Core Laboratories Inc (CLB) 2014 Q4 法說會逐字稿

Good morning and welcome to the Core Laboratories fourth quarter 2014 earnings conference call.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to David Demshur, Chairman, President, and CEO. Please go ahead.

Thank you, Andrew. Good morning in North America. Good afternoon in Europe and good evening in Asia Pacific. I would like to welcome all of our shareholders, analysts, and most importantly, our employees to Core Laboratories fourth 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 a detailed operational review; and Chris Hill, Core's IR Analyst. The call will be divided into five segments.

Chris will start by making remarks regarding forward-looking statements. We will then come back and review market conditions and give an analysis of Core Laboratories' actions taken in 2008, 2009 downturn. Compare with Core Lab actions expected to be taken in the 2014 to 2015 downturn. Then some comments on some technological targets for the year 2015.

Dick will follow with a detailed financial overview and additional comments regarding building shareholder value, Core's first quarter 2015 outlook, and a general industry outlook as it pertains to Core's continued growth prospects. That Monty will go over Core's [three] operating segments. Detailing our progress and discussing the continued successful introduction of new Core Lab technologies that relate to completing, stimulating, and producing wells. And then, highlighting some of Core's operations in 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?

Before we start this conference call this morning, I'll mention that some of our statements that we make during the call may include projections, estimates, and other forward-looking information. This would include any discussion of the Company's business outlook.

These types of forward-looking statements are subject to a number of risks and uncertainties relating to the oil and gas industry, business conditions, international markets, international political climate, and other factors, including those discussed in our [34-f] filings that may affect our outcome. Should one or more of these risks or uncertainties materialize, or should any of these assumptions prove incorrect, actual results may vary from material respects from those projected in the forward-looking statements.

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. For a more detailed discussion of some of our foregoing risks and uncertainties, see item 1A, risk factors, in our annual report on form 10-K for the fiscal year ended December 31, 2013. As well as, other reports and registration statements filed by us with the SEC.

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

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

Well thanks, Chris. We'd like to look at market conditions and analyze some of the 2015 markets that Core Lab will be challenged by. Core believes that today's crude oil markets are in balance by 1 million to 1.5 million barrels per day. Using a net annual production decline curve rate of 2.5% on 89 million barrels of worldwide production daily, coupled with capital investment rates falling year over year by approximately 30%, crude oil markets should balance late in 2015.

Some general methodology in how we arrived at that. Looking at US supply and supply gains. First of all, looking at 2015, we used and removed some 800 to 1,000 rigs from the peak of the market in the fall of last year. In general, for unconventional production adds, we used a 70% decline curve rate in year one; a 40% decline curve rate in year two; and a 20% decline curve rate in year three.

We've applied those unconventional production additions in 2012, 2013 and 2014; and determined that the crude oil production that needs to be replaced, owing to these decline curves, exceeded over 2 million barrels heading into 2015. Moreover, at current prices, when one looks at the MPV of a well, compared to the company's or the operator's cost of capitals, additional wells will not be completed with current pricing. As over 60% of the well costs are tied to completion and stimulation costs.

Wells might be drilled, but they might be extended for their completion times. Just look at a recent report from Continental as an example. They have some of the best acreage in the Bakken. And, they're going to go from 50 to 31 rigs. And, they're going to weigh completion and stimulation events on every well drilled.

So this presents the backdrop from what we see as a significant supply destruction coming from North America and it may be as little as 300,000 barrels in additional production from the US this year. We have seen this scenario play out in previous downturns. None sooner than in 2008 to 2009.

As was the case in 2009, crude oil imbalances were caused mainly by slacking demand but not from overwhelming supply growth. These parameters hold similar to the 2014 to 2015 downturn. Albeit, supplies have been boosted by recent North American high decline rate production additions.

As was the case in 2009, Core sees a V-shaped recovery starting to occur in late 2015. And, that echoes comments from Harold Hamm most recently. During the 2008 to 2009 downturn, Core's share price went from an approximate high of $83 to a low of $30.

The Company continued to pay its dividend, aggressively repurchase outstanding exchangeable notes that were trading significantly low par, and repurchase shares, albeit, at lower rates due to the prevailing financial crisis. Shares then rebounded from that $30 level to $221 in 2014.

So far, during the 2014 to 2015 downturn, we've seen Core's price go from that high of $221 to approximately trading in pre-market conditions this morning at around $87 to $90. And, that may trade lower down to $85. During today's downturn, so far Core has increased its dividend 10% year over year and will aggressively repurchase shares using our free cash flow and new borrowings under our revolving credit facility, which we have recently expanded for such opportunities.

As we see little difference from the 2008 to 2009 downturn to today's current downturn. And, the transitory nature of the imbalances in today's crude oil markets, dividend increases and aggressive share repurchases will reward shareholders as these efforts did in 2009 to 2014. History does repeat itself and long-term Core Lab investors will once again be rewarded.

Now a quick review of Q4. In the fourth quarter of 2014, Core's operations produced our most profitable quarter in company history with record EPS net income, free cash flow, operating margins, and revenue.

