Core Laboratories Inc (CLB) 2014 Q3 法說會逐字稿

Good morning. My name is Bonnie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Core Lab Q3 2014 earnings conference call.

(Operator Instructions)

I will now like to turn the call over to Mr. David Demshur, Chief Executive Officer. Please go ahead, sir.

Thanks, Bonnie. Good morning in North America, good afternoon in Europe, and good evening in Asia Pacific. We'd like to welcome all of our shareholders, analysts, and, most importantly, our employees to Core Laboratories third-quarter 2014 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 a detailed operational review. And Chris Hill will join us as well; he's Core's 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 tenets by which Core's executive management executes the Company's growth strategy. We believe these three tenets have produced industry-leading shareholder returns and returns on invested capital. We will also discuss Core's long-held philosophy of returning excess capital back to our shareholders.

Dick will then follow with a detailed financial overview and additional comments regarding building shareholder value and Core's fourth-quarter [2004] outlook and a general industry outlook as it pertains to Core's continued growth prospects. Then Monty will go over Core's three operating segments, detailing our progress, and discussing the continued successful introduction of new Core Lab technologies as they relate to 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 over to Chris for remarks regarding forward-looking statements. Chris?

Thanks, Dave. Before we start this 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 34F filings, that may affect our outcome.

Should one or more of these risks or uncertainties materialize, or should any other 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 a result of new information, forward 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, 2013, as well as other reports and registration statements filed by us with the SEC and the AFM.

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

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

Great. Thanks, Chris. I'd like to give a brief investor update. During the third quarter of 2014, Core's operations produced our most profitable quarter in Company history with record EPS and in net income reported. Operating income margins also set an all-time quarterly high. Looking forward, Core will remain an internationally focused company, concentrating on crude oil-related developments, especially in deep and ultra-deep water environments. And although we've been affected by recent low activity levels in the international and deepwater theaters, we know, long term, that our focus will continue to benefit our long-term shareholders.

Core will also continue to innovate technologies to boost daily oil production and maximize estimated ultimate recovery rates. As unconventional tight oil plays mature 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 to boost recovery rates in the Bakken and in the Eagle Ford from high single-digit recovery rates to rates in the low teens. These new EOR technologies will generate high margin revenues for many years to come. Moreover, Core will continue to increase market penetration of newly introduced technologies, such as our flow profiler and Kodiak-related technologies, as Core's production enhancement segment produced a record operating result in the third quarter of 2014.

As stated in our 2Q earnings release, all of our operations are committed to posting future results that are equal or greater than the Core Lab standard over the last past decade. Our record third-quarter results are a good start.

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

Core follows a strict discipline for allocating capital for investment in growing our business. And, unless certain return on invested capital standards are met or exceeded, the capital expenditure is disallowed. This strict capital discipline produced quarterly levels of free cash flow of nearly $67 million for the third quarter of 2014. In fact, Core converted over $0.24 of every revenue dollar into free cash. Core's free-cash-to-revenue conversion rate of 24% is one of the highest, if not the highest, of all oilfield service firms, and exceeds the pre-tax operating margins of all major oilfield service companies that have reported Q3 results to date. As our top 30 shareholders say, who own 70% of Core Lab stock, free cash flow matters.

The second financial tenet is to maximize our 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 all oilfield service companies. Core's Board believes that the stock price performance over time is directly related to the Company's return on invested capital.

Based on our most recent calculations, available from Bloomberg, Core's return on invested capital was the highest of any company in its oilfield services comp group that is listed by Bloomberg financial. Also, Core 's ratio of return on invested capital to weighted average cost of capital was the industry's highest. As our top 30 shareholders say, high returns on invested capital matter.

Our third financial tenet is to return all excess capital back to our shareholders. During the third quarter of 2014, Core returned over $107 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. This was the most free cash returned by Core in any quarter in Company history.

At the end of the quarter, Core's outstanding diluted share count fell below 44.2 million shares, levels not seen since the third quarter of 1997. During the quarter, Core returned over $2.40 per share to our shareholders. Since October of 2002, Core's shareholder capital return program has returned over $1.93 billion or $45 per diluted share, to our owners. Collectively, we have lowered our share count by over 39 million shares.

We will continue to follow these three key investment tenets in 2014 and into 2015, which should enable Core to produce industry-leading returns for all of our shareholders. As our top shareholders say, returning capital matters.

