Q3 2022 Core Laboratories NV Earnings Call
[music].
Good morning, and welcome to the Golub audit fees third quarter 2022 conference call.
All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the stocky followed by zero.
After todays presentation, there will be an opportunity to ask questions.
Last quick question.
Yes.
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Please note that this event is being recorded.
I would now like to turn the conference over to Mr. Larry Bruno <unk>.
Chairman and CEO . Please go ahead.
Thanks, John .
Good morning in the Americas, Good afternoon in Europe Africa, and the Middle East 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 2022 earnings call.
This morning, I'm joined by Chris Hill, Core's, Chief Financial Officer, and Gwen Gresham course, senior Vice President and head of Investor Relations.
The call will be divided into six segments. When we will start by making remarks regarding forward looking statements will then have some opening comments, including a high level review of important factors cores Q3 performance. In addition, we will review core strategies in the three financial tenets that the company employs to build long term shareholder value Chris.
Chris will then give a detailed financial overview and have additional comments regarding shareholder value.
Following Chris Glynn will provide some comments on the companys outlook and guidance.
Will then review Core's, two operating segments detailing our progress and discussing the continued successful introduction and deployment of core lab technologies as well as highlighting some of Core's operations and major projects worldwide.
And then we will open the phones for a Q&A session.
I'll now turn the call over to Gwen for remarks on forward looking statements.
Before we start the conference. This morning, I'll mention that some of the statements that we make during this call may include projections estimates and other forward looking information.
Include any discussion of the company's business outlook.
The types of forward looking statements are subject to a number of risks and uncertainty that could cause actual results to materially differ from our forward looking statements. These risks and uncertainties are discussed in our most recent annual report on Form 10-K, as well as other reports and registration statements filed by.
For us with the SEC and the ASM.
We undertake no obligation to publicly update or revise any forward looking statement, whether as a result of new information future events or otherwise.
Comments also 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 Larry.
Thanks Glenn.
For the third quarter of 2022 core lab achieved sequential improvement in revenue operating income operating margins free cash flow EPS and EBIT margins.
Year over year revenue increased by 7% for.
For the full company EBIT margins for the third quarter grew to 11% and operating margins improved sequentially in both business segments.
Following Q2 strong 43% sequential incremental EBIT margins, even after accounting for currency devaluations of the euro and the British pound full company sequential incremental EBIT margins for Q3 grew to over 55% once again reinforcing the operational leverage available to core lab.
As global activity improves sequentially.
Sequentially EPS grew by 50% to <unk> 18 per share ex items.
In the third quarter, we saw a modest sequential improvement in demand for lab work and our European Ukrainian and Russian operations as global trade patterns continue to realign.
While we anticipate this trend will continue the situation does pose uncertainties and potential volatility for both lab services and product sales in the company's Russian and Ukrainian in European markets.
Aside from these uncertainties, we expect continued improvement in both business segments across international arenas and in the U S for the remainder of 2022 and into 2023.
Core continues to execute on its key strategic objectives by one introducing new products and services in key geographic markets to maintaining a lean and focused organization and three maintaining our commitment to delevering the company.
Now to review core lab strategies, and the financial tenants that core has used to build shareholder value over our 26 plus year history as a publicly traded company.
The interest of our shareholders clients and employees will always be well served by core labs, a resilient culture, which relies on innovation leveraging technology to solve problems and dedicated customer service.
I'll talk more about some of our latest innovations in the operational review section of this call.
While we navigate through the current challenges and pursue growth opportunities. The company will remain focused on its three long standing long term financial tenants those being to maximize free cash flow maximize return on invested capital and returning excess free cash to our shareholders.
Before moving on I want to thank all of our employees for their dedication loyalty and adaptability and meeting all of our clients' needs and for the commitment that many have shown as we navigate the moment and prepare for a more active market I'll now turn it over to Chris for the detailed financial review.
Thanks, Larry before we review the financial performance for the quarter. The guidance, we gave on our last call and past calls specifically excluded the impact of any FX gains and losses and assumed an effective tax rate of 20%. So accordingly, our discussion today excludes any foreign exchange gain or loss for current and prior periods.
So now looking at the income statement revenue from continuing operations was $126 million in the third quarter up over four.
<unk> percent from $120 9 million in the prior quarter and up almost 7% year over year.
The sequential increase in revenue was driven by growth in both the U S and international markets. However, nice growth in the underlying operations in multiple international regions has been partially offset by the devaluation of the euro and British pound, which I will expand on later in the discussion.