Our operations, especially our reservoir fluids businesses, have not seen the structural decline we are so often have been recently asked about. Also, if you look at reservoir description operating margins, they confirm the expansion of our high margin reservoir fluids business. All of this is good news, but old news. As our industry has seen Titanic shifts, owing to sharply lower commodity prices, portending significantly lower activity levels in 2015.

In reviewing Core's first quarter 2015 guidance, as we've always stressed, investors and analysts should compare year-over-year results and projections for Core Lab. As opposed to sequential quarterly comparisons, as Core's business does realize seasonal variations. Especially from Q1 to Q4. Comparisons of our guidance to our Q4 results are in error.

Core will also continue to invest money to innovate technologies to boost daily production and maximize estimated ultimate recovery rates from wells worldwide. As new drilling in unconventional title plays fall in response to these lower prices, 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 the Eagle Ford from high single-digit recovery rates into the low teens. As these incremental barrels are the most economical in the reservoir. These new EOR technologies will continue to generate high margin revenues for years out. As the reservoir fluids markets will become more sophisticated and that market can only be served by Core Lab alone.

Moreover, Core expects to increase market penetration of our newly introduced FlowProfiler and KODIAK-related technologies, as Core's production enhancement segment produced record operating results in Q4. Again, providing value-added services needed in the low commodity market, will be targeted by Core Lab. As stated in our Q3 earnings, all of our operations are committed to posting future results that are equal or to greater than the CoreLlab standard that we put out over the past decade.

Our operations successfully navigated the 2008, 2009 industry downturn by reducing operating costs to maintain operating margins. Superior to all other oilfield service companies. We are diligently working on this standard today.

I will now turn it over to Dick for some detailed financial reviews.

Thanks David. Looking at the income statement, revenues were $278.6 million in the fourth quarter versus $276.3 million in the fourth quarter of last year, representing a 1% increase year over year. Revenues for the full year, $1.1 billion of record, as David said also up from a year ago totals. Of these revenue services for the quarter, $200.3 million. Down slightly when compared to $201 million last year. But, for the full year, services were up 2% on a year-over-year basis.

Product sales for the quarter were up 4%. For the full year they are up 1%. Moving on to cost of services for the quarter, 56.6% which was better. An improvement than the 57.2% of service revenues in the fourth quarter of 2013. And, cost of services also improved for the entire year to 57.6% from 58.1% in 2013.

Cost of sales in the fourth quarter, they were 70.5% of sales revenues. Which again, was an improvement better than the 70.8% of sales revenues in the fourth quarter of 2013. G&A for the quarter was $11.7 million, down from last year's fourth quarter. For the full year, G&A was $45.7 million. Representing 4.2% of revenues for the year. That's down when compared to 4.8% of revenues in the prior year.

Depreciation and amortization for the quarter of $6.9 million. And, that's up from that incurred in last year's fourth quarter. For the full year, depreciation and amortization expense was $26.7 million. Slightly higher than the $25.5 million in the prior year as a result of our capital expenditures aimed at technology, services, and products.

Other expense this quarter primarily includes foreign exchange losses at $2.1 million due to the strength of the dollar. The guidance we gave in our last call for the quarter, specifically excluded the impact of any FX gains or losses. So accordingly, our discussion today excludes this foreign exchange loss. A year ago the loss was $1.3 million in the same quarter.

Excluding those losses, we conform our guidance. EBIT for the quarter was $92.5 million. Which is up 4%, or almost 5% year over year. Our fourth-quarter EBIT represents margins of 33.2%. A quarterly high for any quarter for the company.

Full year 2014 EBIT ex-items was approximately $350.8 million. Up $14.6 million, or 4%, compared to that earned in 2013. And, our margins did expand once again by 100 basis points to 32.3%.

Interest expense is $2.9 million in the quarter and that's up from $2.5 million in last year's fourth quarter. And, the revolver balance increased by $89 million to accelerate our share buybacks. Income tax expense in the quarter was $21.3 million and an effective tax rate of 23.8%. We believe our full-year effective tax rate of 23% will also be the same in 2015.

Net income ex-items for the quarter was $67.8 million. Up 4.4% compared to 64.9% in last year's fourth quarter. And, for the full year ex-items, it was up 6.5%. For the quarter, earnings per diluted share ex-item noted earlier was $1.54. Compared to our prior guidance given on our last call of $1.53 to $1.56 per share. And, that's compared to the unreduced mean streak of $1.54 per share.

In spite of the recent, yet dramatic reduction in commodities and industry activity levels, our EPS is up 7.7% from $1.43 in last year's fourth quarter. EPS for the full year was $5.85. Up 10% when compared to the EPS of $5.32 in 2013. Our GAAP EPS for the year was $5.77. Up 9.3% compared to our GAAP EPS in the prior year of $5.28.

If we look at the balance sheet, cash very similar to last year's receivables. Improved our DSOs for 64 days for the full year and that's an improvement from 67 days in 2015. Inventories down year over year to $43.4 million from $46.8 million, reflected of a slightly slowing market. Other current assets were $37.9 million and that compares to $30.6 million at last year end. Primarily due to an increase in income tax receivable of $5.7 million.