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

Thank you, David. We look at the income statement. Revenues were $276.1 million in the third quarter, and that's versus $273.2 million in the third quarter of last year. As David said, this represents all-time third-quarter record revenues. Of those revenues, services for the quarter were $203.6 million, and that's up 5% when compared to $194.3 million last year. Product sales for the quarter, though, are lower, at $72.6 million, compared to $78.9 million in last year's third quarter.

Moving on to cost of services. For the quarter, they are 56% of revenue, an improvement compared to almost 57% in last year's third quarter and a little over 59% in the prior quarter. Our cost of product sales is 73.1% of revenues, and that is similar to last year's third quarter. G&A for the quarter is $12.3 million, about 4.5% of revenues, which is down from 5.3% in the third quarter of last year. For the full-year 2014, we expect G&A to be approximately $48 million. Depreciation and amortization for the quarter was $6.8 million, unchanged from last year's third quarter. We expect depreciation in 2014 to total approximately $27 million. Other expense this quarter primarily includes foreign exchange losses of $1.9 million.

The guidance we gave on our last call for this quarter specifically excluded the impact of any foreign exchange transaction gains or losses, so accordingly, our discussion today excludes this foreign exchange loss. And if you exclude those losses to conform to our guidance, EBIT for the quarter is $91 million, compared to $85.1 million in the last year's third quarter. EBIT margins were 32.9% for the quarter, up almost 200 basis points sequentially and 170 basis points from the third quarter last year. Our GAAP EBIT for the quarter is $89.1 million.

And we've also noticed a trend by some of the larger [caps see as] a contribution margin as their operating margin. This is where they exclude corporate costs like they don't exist and still call it an operating margin. While this is somewhat unorthodox in their choice of description as an operating margin, ours -- for comparative purposes -- would be north of 38%. This is a true testament to the notion that if you can create value for your clients, you can earn a good margin for your proprietary differentiated technology.

Interest expense is $2.6 million for the quarter, compared to $2.3 million in last year's third quarter. Income tax expense in the quarter is $20.3 million, based on an effective tax rate of 23%. We believe our effective tax rate for the full year will be approximately 23.5%.

Net income for the quarter, ex-items, is $67.9 million, up over 12% sequentially and 9% from $62.3 million, ex-items, last year, while our GAAP net income this quarter is $66.5 million. Earnings per share for the quarter is $1.53 on the same basis that our guidance was given and is above the EPS guidance range we gave last quarter. Our EPS is up by $0.17, or 13%, sequentially as well as year over year. Our GAAP EPS is $1.50 per share.

If we look at the balance sheet, cash is $25.3 million, which is similar to the prior-year end balance. Receivables stand at $201.8 million, similar to last year end. But our DSOs in the quarter improved, to 64 days, slightly better than the 67 days experienced for all of 2013.

Inventory, at $49.5 million, is up slightly from the year-end balance in anticipation of upcoming international product sales. Other current assets are $34.7 million, up from the year-end balance of $30.6 million, for the most part as a result of an increase in income tax receivable of $3.7 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.

PP&E is $147 million, up from the year-end balance due to our client-driven CapEx program. Intangibles and goodwill and other long-term assets are up $8.6 million for the year end balance of $218.3 million, due in part to an increase of $3.4 million in the cash surrender value of the life insurance and an increase of $2.7 million in deferred tax assets.

If we look at the liability side of the balance sheet, accounts payable is down slightly from prior-year end, and other current liabilities are down to $77.4 million from the year-end balance of $85 million, primarily due to expected incentive compensation. Our long-term debt stands at $370 million, compared to $333 million last quarter, and is comprised of $150 million in senior unsecured notes and $220 million drawn on our bank revolving credit facility. The increase in borrowings came as a result of our increased share buyback program that David discussed. As of today, drawings under our credit facility remain at $220 million.

Other long-term liabilities come in at $86.3 million, which is down slightly. Shareholders' equity ended the quarter at $101.8 million, down from the year-end balance of $169.4 million, and that's primarily due to share repurchases in excess of net income since the end of last year.