Additionally, although we have seen some improvement the Ukraine, Russia conflict continues to adversely impact service revenue in the affected regions.
Of this revenue service revenue, which is more international was $87 9 million for the quarter up 3% sequentially from $85 4 million last quarter.
The growth the growth in service revenue this quarter has come from multiple international and regions, including some recovery from disruptions caused by the conflict in Ukraine.
While underlying activity continues to grow our international service revenue was negatively impacted by foreign currency exchange rates versus the U S. Dollar.
Using a constant US dollar international service revenue would have been translated into an additional $1 5 million when compared to last quarter and an additional $4 3 million when compared to Q3 of last year.
The impact of these currency movements during the first nine months of 2022 was approximately $9 million compared to the same period in the prior year.
Product sales, which are more equally tied to U S and international activity were $38 1 million for the quarter up over 7% sequentially and up 15% from last year.
U S product sales for the quarter were up over 22% sequentially and up over 13% year over year.
Our energetic product sales into the U S markets continues to be the primary driver and were up over 19% sequentially and up over 20, 27% year over year.
International product sales, which are typically larger bulk order orders and can vary from one quarter to another decreased approximately 4% sequentially, but were up over 16% when compared to third quarter last year.
Moving on to cost of services ex items for the quarter were a little below 77% of service revenue, which improved from 80% last quarter and 79% from last year.
Cost of sales ex items in the third quarter was 82% of revenue and also improved from 84% last quarter.
The improvement this quarter was primarily driven by gains in manufacturing efficiencies and higher U S sales.
We anticipate improvement in the manufacturing absorption rate in future quarters to be in line with projected growth in product sales.
G&A ex items for the quarter was $10 million relatively flat compared to last quarter.
G&A ex items is anticipated to be approximately $40 million for the full year of 2022.
Depreciation and amortization for the quarter was $4 2 million and down a little from $4 4 million last quarter.
EBIT ex items for the quarter was $13 3 million up from $9 6 million last quarter, yielding an EBIT margin of 11% and up over 260 basis points sequentially. This quarter marked the company's highest sequential incremental margin since the COVID-19 pandemic.
On a GAAP basis, EBIT was $14 6 million for the quarter.
Interest expense ex items was $2 9 million up from $2 7 million in the last quarter.
GAAP interest expense was $3 1 million, which includes writing off 210000 of unamortized debt costs associated with renewing our credit facility during the quarter.
Income tax expense ex items at an effective tax rate of 20% was $2 1 million for the quarter and on a GAAP basis was $3 9 million for the quarter.
Higher tax expense for the quarter was largely impacted by foreign currency gains primarily in the U K.
Our unrealized foreign currency gains associated with U S. Dollar denominated receivables are subject to tax locally.
Company has taken additional steps to further mitigate this type of foreign currency risks to reduce future tax expense associated with foreign exchange rates.
The effective tax rate will continue to be somewhat sensitive to the geographic mix of earnings across the globe and the impact of items discrete to each quarter. However, we continue to project the companys effective tax rate to be approximately 20%.
Income from continuing operations ex items for the quarter was $8 3 million up $2 8 million or over 50% from the last quarter.
On a GAAP basis, we recorded income from continuing operations of $7 6 million for the quarter.
Earnings per diluted share from continuing operations ex items was <unk> 18 for the quarter up from 12 last quarter and GAAP earnings per diluted share was <unk> 16 for the quarter.
Yes.
Turning to the balance sheet receivables were $100 2 million and up slightly from $99 1 million in the prior prior quarter.
Our dsos for the third quarter were at 67 days, which improved from 69 days last quarter.
Inventory was $54 8 million as of September 30th up approximately $2 2 million from last quarter and <unk>.
Inventory turns for the quarter were at $2 three compared to $2 four in the last quarter.
As previously highlighted the company continues to experience an increase in cost that go into inventory. Additionally.
Additionally challenges in the supply chain persists. So we continue to carry a larger amount of inventory to help mitigate disruptions.
We anticipate inventory turns will remain at similar levels with some improvement as we progress through the remainder of 2022 and into 2023.
On the liability side of the balance sheet, our long term debt was $185 million at the end of the third quarter and considering cash of $14 million net debt was $171 million or a slight decrease from last quarter.
At September 30, our leverage ratio improved slightly and was $2 42 compared to $2 47 at last quarter end.