BP&E is $149 million. That's up from the prior year-end balance. Again, that's due to our client-driven CapEx program. Intangibles did well in other long-term assets were $224.8 million. And, that's up from the prior year end. Again, primarily to an increase in the cash surrender value of life insurance.

On the liability side of the balance sheet, accounts payable is down slightly. Other current liabilities of $84.8 million virtually unchanged from the prior balance. Long-term debt, though, at year end was $356 million. That's up $89 million when compared to our long-term debt at the prior year end. And, that is, as David mentioned, because of our opportunistic share repurchases.

Remember, our debt is comprised of our senior notes, that are $150 million. As well as $206 million under our bank revolving credit facility. Other long-term liabilities ended the year at $93.8 million. And, that's up from $88.8 million, and that's primarily due to increase of $4.7 million in deferred comp.

Shareholders equity ended the year at $94 million. Down from the prior year end of $169.4 million. And, that's primarily due to share repurchases and dividends paid. Offset by additions from earnings.

CapEx in the quarter of $9 million. For the full year, $36.6 million and that is up from $35.4 million in the prior year as we were address opportunities created by our clients in 2014. Our CapEx program in 2015 will focus on projects that are client directed. As those projects should create our highest returns on invested capital. The total expected level for our capital investments for 2015 has not yet been determined.

Now, if we look at cash flow in the fourth quarter, cash flow from operating activities was $97.8 million. After paying our $9 million in CapEx, our free cash flow was $88.8 million. The highest quarterly amount for any quarter. In the quarter we used our cash to pay approximately $21.9 million in cash dividends and to repurchase 408,328 shares. For the full year of 2014, cash flow from operating activities was $303.4 million. All free cash flow after paying for our CapEx program was [$257] million. Again, a record for the company.

Now let's talk about guidance. As David said, we offer operators high technology services and products that optimize our clients' revenues, derived from the current production. As well as from ultimate recovery from their fields. In an industry downturn such as today's environment, we may experience some degree of insulation due to our proprietary technology, as well as a historical flight for our more technologically sophisticated clients to value-added service providers like Core Lab.

Our unique reservoir fluids technologies are expected to see continued growth as these services are critical in optimizing unconventional and deepwater developments. Our FlowProfiler services are expected to again realize greater market penetration. As is also the case for our KODIAK enhanced perforating system. Nevertheless, due to significantly and sharply lower commodity prices. Which we anticipate that North American land rig count will continue to fall sharply into the second quarter of 2015. Although, deepwater activity in the Gulf of Mexico should continue at or near fourth quarter 2014 levels.

International activity levels will decrease slightly. With the Middle East region continuing at a relatively higher level of activity. Therefore, our production enhancement segment will be most affected by the sharp North American downturn as it was in 2009. Our reservoir description and reservoir management operations are expected to be affected, but to a lesser degree. Accordingly, we began right-sizing our operational cost base in the fourth quarter 2014, and have continued that into 2015.

Development costs for new technologies and services will remain intact. While we plan to marginally trim client-directed, client -- or capital expenditures in 2015. Owing to our belief that crude oil markets will balance later in 2015. Before we project first quarter 2015 revenues to be down approximately 12%. And EPS to be down approximately 20% from year ago levels. Similar declines realized when compared to the 2008, 2009 industry downturn.

We believe our performance in the first quarter will be superior to industry activity levels that we project will be down more than 12% year over year. As North American activity levels will be down significantly greater than 12% year over year. Decremental margins for our production enhancement operations will weigh on our overall first-quarter results. We project first quarter 2015 revenue of approximately $230 million and EPS of approximately $1.05 to $1.10. Which does factor in recent Ruble, Euro and Canadian dollar weakness versus the US dollar.

Just a quick point to remember, we are a year-over-year managed company, not a sequential-quarter company. We're not a driller with contracts. Rather we move with industry spend. Which is seasonal. As the oil companies wrap up their annual capital budgets at the beginning of each year and then go about spending that CapEx during the year, which generally means that their spending ramps up as the year progresses.

Q1 is always, most of the time, lower in activity than the preceding fourth quarter for that reason. We look at how Q1 compares to the prior Q1. So this guidance was derived by reducing our prior Q1's revenue by 12%. Which is just the same as occurred in 2008, 2009.

The rapid contraction of the North American rig count, coupled with the suspension of the completion and stimulation of recently drilled wells, will likely cause year over year first quarter decremental margins of approximately 80%. Which does match our recent incremental margins. Decremental margins going forward should improve as we take further action to right-size our operational cost structure in future quarters. That being said, free cash flow in the first quarter of 2015 is projected at approximately $50 million.

All operational guidance excludes any foreign currency translations and any shares that may be repurchased other than those already disclosed and assumes an effective tax rate of 23%. We are unable at this time to provide full-year 2015 annual guidance with a high degree of confidence. Now I'd like to hand the discussion over to Monty, who will provide an operational update.