Capital expenditures for the quarter are $7.8 million. That is down from $9.1 million in the third quarter of last year. We do expect our CapEx program for the full year to be approximately $37 million. As you know, our CapEx growth is client directed for the most part, meaning that we will increase our capacity for locations or for increases in technology on the basis of discussions with clients about their specific needs. And, of course, that's one of the reasons why we've been able to generate our high returns on invested capital.

If you look at cash flow, cash flow from operating activities in the quarter is $74.4 million. And, after paying for our $7.8 million in CapEx, our free cash flow is $66.6 million. In the third quarter, we turned over 24% of our revenues into free cash flow. And that's certainly one of the highest cash conversion rates in our industry.

During the quarter, we used our free cash flow, cash balances, and borrowings to pay $22.2 million in quarterly dividends and to repurchase 562,913 shares for $85.1 million. Through close-of-business yesterday in the fourth quarter, we have repurchased a further 119,254 shares, at an average price of $139.41 per share, for an aggregate cost of $16.6 million. The outstanding indebtedness under revolver continues to stand at $220 million, compared to $117 million at the end of the year. Our diluted share count now stands, as of today, at 44.1 million shares.

Okay, let's talk about guidance for Q4. As a reminder, we generate approximately 70% of our revenue from projects originating outside the US. Over 80% of our revenue originates from crude-oil-related projects, and approximately 40% of our revenue is from offshore reservoirs, with approximately 20% of all of our revenues derived from deepwater developments.

We anticipate that fourth-quarter 2014 North American activity will continue to increase slightly for emerging unconventional oil plays, while activity will remain at stable levels in established unconventional tight oil and gas plays. We also anticipate generating revenue from five of the nine second-half 2014 coring programs awarded to Core lab in the deepwater 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 weaker Brent crude prices, we project flat activity levels through the end of 2014, and expect similar levels of activity entering 2015.

Fourth-quarter 2014 guidance does reflect a continuation of the higher activity levels experienced in the third quarter. In spite of recent crude-oil pricing weakness and continued softness in the near term or a wide deepwater environment, our fourth-quarter results are still expected to be up from the third-quarter levels. The effects of lower crude prices can be seen in the outlying areas of unconventional plays, as production growth rates continues to decelerate in the Bakken play.

If crude prices strengthen in the fourth quarter, then our guidance could prove to be conservative. We believe crude-oil markets will balance early in 2015, with crude-oil prices strengthening to earlier 2014 levels. Longer term, the world will continue to be challenged to increase global crude supplies, and the incremental barrel will continue to gain in value. Our technology focus, aimed at helping our clients produce those incremental barrels, position us well for continued future long-term revenue and profit growth. For the fourth quarter of 2014, we expect revenues of $275 million to $280 million, with EPS ranging between $1.53 and $1.56.

Exogenous events affecting our fourth-quarter 2014 EPS guidance include reduced profitability in Russia by $0.02 due to ruble depreciation; a cessation of work from Kurdistan impacting our guidance by $0.02; and slowing work from southern Iraq impacting our operations by $0.01. While no company, including Core Lab, created the sanctions on Russia or the spread of uncertainty in Iraq and Kurdistan, what we are saying is that, excluding those issues -- as was done for the other companies that operate in these areas -- our operations continue to perform very, very well, and our true operating margins continue to expand.

If you've run the math, and add the impact of those items to our current guidance, it actually exceeds our prior guidance for our underlying business. This perspective may have been missed.

Operating margins in the quarter are expected to continue at high levels and to be approximately 33%, 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 as a result of operational activity expected in higher tax rate jurisdiction.

Free cash flow for the final quarter is expected to range between $72 million and $77 million. All of our operational guidance excludes any foreign currency translation and any shares that may have been repurchased, other than those already discussed.

And now, I'd like to hand the discussion over to Monty for an operational review.

Thanks, Dick. I want to thank our employees for producing our most profitable quarter ever. Third quarter revenue of $276 million was slightly higher than Q3 2013 and Q2 2014. Operating earnings, excluding FX, grew 7% over Q3 2013 and 10% over Q2 2014. Operating margins of 33%, excluding FX, improved 170 basis points over Q3 2013 and set a new quarterly record high. Reservoir description revenue of $131.4 million grew 1% over Q2 2014 and was level with Q3 2013. Operating earnings of $36.3 million yielded operating margins of 28%.

