thanks for spending your morning with us, and we look forward to our next update. Good-bye for now.

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