Thanks, Dick. The fourth quarter of 2014 was our best quarter ever. Setting records for revenue, operating income, excluding FX, and operating margins. The credit for these achievements goes to our 5,000 employees around the globe and we thank them.

Reservoir description revenue of $131.7 million was up slightly sequentially. And, operating earnings of 37.3% were increased 2.8% to over, I'm sorry, over Q3 2014. Operating margins of 28.3% improved 60 basis points from the prior quarter, and reaching our highest in four quarters. Meeting these margins higher has been the structural expansion of the high end of the reservoir fluids market that only Core can serve.

Recently, our reservoir fluid services group completed a number of US enhanced oil recovery projects to investigate the viability of miscible gas injection into their reservoirs. These reservoirs had been on water injection for several decades to the point that their oil production was barely sufficient to sustain production costs.

The EOR studies included targeting of the minimum miscibility pressure at which the injection gas would displace oil from the formation most effectively. Miscible gas injection is extremely efficient at replacing much of the remaining oil. So, it makes sense to investigate the feasibility of available gas to flood these older reservoirs. In some cases, carbon dioxide is available. But, as the natural gas is abundant, it makes sense to test both to review the economics of one over the other.

Core Lab's worldwide expertise in determining the optimum gas composition and injection pressure is unsurpassed. The EOR studies performed in our state-of-the-art laboratories investigate compositional changes that occur as a result of gas mixing with oil. How much the oil swells. And how the mixed fluid viscosity is reduced. All of these factors, along with the core flood experiments, factoring in a variety of rock qualities, allow our clients to calculate the amount of additional oil that may be recovered by this rejuvenating process.

In the majority of these cases, these viability studies confirm to the client that gas injection makes economic sense. In addition to providing the fundamental information required to determine gas injection viability, Core's reservoir fluid services group also investigates those factors that might mitigate the effectiveness of gas injection. One of these factors includes the destabilizing, the heavy components of the oil, may lead to deposition of organic solids and asphalt teems in the reservoir production tubing.

Our [confidence] of EOR testing programs review whether asphalt teem deposition is likely to cause injectivity issues. Thereby, leading to a reduction in the dispersion of gas through the reservoir. Which it may in turn lead to reduced displacement and lower oil production. The testing of treatment chemicals to mitigate any organic deposition that may occur during the gas injection process is also part of our study and a key piece of information client engineers need to optimize their reservoir management plans.

Performing EOR viability studies to investigate gas injection project economics is one way that Core Lab assists our clients to recover the latent potential in their current oilfield assets. Gas injection EOR projects can be an alternative to risky and expensive exploration projects. Producing a known oil from a known source, with production facilities already in place. Core's technology is used to tap the undiscovered potential of these old oil reservoirs and help our clients optimize their return on investment. Core Lab believes EOR is the future of the reservoir fluid business and has expanded facilities and put in place state-of-the-art equipment to position ourself as the provider of these services in the years to come.

Core-developed digital rock characterization services continued its rapid growth in Q4. Digital rock characterization, DRC, which is primarily an imaging-based core analysis program, was started in February 2014 and developed using our extensive expertise in geology and rock property analysis. This expertise gives us unique modeling capabilities and brings real value to our rock -- digital rock characterization services.

Across the globe it is well documented that image analysis of core rocks, can provide a plethora of petrophysical information. This information can range from purely qualitative and visual to numerical, modeling, calibration-based, quantitative data. The project and concept require low to very high resolution imaging equipment. State-of-the-art imaging combined with extensive core analysis-based calibrations using Core Lab's global core analysis experience provide fast, detailed, and reliable data, which in turn helps operators describe reservoirs in a much more detail than ever before. The first level of imaging is obtained by high-frequency CAT scanners.

The extensive modeling, based on Core Lab's lab measurement knowledge, DRC provides a virtual geological core description. Integration of this description with spectral gamma scan provides detailed lithological information. Mostly within a week of coring. Core Lab performs this services in Houston, Denver, Bogota, and Abu Dhabi currently, and plans to extend these capabilities further in 2015.

The second level of imaging provides micro core level x-ray information and utilizes a micro CT scan. Various petrophysical properties: porosity, permeability, capillary pressure, electrical properties, et cetera are calculated using high-resolution 3-D rock models and advanced rock-based software. First level of imaging, combined with core analysis-based calibrations provides a quick look into reservoirs. Accurate sub-sampling and models based on higher resolution levels, lead to very detailed reservoir description and can resolve some industry-wide upscaling problems.

The Core Lab DRC approach represents a significant improvement over competitors' deliverabilities, due to the extent to which we ground-truth our interpretation and modeling. Using first, geological input in the form of actual laboratory-derived mineral composition. And secondly, actual physical measurements of capillarity and permeability. Our digital rock models therefore, have a real quantifiable physical basis and are not purely theoretical.