In the third quarter, we expanded our digital core analysis services to Abu Dhabi and Bogota. This service, developed in our Houston advanced technology center, enables Core to integrate computer tomography images with laboratory-measured, petro-physical data sets. This combination of high-resolution CT images, together with Core's proprietary Nano-Perm and Shell services are used to quantify and calibrate petro-physical and hydrocarbon saturation properties of CT image to Core.

The success of this advanced technology in the US has encouraged Core to expand this service into its Middle East and South American operations, where business activity is high and the appetite for new technology in these regions is in great demand. We are adding new services in this product line regularly as the demand and revenue grow.

In addition to providing high-pressure enhanced oil-recovery and flow-assurance services for ultra-deepwater Gulf of Mexico projects, Core is actively involved in continental US EOR projects. EOR work continues to increase in the continental US across multiple basins, as projects continue for many operators. Several of these operators have developed multi-field projects that started in 2014 and are expect to continue through 2015. These projects integrate our sampling, PVT, and EOR services to evaluate and optimize the production potential of our US -- of their US unconventional plays.

Core was awarded a major geological contract for rock properties and reservoir geology in Q3 by Karam Petroleum in India. These contracts have a value in excess of $42 million over the next three years. With the award of these contracts, Core is now the major geological service company in India.

During the third quarter, Core introduced and successfully deployed its patent-pending Iron Core Hand. This unique, entirely self-contained device, and the associated services, employ a proprietary design developed by Core Lab staff in response to market information and express needs of our clients. Iron Core Hand was developed to address large diameter and other heavy core segments that would otherwise pose a risk of back and hand injuries during a two-man lift.

When deployed at the well site, Iron Core Hand dramatically reduces or eliminates safety risks associated with core handling. Seeing the obvious safety advantage of Iron Core Hand, a major Gulf of Mexico operator had us deploy the unit on successive core-handling jobs. The unit, and our highly trained well-site engineers, performed flawlessly. In addition to improving core-handling safety, Iron Core Hand reduced staff fatigue and accelerated the well-site core-handling process. With these successful deployments in hand, and the anticipated efficiencies confirmed, additional units are being constructed. The Iron Core Hand reflects the latest in a series of innovative designs intended to improve well-site safety, and illustrates Core Lab's tireless commitment to improving workplace safety for our employees and clients.

Production enhancement revenue of $122 million grew 10% over Q2 2014. Operating earnings were $46.7 million, which is growth of 25% over Q2 2014. Operating margins of 38.2% are an all-time high and increased 460 basis points over Q2 2014.

Operators are continuing to use our patented flow-profiler service to help optimize well spacing, fracture-stimulation size, and horizontal targeting. This has resulted in increased hydrocarbon recovery by identifying opportunities to stimulate more intervals along the well bores and layers within complex formations.

Our diagnostics identified that the fracture systems are more contained vertically than previously expected. This means that horizontal wells need to be landed at various depths within the reservoir to insure all layers are stimulated and produced. Our flow profiler continues to identify hydrocarbon-bearing rock that has not been contacted by the hydraulic fracture system. This information is driving changes to completion designs and development plans yielding increased hydrocarbon recovery.

In west Texas specifically, we have traced almost 150 wells, both vertical and horizontal. Several operators have used our diagnostics to adjust horizontal landing depths and targeted intervals based on the hydrocarbon productivity of certain intervals.

Core is concentrating our efforts in perforating-system sales of our higher-technology products to deliver value to our customers and returns to our shareholders, in preference to the commodity products, where price competition is a major factor. This reduces our revenue while maximizing returns for Core and our clients.

In the western US, an operator was unable to use conventional fracking procedures in his field, and decided to enhance their well completion with Core's patented Kodiak-enhanced perforating system and HERO HR -- High Efficiency Reservoir Optimization charges for Hard Rock. The perforating and simultaneous stimulation was tubing conveyed on a single run, with 5,544 feet of [guns] loaded with 25,560 HERO HR charges and 2,604 Kodiak propellant pellets.

The 39-gram HERO charges, the world's deepest penetrating, was 69.3 inches of penetration, and the Kodiak-accelerated propellant pellets were used to boost the effectiveness of the perforating/stimulating event as the customer was unable to use conventional fracking procedures in this field. The detonation of the perforating charge initiates a complex, sequentially oxidizing reaction of the propellant pellets, thereby generating a high-pressure pulse of gas. This pulse then initiates and propagates fractures -- sort of a mini-frac -- into the reservoir sequence, creating cleaner perforating tunnels, and improved hydrocarbon production and ultimate recovery rates.