We are projecting our leverage ratio to continue improving through year end with a more significant improvement in the first quarter of 2023.
Our debt is currently comprised of our senior notes at $135 million as well as $50 million outstanding under our bank revolving credit facility.
Looking at cash flow for the third quarter of 2022 cash flow from operating activities was $5 8 million and after paying for $2 7 million of Capex in the quarter. Our free cash flow was $3 1 million are up $5 7 million from the last quarter.
We expect the growth in working capital to moderate cash from operations to strengthen and for the company to generate positive free cash flow in future quarters.
We'll continue managing capital expenditures to be in line with activity levels for the remainder of 2022 for.
For the full year of 2022, we expect capital expenditures to be in the range of $11 million to $12 million.
Core will continue its strict capital discipline and asset light business model with capital expenditures, primarily targeted at growth opportunities and operating efficiency initiatives.
Core lab's operational leverage continues to provide for the ability to grow revenue and.
And profitability with minimum capital requirements.
Capital expenditures have historically ranged from two 5% to 4% of revenue even during periods of significant growth that same level of laboratory infrastructure intellectual property and leverage exists in the business today.
We believe evaluating a company's ability to generate free cash flow and free cash flow yield is an important metric for shareholders, when comparing and projecting companies' financial results, particularly for those shareholders, who utilize discounted cash flow models to assess valuations.
I will now turn it over to Gwen for an update on our guidance and outlook. Thank you Chris.
As the fourth quarter 2020 to unfold.
Dissipates the crude oil commodity prices to remain near current levels that may fluctuate in response to the crude oil supply and demand uncertainty.
Slowing global economic growth inflationary pressures and government imposed COVID-19, lockdown in China.
Over the long term crude oil supply is projected to tighten as production growth basis limitation data private long underinvestment in many regions around the globe as a result.
Expect operators to expand their upstream spending plans into 2023 supporting Coors outlet for continued improvement in international onshore and offshore activity with projects emerging across most regions.
These crude oil fundamentals, our leading indicators for what core seed at the strengthening multiyear international recovery.
Turning to the U S.
We expect U S onshore activity to remain steady and modestly grow in 2023 and operators remain focused on capital discipline and availability of additional frac crews and drilling rig may be constrained.
As a result for the fourth quarter 2000, 2022, Core's reservoir description segment revenue is projected to be flat to up slightly.
While momentum in international activity continues to bill near term growth may be affected by two factors.
Volatility associated with the Russia, Ukraine, geopolitical conflicts and client driven project delays.
Production enhancement segment revenue is estimated to increase by mid to high single digit as U S. Land activity is projected to remain steady and international growth continuing.
For the fourth quarter of 2020 'twenty.
Core projects U S activity to remain stable in the recent improvement trends in international offshore and deepwater market to continue.
To project fourth quarter revenue to range from 126 million to 131 million and operating income of 13 million to 15 million, yielding operating margins of approximately 11%.
EPS for the fourth quarter is expected to be 17 to 21.
The company's fourth quarter guidance is based on projections for underlying operation.
<unk> gains and losses and foreign exchange fourth quarter guidance also assumes an effective tax rate of 20% now.
Now ill pass the discussion back over to Larry.
Thanks, Glenn first I would like to thank our global team of employees for providing innovative solutions integrity and superior service to our clients. The team's collective dedication to servicing our clients has been very visible during the current challenges and is the foundation of core lab's success.
Turning first to reservoir description for the third quarter revenue came in at $79 million.
Up 4% compared to Q2 when.
When looking at growth in revenue for reservoir description. It is important to consider the sharp devaluation of the euro and the British pound. These.
These currency devaluations lowered reservoir description revenue when translated into U S dollars by approximately $1 5 million for the quarter.
As compared to Q2 and year to date by approximately $9 million for 2022 compared to 2021.
Operating income for reservoir description ex items was $8 4 million and operating margins were 11% even after accounting for the currency devaluations I just mentioned quarterly sequential incremental margins for reservoir description, we're still over 70%.
As we look ahead, while still well below pre COVID-19 levels, we see the growing international rig count as a harbinger of an improving landscape for reservoir description a trend that we project will play out for the next several years, particularly in the Middle East North and South America and most other regions.
Now for some operational highlights from the third quarter.
Core continues to leverage its global reach expertise and proprietary technologies to evaluate core and reservoir fluid samples from a multi well exploration program in the deepwater Orange basin located offshore Namibia.