Production enhancement revenue of $124.1 million was the highest in company history fourth quarter, and grew 7.7% over Q4 2013 and 1.6% sequentially. Operating income was $45.7 million and grew 10% over those of Q4 2013. Operating margins of 36.8% were up 80 basis points over Q4 2013. Demand for our diagnostic services remained high through the fourth quarter as clients continued to test various strategies to stimulate the highest percentage of the reservoir rock in the most cost-effective way.

Our FlowProfiler service continues to grow and gain market penetration. We expect this to continue as the FlowProfiler brings great value to our clients. Currently, we are seeing a common theme where clients are moving from the well-building mode to putting more attention to optimization and best practices. Return on investment is a driver and our global technology team of regional engineering advisors and diagnostic services are an important solution to help our clients quickly determine the optimal way to exploit their reservoirs.

Our fracking experts and regional engineering advisors are mining our extensive database of re-frac diagnostics data over the last several years. And, are helping our clients determine how best to target re-fracs as a way to gain production without drilling. The early wells in a field are not optimized. Leaving large percentages of unstimulated rock. These are prime candidates for re-fracs, and our diagnostics are even more critical in these environments because diversion techniques and strategies need to be optimized.

Offshore activity continues to be strong and our PACKSCAN and other complementary services continue to be critical to these operators. On our recent projects, our diagnostics identified that a gravel packed operation completely failed. All surface data identified the job as a success. However, troubles pulling out of the hole caused fluid losses that washed the gravel pack away. This knowledge from our PACKSCAN enabled the operator to pull the completion and re-gravel pack successfully. Saving hundreds of millions of dollars in potential lost production due to gravel pack failure.

Proven technologies such as HERO, SUPERHERO charges and the HTD-BLAST drove record quarter revenues as clients continued to look towards Core Lab for more effective perforating techniques to optimize frac results. The use of Core Lab's proprietary HERO HR charges, specifically designed and engineered to achieve maximum penetration in hard compressive strength formations, have been adopted by numerous clients, both domestically and internationally.

Recently, Core Lab has been responding to multiple client requests to utilize KODIAK technologies both in North America and international arenas. KODIAK propellant stimulation technology enables operators to reverse mature wells, zones in the decline. As well as stimulate extremely long horizontal zones simultaneously. This is an example of operators taking advantage of Core Lab production enhancement technologies to capture value by increasing production at a much lower investment level. This will be even more important in the current market.

Then, reservoir management revenues of $22.7 million were up sequentially 1%. Yielding operating income of $9.6 million An increase of 25% over Q3 2014. Operating margins of 42% were the highest ever. Up 820 basis points over the prior quarter. Reservoir management had a strong fourth quarter due to a combination of projects, sales, and the initiation of new projects both in North America and internationally.

In the US, reservoir management experienced high demand for our projects in the Permian and Appalachian basins. Our project in the Delaware basin that focuses on reservoir characterization and fracture stimulation well performance increased membership to 29 companies targeting the Avalon, Bone Spring, and Wolfcamp reservoirs. The Midland basin project increased membership to 51 companies. This project is directed at improving an operator's well performance through the integration of geology, petrophysics geomechanics, fractured stimulation design and post-frac production analysis. Well performance has continued to improve by this integration process for optimization.

Reservoir management also experienced a resurgent of interest in our Marcellus, Upper Devonian, and Utica - Point Pleasant projects in the Appalachian basin. We added more members to the Marcellus project, bringing the total to 55. However, most of our client interest has been directed at the expanding Utica - Point Pleasant gas play in Pennsylvania and West Virginia. We now have 20 member companies in this project and expect this number to grow based on the high gas rates being reported from exploration wells.

Also in North America, reservoir management initiated new projects during the quarter. These consist of the Montney Phase 2 and Wilrich Sandstone projects in Canada and a project targeting the Upper Cretaceous oil-bearing formations in the Powder River Basin of the US.

Internationally, reservoir management completed an interim report on its Mozambique reservoir and a field study to study participants ahead of the current license round close. The project will be completed during Q1 2015.

Also in the quarter, we initiated two new Atlantic margin studies, an extension to our Brazil equatorial basin data set and Atlantic Ireland. Atlantic Ireland held a new suite of deepwater projects in the northern Atlantic. Q4 saw continued demand for our South Atlantic portfolio both in Africa and Brazil.

As Dick mentioned and as was mentioned in our press release, our decremental margins that we expect as we right-size the business are in the 60% range. We are right-sizing our operations around the globe, as applicable to prepare for the future of 2015. We will now open the call for questions.

(Operator Instructions)

Ole Slorer, Morgan Stanley.

Yes, thanks for that and congrats with a record quarter.

Yes, that's old -- Ole, that's old news.

Yes, I know it's very old news at this point. I think it's difficult to have a view on anything at the moment without having some view on how global oil demands, supply versus demand, is incrementally moving. You mentioned 1 to 1.5 million barrels of excess capacity at the moment. Production versus -- are you talking about production relative to consumption? Or, production capacity? There's been another firm commenting a little bit about the difference of the two. Wonder what your view on this issue is.