Core's ultra-high-pressure, high-temperature perforating gun system was used to successfully complete a lower tertiary well on the shallow shelf in the Gulf of Mexico. Core's ultra-HPHT system is designed to withstand pressures up to 30,000 PSI, and temperatures of up to 470 degrees Fahrenheit, suitable for operating in the ultra-deep wells currently being drilled on the continental shelf in the Gulf of Mexico.

Currently, plans are being made for completion of an additional well in the same formation by the same operator. Core's perforating testing facility utilized in design and testing of the ultra-HPHT perforating system is expanding its capabilities to allow for testing up to 40,000 PSI, and 600 degrees Fahrenheit.

Reservoir management revenue of $22.6 million grew 2.1% over Q3 2013. Operating earnings of $7.6 million grew 18% over Q3 2013 and yielded operating margins of 34%, an improvement over Q3 2013 by 450 basis points.

Internationally, reservoir management completed deepwater projects in the equatorial basins of Brazil, and Phase II of the Cote d'Ivoire in West Africa. These projects extend our footprint in these rapidly growing petroleum provinces.

Our work is continuing in the Senegal Guinea-Bissau deepwater joint industry project. In East Africa, we are working with our partner IMP Mozambique to complete the Mozambique regional reservoir study in anticipation of the recently announced license ramp.

Overall, we have had high demand for our portfolio South Atlantic and transform margin regional data sets. On the unconventional side, reservoir management completed a fracture-stimulation optimization project for an operator exploiting tight-gas sands in eastern Australia. The operator will be implementing new stimulation designs and modifying their field development plans as a result. Reservoir management also signed a multi-year contract for evaluation of potential unconventional reservoirs in the Middle East.

In North America, demand has remained strong for our joint industry projects in the Permian Basin: 3 more companies joined our Delaware Basin project, bringing the total to 27; 2 more joined our Midland Basin project, for a total of 50 members. Both of these projects are focused on the reservoir characterization, fracture stimulation, and optimizing well performance of the Wolfcamp, Bone Spring, Avalon, Kline, and other unconventional horizons. In the quarter, reservoir management also completed a large proprietary pilot project that evaluated a new shale play in the Rockies.

Bonnie, we will now open the call for questions.

(Operator Instructions)

Our first question comes from Blake Hutchinson of Howard Weil.

Good morning, guys.

Good morning, Blake.

I'd like to start in terms of kind of broad strokes with some of your Brent commentary, I guess, both pertaining to Core and the industry. Is the kind of drawing of reference to the recent pullback in Brent to the more flattish outlook for many of your businesses more a realization of the reality that would have been similar around $100 Brent, and the recent pullback just kind of solidifies more of a flat outlook, and -- what I'm getting at here, is your opinion, from what you hear from your customers, of what level of Brent we really need to get the industry moving again. Is it $110? Is it $120 Brent the reality for what we need to induce a healthier spending environment?

Well, a couple of very complex question there, Blake. We looked at it, we had $110 Brent over the past several quarters, if not years, and we didn't see any large response out of international and/or deepwater activity really outside of the Gulf of Mexico. And that was due to just project delays in looking at trying to remove costs from some of these large offshore deepwater developments. We think those now start to come into play where those costs have been taken out. And certainly Brent, at over $90 -- the returns on those deepwater offshore projects, the returns are certainly there.

More impact we see are on the fringier unconventional plays with crude prices down near $80. I think we see that manifest itself when we look at the deceleration of the amount of production growth, for instance in the Bakken, going from an average on a monthly basis of somewhere around adding 27,000 barrels per month, now down to -- recently, the last trend is down to around 17,000 per month.

That being all said, and mixing that into a pot -- and vis-a-vis the growth prospects for the Company -- let's remember that, when we look at our service sales, those were up 5% year over year. When we look at our product sales, those were down collectively about $7 million year over year. Had we held them -- the product sales -- equal, our growth year over year on revenues would have been somewhere around 7% to 8% to 9%. Really parallel to other companies -- international companies that have reported.