Conventional core recovered from targeted strategic stratigraphic intervals.
Were scanned using core lab's noninvasive technologies for reservoir optimization branded as Nitro.
A wide range of critical Petro physical parameters for pay delineation, we're generating using core lab's innovative measurement and modeling techniques, allowing for rapid delivery of data and early time assessment of the recovered strata.
Selected samples are now progressing through the traditional time honored program of physical laboratory measurements.
Recent successes in the midyear have generated renewed interest in core Lab's regional study of reservoir and seal rocks from offshore Namibia. This study conducted in collaboration with the National oil company of the midyear includes geological analysis of samples for more than 20 wells.
This study is just one of 'twenty two multi well multi company studies that core lab has conducted of sedimentary basins offshore Africa.
In other developments core lab is pleased to announced that during the third quarter of 2022 quantum energy partners and trace midstream management joined cores carbon capture and sequestration consortium, bringing total membership to eight participants these.
These new members enhanced the consortium has exposure to both private equity engagement and midstream operations expertise and the emerging carbon capture and sequestration market.
The objective of the consortium is to analyze geologic risks and challenges associated with carbon sequestration, leveraging <unk> expertise and subsurface characterization.
Regulatory entities that govern carbon sequestration projects require extensive site evaluation.
Core technologies to ensure that the models for simulation and monitoring of Sidoti injection and sequestration are built on a robust datasets and are applicable for the permitting process.
Moving now to production enhancement or core lab strengths in both energetic systems and completion diagnostics help customers optimize their well completions.
Revenue for production enhancement came in at $47 million up 4% sequentially and up 20% year over year.
Operating income ex items was $4 7 million.
Operating margins were 10% for the third quarter of 2022 and sequential incremental margins were 44%.
During the third quarter of 2022 core lab continue to build on its on the success of its proprietary plug and abandonment perforating system called <unk>, which is used for oil and gas well abandonment programs Korolev provide solutions that leverage its expertise and energetics as an alternative to traditional casing billing which is.
Slower and more costly.
Thus far in 2022, who are successfully deployed its Pac technologies and over 30 wells in the North Sea.
Of course pack energetic solutions are often used in Perth wash cement applications. This technique enables the operator to selectively establish circulation in the annual ish base between casing strings, thereby creating pathways for setting the permanent cement plugs required for well abandonment.
Over on the service side of production enhancement operators continued to leverage <unk> expertise and completion diagnostics for offshore wells during the third quarter of 2022.
Core spectra Stim spectra scan and pack scan downhole imaging technologies were utilized in deepwater Gulf of Mexico, Miocene wells to evaluate single and dual zone Frac pack completions.
In addition to those technologies Coors flow profiler oil diagnostics, where you used to assess to production.
Ultra deepwater Gulf of Mexico reservoirs involving multi zone completions.
The cost associated with completing multiple wells and these high stakes deepwater wells necessitates confirmation that each frac pack is properly configured in each targeted zone is contributing oil production as per the completion plan.
Recently Core's production enhancement team was tasked to deploy a unique flow profiler diagnostic tracer and each of four Frac pack completion zones Core's proprietary laboratory analytical techniques on produced oil samples confirmed that all four zones, we're contributing to production.
Flow profile are also healthy operator, I understand how the reservoir was responding allowing them to adjust flowback procedures to achieve the drawdown pressures that would optimize production without damaging the reservoir.
Of course completion diagnostics are a critical tool for determining whether planned completion programs were successfully executed downhole, many thousands or even tens of thousands of feet away from the wellhead.
That concludes our operational review we appreciate your participation in <unk>, we will now open the call for questions.
Thank you very much.
We will now begin the question and answer session.
I'll ask a question you May press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
Draw. Your question. Please press Star then two.
At this time, we have advanced momentarily to assemble our masters.
The first question comes from Stephen Willey from.
From Stifel Financial Corporation. Please go ahead.
Thanks, Thanks, good morning, everybody.
I think two questions from me if you don't mind.
If we could start on the on the reservoir description side and I understand the FX issues and.
And headwinds when we what we are kind of consistently hearing from.
Other service companies.
Even larger.
<unk> is.
We're on the cusp of kind of pretty strong international growth.
'twenty, three and 'twenty four likely.
How should we be thinking about the R&D business in that environment, I mean should we start to see <unk>.
Consistent double digit year over year growth in that business I'm, just trying to trying to get a sense for how the growth rates should look at I mean looking at history that would seem to be reasonable that I'm trying to put together the puts and takes here.