And, also how we are moving. You gave some color on North America. Maybe you could also elaborate. So, at what point do you actually see North America production sequentially rolling over when with the down year over year? And, also where else in the world do you see issues with production emerging as a result of current CapEx cuts? And, on declines, you mentioned the IA number. But, I would imagine that the decline is also a function of reinvestment in the field. So, if you could shed some light on your views on that.

Okay, very good, Ole. Well, starting with the methodology that we use to look at US production, pretty much frame that in the unconventionals. So, if you apply those numbers, and -- I gave general numbers. But, when we apply the specific numbers to the individual basins, there is a possibility, depending on the number of wells that are drilled, completed, and stimulated, that we could see a reversal in production gains from unconventionals in the US sometimes in the fourth quarter of this year. So, that's why we are predicting, as we did back in 2008, 2009 as a V-shaped recovery.

Because, as you look at rising oil prices, the cost of capital, net present value of wells -- I think right now in the Bakken, you've got 775 wells that have been drilled but have not been completed and stimulated. So, there is a backlog. That backlog will start to be eaten into when crude prices get to a level where it makes sense for those operators to complete and stimulate those well bores.

Worldwide, areas that I -- we think that will be the hardest hit with respect to challenges on maintaining production, look no further than Russia. This will be a high decline rate environment. When we look at the amount of investment that's gone in, the investment needed, that certainly will be one area that is certainly susceptible to high levels of production declines, somewhere on the order above our worldwide decline curve rate of 2.5%. Continuing certainly in the North Sea, where we will see decline curves exacerbated, due to the lack of investment. Other areas that production gains might be muted would be Central and South America and some portions of West Africa.

Thanks for that, David. Let's clarify, and it's a year-over-year of reversed low gains. So, if fourth quarter reversed low gains to mean year over year, that, in the fourth quarter is when you expect year-over-year declines?

That is correct.

That clarified that. Secondly, looking at your business in its context and comparing it with the world you now describe as a cycle of multitude that's similar to the last one you entered. At that point in time, you went down, I think, about 12% or so, 12.5% year over year, third quarter 2008 to third quarter 2009. You're guiding something similar to that now here in the first quarter. Your business from a revenue mix.

But, you know direction is reasonably similar. But, you're now making much more money out of a couple of high-tech products. Do you think that it makes you more vulnerable as operators, you know, cut back on anything they can cut back on? I mean the HERO chargers and FlowProfiler are certainly nifty products. But, are you at risk of a bigger decline, you think, compared to the prior cycle? Or, should it be similar? How do you think about that?

Well, because we do have a higher level of production enhancement revenues at higher margins, it could look dissimilar with 2008, 2009. Just because when you look at margins in production enhancement, they are so much higher and it is a higher percentage of our business.

That being said, with rolling out FlowProfiler and things like our KODIAK energized perforating system, I'll turn that over to Monty on some comments on market penetration of those that might certainly meet those declines that we would see due to lesser activities.

Thanks, Dave. I -- we have spent the last two weekends with key client groups discussing exactly those products and a few others that -- how they can derive more value in what they're doing. How they can derive value from their reservoirs by using these services, these perforating methodologies and products, to enhance what they're doing and get more out of it. Those two client groups are very well received on these. A lot of interest in expanding the use of both the FlowProfiler and, in particular, the KODIAK energized perforating systems, to enhance what they're going to be doing in this coming year.

We have a couple more of these sessions planned and scheduled -- on the schedule with some more key clients in the coming couple of months. And, we are encouraged that our market penetration will, in fact, increase as the clients seek the best value in what they're doing.

Well, that's my two questions. So, thanks for that answer.

Okay, Ole.

James West, Evercore ISI.

Morning, Dave. Morning, Dick. Monty.

Morning, James.

Dick, quick question for you on liquidity at this point. And, I'm sorry if I missed this earlier. But, how much do have available to repurchase stock at this point?

Yes, what David referred to was our revolver going up to $350 million.

Right, and I --

And so, what we gave on the call about the amount drawn at $206 million. So, we've got another say, $144 million.

Okay, okay, got you. And then, in terms of timing of getting back in the market. You've obviously not reported earnings. When can you start buying back stock again? Can you buy it back, I mean, today your stocks were down, it looks like, pretty large. Can you get back in today or do you have to wait a few days?

We follow the various NYSE and Euronext rules. And, when we have all inside information public, those restrictions don't apply at this point.

Okay.

Let's just say when we -- yes. James, when we're back in we will be certainly aggressive buyers at these levels.

That's what I figured. I wouldn't expect any less. Thanks, guys.

Okay, James.

Chase Mulvehill, SunTrust.

Thanks, Dave. Thanks, Dick.

Morning, Chase.

Hey. Just wanted to touch on the reservoir description. I think most guys I talk to kind of struggle with how to model this. So, if you can kind of just help us understand, you know, how much of this segment is driven by exploration spending and kind of OpEx or production related spending. And then, talk to how much of this segment, you know, is driven by NOCs, you know, excluding PEMEX and PETROBRAS. And then, how much is driven by, kind of, IOCs.