But remember, we are on a march to reduce the amount of basic technology sold out of our product sales division. So, while our margins are marching higher, we do hurt ourselves from a sales standpoint by taking out sales of the basic commodity and replacing them with higher margin. We're just taking out more of the basic technology sales, right now, to try to reduce that from what is about 20% of those sales, or about somewhere on the order of several tens of millions, and replacing them with other product sales that are of much higher margin.

So, collectively, although we are hurting ourselves from the appearances of a revenue growth prospect, and certainly that is tied to Brent and WTI prices, we are also seeing an effect in there on, for us, lessening product sales on the basic technology side. Does that help?

Sure. Yes, no, absolutely. The mix impact is duly noted given Dick's comments on product sales and, obviously, the margins that were attained in PE. I guess, sticking to reservoir management, where I associate more of the Brent levered growth commentary would center around -- I mean, what specifically now -- you know, we kind of did broad strokes -- does that mean to Core Labs?

I guess when I think about the building blocks of growth, it's kicking off the 150 to 200 projects of the size that you're bidding on, kicking off. Does that change radically? Is there less velocity of activity on current fields that you're sticky on, or is this just an adjustment to the exploration portion of that reservoir management business?

Reservoir description, I believe you're saying.

Excuse me. Yes.

Yes. We're not -- we don't have a lot of exposure on the exploration side. That's less than 15% of our business. It is clearly related to the amount of year-over-year activity levels for reservoir description in the international theater and tied to deepwater. And, right now, we have essentially have those -- from 2013 to 2014, we have those flat, and you can see reservoir description is up 1%, 2%, 3% year over year.

We don't expect that to continue just because of a lot of these projects are now going to be commissioned. And some have already been commissioned: Total, deepwater, offshore, Angola; BP Mad Dog II coming up for commissioning here in Q1 of 2015. So, we think that breaks the dam on a lot of major development projects that we'll play a critical role in, and we'll get back to seeing those international and deepwater growth rates get back to where they are.

And those do have a benefit, not only from a revenue growth standpoint, but as you know, the incremental margins that we generate from those prospects, clearly seen out of the wells that we've already done in the deepwater Gulf of Mexico in Q3, have an impact not only on revenue growth, but more importantly on incremental margins and margin growth in reservoir description.

And, just finally, that comment probably holds at this current Brent.

Oh, correct.

Okay. Great. Thanks. I'll turn it back.

Our next question comes from Rob MacKenzie of Iberia Capital.

Good morning, guys.

Good morning, Rob.

David, I wanted to maybe dig some more into some of these percentages you've been throwing out. Can you give us a feel for what percentage of, specifically, reservoir description is targeting existing producing fields -- enhanced oil recovery-type work, and the like?

I would say about 85% of that business is targeting existing fields.

Okay.

15%, you know, really greenfield developments.

Great. And then, within production enhancement, am I correct in assuming that roughly three-quarters to 80% of that is the perforating business, and the other part is ProTechnics?

Rob, it's about two-thirds would be the products. One-third would be the diagnostic services.

Okay. And then, the products -- the perforating business, that would seem to be fairly directly tied to, I guess, primarily North American frac stage count, right, given that it's perforating?

Stage count is clearly the revenue opportunity for us for the entire segment. When you think about it, it's -- we can sell a product into each stage, and we can do diagnostics on each stage. So, that's a reasonably good metric to use for that segment. However -- cautionary -- one-third of that segment is outside of the US, which is not necessarily as tied to stage count.

Right. Just regular perforating and the like. Okay. Great. That does it for me for now. Thank you.

Okay, Rob.

Our next question comes from Phillip Lindsay of HSBC.

Good morning, gentlemen. A couple of questions, please, a general one first. What assumptions are behind your assertion that the oil market will balance out early next year? Do you, for example, assume that we do get an OPEC cut, or that US shale activity or investment slows? That's the first question.

And then, the second question -- do you think that you'll, or you can still, maintain that 200 to 400 basis points outperformance versus the overall market in a flat or even down market? Does that rule of thumb still stand in your financial planning?

Yes, Phil. Welcome. Indeed, the 200 to 400 basis points, based on just historical performances in up and down markets, we believe that to be the fact. And that whole case holds -- the case, we know no reason why that shouldn't be. The philosophy of the Company to generate new technologies and to enter new fields holds today as it has in the past.