Yes, Stephen I think Thats right.
We.
I agree that we're starting off for a heading into a multiyear up cycle that is going to really benefit reservoir description as we've talked about with you and with.
Other analysts and investors reservoir description by its nature tends to lag directional trends.
We've been saying that for a while.
It held in very well when COVID-19 hit and a lot of the.
So sort of service companies that were more exposed to well construction and all really went down sharply reservoir description held in very well.
Now.
Those leading indicators of an increased activity the international rig count being a very good bogie for that.
Gaining traction we see that going forward.
Aligns very well with our client discussions and so our reservoir description that was going to start.
Making headway there in terms of its margins, which were 11% or so for Q3 and we think.
It may not be as linear as anybody has any of us would like but we think that it's the beginning of a nice upcycle and getting back into some nice double digit margins.
Great. Thanks, that's helpful. And then obviously the quarter was really strong on the margin side when when we look at the energetics business in the U S land market it sort of seems to have evolved in there.
There seems to be a lot of offerings on sort of the integrated side, but you had a really good quarter. There can you talk about some of the some of the underlying positives.
Drove the product sales in North America in the third quarter sure Glen why don't you.
Get into some of the details here, yes, Steven so.
Part of the completion activity and the increased a bit but was a little bit anemic compared to other quarters with our energetic sales, though we outperformed activity, but completions and frac spread kind of a S. R.
Markers, there and so with our U S sales were up about 19% sequentially and 27% year over year.
<unk> penetration into the market with our existing <unk>.
<unk> products that we had and then we also did pretty well internationally and as you recall those are pretty as can be.
Bulky.
And they can move quarter to quarter and so in Q3, we had some nice shipments there as well.
And just real quickly on that front anything on the pricing front around around the energetics business right now in North America.
Yes, getting some pricing improvement as you know that area of the market was hit pretty hard during.
During COVID-19 and we've been working with operators wireline company and we've seen some nice.
Let's say modest pricing improvement today.
Great. Thanks for the color.
And Stephen I might add to that that that.
We are seeing really nice penetration and demand for our premium energetics.
Which has always been sort of the bulwark of our products business.
Okay.
Helpful. Thank you.
Thank you.
The next question comes from John Daniel from Daniel Energy Partners. Please proceed.
Hey, John Good morning, Hey, guys. Thanks for putting me in.
Just two questions for you this morning.
You noted renewed interest in some of the.
Some of the studies and I am curious when you look back historically as you've seen interest rise for reviewing and study purchases how long does that translate into more business, whether for you or just for the industry writ large.
Yes, so interesting model that we have on those John .
We collaborate on there are international studies, we collaborate with national oil companies.
And.
The E.
We deliver those to the original participants when we complete the analytical program and then we retain a resale.
Right on that.
Data so it doesn't kind of an off the shelf sale, which yields some pretty high margins when we do that we use.
Usually sharing those with our.
Collaborative partner with the National oil companies.
But what we see on those is.
I would say after a quiet several years of.
Interest in these offshore studies from the Africa offshore Africa market.
All of a sudden thats picked up pretty nicely in the last quarter or so so we think we're early in the reconnaissance phase where people are starting to reengage and look at opportunities that they might have had on the shelf.
During a period of turbulent activity in the in the industry.
Okay.
Fair enough and then you also noted the.
Success of the Pac system.
As I.
Read the commentary on that it sounds like it's more of a system designed for offshore wells and the PMA process, primarily Thats correct. Yes, we do have we do have some offerings that we would use in land business, but the big market and while we focus our efforts on that sort of the big upside.
For us on now well abandonment and plug and abandonment programs is on the complex offshore wells, but there's multiple casing strengths.
I've referred to this at times is that there is an energy transition aspect to this is going to take decades to plug and abandon all of the offshore wells that are that have been drilled and so we're still adding new ones. The rig counts going up new wells are being added is going to be a very nice long horizon and so we focused.
Some efforts on to making sure that we are well represented there with our innovative technologies.
Okay. The reason I ask you about it.
There are a lot of times as you drive around the steel and talked to folks I'll say.
In the onshore market. The E&P company typically just goes low bid when it's time to <unk> and.
And I'm curious just kind of given the emphasis these days on ESG and doing things right.
If you see somehow greater adoption of technology or sophistication when it comes to onshore P&A.
Moving forward.