Okay, think about a reservoir description in its total being a very international, very crude oil-related business. So, if 85% of their revenues are generated from reservoirs, fluids, and rocks outside of the US -- so, that would be one parameter. It is a very development- and production-oriented business. So, it doesn't have a lot of exploration component.

You need only look to 2008 and 2009. I think those revenues were down just a couple percent or 3%. And, we would expect that in 2014 and 2015 as well. So, think about that as a stable platform. Looking at fields that are already under production. Projects related to enhanced oil recovery projects, both on the fluids and the rock side.

And, as we've tried to make the theme of this earnings release, the importance of reservoir fluids, especially high-end within Core, is this is a business that essentially Core has a wide technological lead on all others. We've been asked many times about this structural decline of this business. We don't know where this is coming from. But, certainly, when I look at that business, it is growing double digits, year over year over year. So, that part of the high-tech fluids business is certainly a bellwether in coming and holding revenues and holding margins in that business.

Okay. Thanks for that color. One quick follow-up. Just so we're not surprised as we move forward to 2Q. And, I know -- there's a lot of -- there's not a lot of visibility. But, if we think about, oh, what happened in 2009. And, we look at year over year, not quarter over quarter. The peak year-over-year revenue declines, they were 17% if we looked at it quarterly. And so, is that a fair assumption, to say that, you know, you won't do worse than 17% year over year as we roll forward into 2015?

A little too early to tell on that. Let's see how the Q1 rolls out and how many rigs go down. And, that's why we didn't give any further guidance. Perhaps on the conference calls from other oilfield service companies, they will venture to put some information -- some solid information on there, on what they see in Q2.

Okay, and decrementals would be much better than 60%?

Well, we're striving towards that and we've got to rightsize our cost base, which we are doing today.

Okay, awesome. Thank you, fellas.

All right, Chase.

Phillip Lindsay, HSBC.

Yes, good morning, gents, thanks for taking my question.

Yes, Phillip.

Two questions, if I could. It's also on some reservoir description related. When you look at the six or so flagship labs that you have internationally. Where would your main utilization concerns be, you know, outside the U.S?

I suppose, if we look back at the last downturns in 2009. Slightly unusual performance, I thought, from the business. Margins were actually up on lower revenues. Can you just remind us, wasn't something one off in nature about that performance with the mix particularly favorable, for example? Or, do you think you can actually repeat that, the -- this time around?

I don't know, Phil, if we can repeat it. But, remember back in 2008, 2009, we did have a good bit of support of worldwide deepwater developments. That's a little lesser today. Although, we do remark that we think that the deepwater Gulf of Mexico will be a stalwart in adding, or maintaining a revenue base with the possibility of maintaining or increasing margins. And also, we've made a number of comments on Core's reservoir fluid business also being some support for those revenues.

Areas of weakness that we anticipate in taking actions on would certainly be Canadian operations. Our advanced technology center in Calgary would be one. And then, the other would be the Asia-Pacific arena, with our flagship lab in Kuala Lumpur. Other than those two, we say -- we see steady as it goes through the year, even though international spending probably will be down somewhere on the order of 10%.

Okay. Surprising to hear Europe or Aberdeen absent from that.

Yes, Phil, as you know because you visited there -- heavy in the fluids business. And so, they are a prime example of the market share and the technological lead we have in those businesses. And certainly, our -- that is our worldwide leading fluids lab. So, it's no surprise to us that they're not included in those remarks.

Okay, all right. Second question. Let's get your views on rig productivity, as well as well productivity, today versus 2009 or previous downturns. Obviously conscious of the mix is different today. So, what is your view on how production rates may fall versus previous downturns?

I think they'll fall -- we think they'll fall higher. Because if you think about all of the methodology that has been used, what are we trying to do? We're trying to speed up when we capture that MPV. So, when we look at the number or the length of the lateral, the number of stages that are being used, the number of proppant that's being pumped, it is indeed to capture that MPV in a quicker period of time. So, when you look at decline curve rates in these unconventionals, you'll actually see that they have increased over the years -- slightly, but due to capturing that MPV in a quicker part of time.

Okay, all right. That's great. Thank you.

Okay, Andrew, we'll take a couple of more questions.

Rob Mackenzie, Iberia Capital.

Hey, guys. Couple here, some of it related to what we've heard before. I guess, one of the questions I get from investors a lot is what does the next upcycle look like. And, to put it into context, you know, and use some of your language, we have seen, apparently, a decline in spending on some of the established unconventionals. Which plays do you think are likely to be, you know, the -- and the relevance of each one? The primary driver's, of course, growth in the next upcycle.

Well, certainly, international deepwater will go to the forefront once again. Probably followed by activity levels in the Middle East. So, those would be the -- really the two that we continue to concentrate on. You've got to mention unconventionals. You've got to keep that in the -- certainly, in the listing of areas on the upturn when we get a rebound in crude oil and crude oil prices. So, I would think that would frame it, Rob.