With respect to the balance of the crude-oil markets, we now see a deceleration of the growth of production from many of the maturing shale plays, liquids rich, in the US. Moreover, remember, worldwide, we have a 2.5% net decline curve rate that we will apply. And, if history bears true, we will see some small cuts out of OPEC. That's our philosophical thinking and the reasoning why we think those oil markets balance early in 2015.

Okay. All right. Just one last follow-up, if I could. I don't know whether you'll get around to this or not, but, would you be prepared at this point to give any directional guidance on your CapEx for next year? Do you think you'll be lower, higher, or similar?

It, of course, is directed by our clients, and so we're going to be watching their budgets, but it could well be lower as a result of their lower activities. Or, as David said in earlier commentary, if commodity prices do recover, we could see a change. Because it is client directed.

All right. Thanks.

Okay, Phil.

Our next question comes from Brandon Dobell of William Blair.

Thanks. Good morning, guys.

Hello, Brandon.

How much visibility or confidence do you have in the pipeline for EOR projects or some of these deepwater coring projects that have been a bit tough to predict so far this year? As you look into 2015, how much visibility on the pipeline do you guys have?

Into 2015, on the EOR side for some of the maturing shale plays and other plays -- pretty good set of confidence in that, because we know those are going to occur. Certainly, the crystal ball is not as clear on deepwater, owing to where commodity prices will go. If, indeed, the oil markets do balance, as we think they would, we think we'll have a good chance to have some excellent upside from this year, both from international activities and also from deepwater developments.

Okay. You went through a decent explanation there on FlowProfilers and other products and how they're impacting frac design. What kind of changes are you seeing producers make in response to what they learn from FlowProfiler? And are they using different spacing, more or less proppant? I guess I'm just trying to figure out how they're taking the data to increase recovery rates on those wells.

The biggest impact that we found from FlowProfiler is the landing of horizontal wells, in what were thought to be pretty homogenous shale sections. We know that salicious stringers that run through there restrict the growth of frac height, so it is important that, let's say, on a pad, if we've got five wells coming off of one side of that pad, that those all be landed -- depending on the complexity of the formation, that is -- where those horizontals are landed. We probably would no longer land those all in the same zone.

As a matter of fact, in some cases, we've seen those five be landed in five different zones to insure that contact was made when the well bore was hydraulically stimulated with all of the potential producing zones. So, I think the biggest upshot out of this is the spacing of the horizontals, but far more importantly, the vertical landing of those wells in that horizontal reservoir.

Okay. And, final one for me. You talked about getting recovery rates in some of these mature basins up from single digits to mid teens or so --

Low teens?

Sorry, lower teens, not mid teens. How much evidence do you guys have that the products and services you provide are doing that? Is it a small subset of wells? Is it a large subset of wells? How much reference ability do you guys have to sell to new customers from successful projects?

Yes, still a small subset of wells, and a small subset of clients. But the clients that are the ones that are investigating these have been the first movers in the maturing unconventional plays for different completion techniques -- read that longer laterals, more stages, closer clusters, more proppant.

And it's the same subset of companies that are looking at these EOR techniques that, when we can see that those will be successful, will be followed on by the others that are exploiting some of these mature shale plays. No reason why that shouldn't be the case.

Got it. Okay. Thanks a lot.

(Operator Instructions)

Our next question comes from John Daniel of Simmons and Company.

Hi, guys, good morning.

Good morning, John.

Just a couple from me. Do you think that, in the current oil price environment, let's just say, if prolonged into early next year -- if that perhaps delays any customer adoption of new product offerings, thus potentially adding an element of risk to further margin expansion?

I don't think so, because they're going to get -- in implementing these new technologies, they're all based on looking at increasing recovery rates in those incremental barrels. John, those are the cheapest barrels that they have already in place.

So, maybe as opposed to drilling new outlier wells in fringier areas, or outlying areas, they concentrate on well bores and developments already in place, and they look at implementing some of these EOR techniques. It's the biggest bang for their buck.

I don't disagree. But I think that's a good theory. But, as you know, some of these cats will do whatever they can to lower well costs at the expense of what's the right long-term decision. I just didn't know if you've seen that in the past -- people looking just at short-term lower costs versus the longer-term benefit.