Okay, that's very helpful. Thank you. And calibrating your, kind of, if you can give us some color on your guidance for the first quarter. I understand, you know, the high decrementals. But, if you were to normalize for, you know, not being able to keep up the cost, and say, you know, if you were able -- or put another way, if you were able to cut costs commensurately with the decline, where do you think that EPS number would be, you know, once you get the costs lined up with that level of activity?

The EPS number, probably with revenue down 12%, decrementals somewhere in the 20s -- so, probably somewhere on the order of -- I'm doing the math in my head -- about 28. Something like that. I think that mathematics works.

And, do you expect a similar kind of quarterly progression this time versus, say, 2008, 2009?

Don't know yet. Let's see how Q1 goes out and how many rigs do go down. We have been surprised by the number of rigs that have gone down since the peak. We think that trend continues.

Okay, thanks. I'll turn it back.

Okay Rob.

Okay, and, due to time constraints, is there time for one more question, sir?

Yes, we'll take a couple of more, Andrew.

All right. Kurt Hallead, RBC.

Hey, good morning.

Good morning, Kurt.

Interesting times indeed. Yes, I was just kind of curious, Dave -- they've taken the line of questioning this way, right? This kind of reminds that if you kind of look at a lot of the rhetoric and commentary and rig count drops and, you know, production curve increases on a crude oil. I don't know. There could be a lot of the similarities that were made a couple of years ago about natural gas and how natural gas production curves are going to roll over.

And, I understand that there's dynamics there that was associated. Natural gas could mask those elements. I'm just wondering, when you look at this dynamic, and the questions that we've been getting about duration of a lower oil price environment -- you've already spelled out your scenario of a much more of a V-shaped recovery. But, when you've gone and kind of risk assessed your outlook, what do you think the risk of that outlook could be? What could cause it to be less of a V and more of a U, let's say?

Production gains from -- unexpected production gains from other parts of the world. So, for instance, if you had unexpected production gains off of -- in the Atlantic margins area. We currently don't see those occurring. Or, rapid increases in production from projects in the Middle East. We don't see those occurring.

But, I guess that would be one factor that could make it a U or even tend to an L-shaped recovery. But, we just don't see that in the cards. We've got the laws of physics and thermodynamics that go to work everyday on the producing oilfields.

Moreover, if we look at the oil versus natural gas market, you have a contained market for natural gas here in the US. And, a much more stable production base in that market. As opposed to a worldwide crude oil market. Especially, when we're going to see exports of crude oil to the international marketplace, probably be approved in earnest over the next 1 to 1.5 years.

All right, cool. That's it for me, thanks.

All right, Kurt.

Blake Hutchinson, Howard Weil.

Good morning, guys.

Good morning.

I'll just keep it to one and keep it pretty open-ended for you, David, just because I'm tailing in here.

Thanks, Blake.

Yes, absolutely. Just -- I was hoping to get, you know, we've fairly well delineated, where we're going here in the US. And, I think you noted earlier that your international outlook is kind of predicated on risking the expiration side of the book and tuning it up versus the kind of 2008, 2009 time frame.

But, maybe you could just take us around in terms of your franchise, specifically. And, give us some of the positives and negatives that you see from your broad international franchise in 2015 over 2014. You know, either -- you talked somewhat about the product lines but maybe geographic winners and losers. Or, however you'd like to couch that to maybe give us a greater feel for how you think the international market unfolds for the year-over-year period.

Yes, as I mentioned, we have looked at the international market and we think spending year over year can be as down as much as 10%. With some of the areas being the most affected, would be Central and South America, parts of the West Coast of Africa, certainly North Africa, Asia Pacific. We -- certainly Russia. We would see higher levels, relevantly higher levels of activity levels for us in Middle East and in North Sea.

Okay, that's helpful.

Middle East being rocks and fluids, and North Sea primarily being fluids.

Great. And, I'll -- sorry, I lied, I just want just one point of clarification, Dick. We've talked a lot about 60% year-over-year decrementals for first quarter. Just so we're setting the first quarter right. I thought heard an 80% come into your preamble as well. Was that specifically directed at year-over-year production and enhancement? I guess I would think of that as being more, you know, maybe 100% plus decremental. Just making sure I didn't hear an 80% in there, incorrectly.

You heard me say that, but I was incorrect and misspoke. It's a 60%.

Okay, so sticking with the release. That's just -- want to make sure. Okay, appreciate that, and I'll end it there. Thanks.

Okay, Blake.

I would now like to turn the conference back over to David Demshur for any closing remarks.

Okay. I'd like to thank everybody for joining us this morning. In summary, Core's operations posted another all-time record quarter. But, we know significant challenges await in 2015. However, we've never been better operationally or technologically positioned to help our clients to maintain and expand their existing production base. We remain uniquely focused, and are the most technologically advanced reservoir optimization company in the oilfield services sector. The Company remains committed to industry-leading levels of free cash generation, returns on invested capital, and excess capital being returned to our shareholders.

So, in closing, we'd like to thank all of our shareholders and the analysts who follow Core. And, as already noted by Monty Davis, the executive management and Board of Core Laboratories give 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. Goodbye for now.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.