We have seen that from some clients, but I would say that I wouldn't put that into the risk profile yet.

Fair enough. Just another crystal ball question for you, Dave. At this point, your view on the worldwide rig count, in terms of growth next year?

You have to give me a crude-oil scenario, and if the crude-oil markets do balance -- let's say WTI gets back to $90, Brent gets back to $100 to $105 -- I think we see flat rig environment in North America, and you see additional activity internationally.

Okay. What if I were to be more cautious and say $85 WTI, $95 Brent? Just moderately lower.

Brent, really no change. Maybe a little bit on the margin. You had WTI where?

$85. $80, $85. In that range.

You probably have some rigs going down. Again, it's these fringier zones of the Bakken, the Eagle Ford -- those. The Niobrara. You have less wells drilled in the TMS. So, that's what you're looking at.

Fair enough. Housekeeping one for you, Dick. The G&A guidance calls for $48 million for the year, which suggests about $14 million in Q4. Is that just end of the year related stuff, or is that a new run rate into 2015?

It's not a run rate. It's your typical Q4.

Okay.

And it could prove to be less.

All right. That's all I have. Thanks.

And, John, one follow-up on that rig count, especially in North America. I think all eyes need to be on the stage count as well. Because we still believe that we have longer laterals, more stages, tighter perf clusters, more proppant. We think that, that certainly continues.

All right. I've got one more, if there's not a long queue. Just a quick one here. On the whole proppant per well, you guys were very early on and(inaudible) about talking about the benefits of more proppant per well. At this point, have you seen any examples to suggest that these mega wells -- the 15, 20 million pounds of proppant per well -- if we're overdoing it, and we might actually see better well results if we dial it back a tad?

I wouldn't say that we haven't seen any of those, but the overwhelming majority have benefited from that.

Yes.

If you start out with rock that is not so good, you end up with returns that are going to be not so good.

I think it's a two-part question, John. One is from a science perspective. They've proven to provide better output. The economics question is totally different. We can't -- it's hard for us to respond to.

Fair enough. Okay. Thanks, guys.

Our next question comes from Veny Aleksandrov of FIG partners.

Hey, guys.

Hello, Veny.

Good morning. My question is about these offshore projects that you have been talking about. There were nine of them, and you were talking about working on five. What happened to the other four? Are they still alive? Are they post 2015, what's going on?

All of those projects, still at this stage, are alive. And so, will all of them be done? I would say our doubts are going to be higher in 2014. But those that are not being done will be pushed into early 2015. Of course, as in our commentary, we still see being on target to at least do five of the nine that we have risk adjusted.

Great. And my next question is, you mentioned that if oil prices recover in Q4, your guidance for Q4 might turn out to be conservative.

Correct.

If we have any positive impact, are we going to see it on the production enhancement side, or both the production enhancement and the reservoir description?

Probably both.

Both.

Yes.

Thank you so much. Appreciate it.

Okay, Veny.

(Operator Instructions)

We'll take one more.

Our last question comes from Robert Bellinski of Morningstar.

Good morning. Thanks for taking my call. You mentioned in the release that newer unconventional plays are offsetting slower activity in the established plays. I'm just wondering, by how much are these newer plays offsetting? Is it one to one, or --? And then, second, how much runway do you see in these new plays at this point, especially if WTI happens to stay at recent levels?

Yes, I would say the replacement is almost one per one now. And, what was your second question?

How much runway do you see in the new plays, in terms of activity?

Certainly with supporting WTI prices, so $90. A lot of these emerging new plays, there will be sweet spots developed in them. And we will see activity levels there. There will be smaller sweet spots in a number of those that we named, maybe outside of what we suggested in the Permian Basin. But we still think there's a great deal of runway there.

Thanks.

Okay, Bonnie, we're going to go ahead and wrap. So, in summary, Core's operations posted another all-time record quarter, but we know we can still 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 optimation 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 and returns on invested capital, with all excess capital being returned to our shareholders.

So, in closing, we would like to thank all of our shareholders and the analysts that follow Core. And, as already noted by Monty Davis and the -- the executive management and the Board of Supervisor Directors of Core Laboratories gives a special thanks to our 5,000 worldwide employees that have made these outstanding results possible. We are proud to be associated with their continuing achievements.

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

Thank you. This concludes today's conference call. Participants may now disconnect.