A big picture question, just your thoughts, yes, I think thats still going to have to evolve a bit.
The design of the onshore wells and I hate I hate to use the word simple because they are certainly not but compare to.
A very complicated offshore well with multiple strings of casing and multiple completion zones.
It's a much more complicated task I don't disagree with your assessment that there is a.
Our highly prized.
Approach to doing these cost effectively and thats, what we focused our efforts on on the like on the Pac system and our other plug and abandonment offerings, we save the client substantial dollars in rig time.
From going in and trying to mill out some very hard steel all those.
Casing strings, and having the <unk>.
All the casing.
By using our energetic systems to create those communication pathways to allow those cement plug to be set so yes, youre right cost is a priority and we are using our technologies to help lower costs and save time.
Awesome. Thanks, Larry Thanks, Glenn Yes, Youre welcome John .
Thank you.
Next question comes from Don Crist from Johnson Rice. Please proceed.
Hey, John Good morning, everybody how are you.
Good I wanted to ask.
I wanted to ask about just the geographic leverage I mean, obviously, we're seeing activity pick up in Brazil, West Africa, Middle East et cetera.
One area that you have more geographic leverage too than another and should we monitor where rigs are going into Brazil might be better for youll versus west Africa et cetera.
Not particularly John I mean I think.
We have a we have a really broad international footprint and so we.
We have operations in Brazil, we have operations in multiple countries throughout the middle East.
We have operations in Asia Pacific and so.
And in Africa, So we are well.
Positioned now during tough times that works against you you've got that kind of sprawling infrastructure, but during good times.
That's when you really harvest the benefit of.
Holding in there.
During turbulent times in the industry and so.
I would say to give you a little more color I would say the middle East is at the forefront of what we're seeing as.
A pickup in activity now we're in four different countries I don't get into too much detail about those because in some of those countries I only have one client and so.
You can you can do a little geographic assessment and figure out what those are but I'd say the middle East is an earlier mover and a bigger mover than we're seeing other places.
Certainly the SaaS Atlantic margin has been very good for core lab for the last number.
<unk> of years and it looks like it's improving we actually expanded operations in Brazil.
I would also maybe also keep an eye on both sides of the Gulf of Mexico, I think theres some opportunity there.
And as I mentioned in the call earlier west.
West Africa has been kind of quiet for us for a while and I think renewed interest.
As people start to reevaluate opportunities.
Particularly offshore but also some onshore Africa.
Please yes.
The only other thing I would keep in mind is that the rocks and fluids or mobile so it's pretty often that they'll come to one of our advanced technology centers for the more advanced testing and hub and spoke structure has served us very well. So we want to be close to where the activity is and then to maximize.
Our utilization of our technologies will sure.
<unk> those samples around to the our major centers.
I appreciate all that detail and just one final one for me.
Obviously, there is theres still a lot of attention in Europe with the Russia situation, then and we're coming up on a decision point here on December 5th.
DSA work on on Russian crude is that completely out of your model today.
If Russia exporting crude that will not hurt you going forward is that a correct statement.
No I don't think Thats correct, I mean, we still have clients that.
<unk>.
European clients included in that that want us to be part of their activity that includes the Russian crude.
I guess I'd take a perspective that the.
For crude oil.
Okay I appreciate the color I'll turn it back thank you.
Sure. This is Chris we have not sold any shares under the ATM.
But keep in mind, we do have $75 million of notes that are coming due next year.
We're working.
To improve the liquidity in the company and how we're going to retire that or sort of refinance those so we're.
We're keeping multiple options open, but we're going to try to do it without utilizing the ATM and just to expand on one point.
That that $75 million note that comes due next September 12 was a 12 year note. So set up in a different time, but it just happens to be coming due now and so wanted to.
Have options, if we needed to.
As Chris mentioned.
We have not sold any shares under the ATM.
Okay. Thank you very much youre welcome.
Thank you.
The next question comes from Dan Kutz from Morgan Stanley . Please proceed.
Morning, Dan.
Good morning, Hey, good morning, Glenn Good morning, guys.
So I just wanted to.
And a follow up on the capital allocation.
Question.
I guess, considering that you have a maturity next year.
You put the leverage target out there of one five times.
So.
Appreciating that those two factors I was just wondering if you could help us think through.
Your calculus and thoughts around.
Potential increases in shareholder returns, what you would need to see.
Feel comfortable starting to consider that and what would kind of be obsession.
<unk> been making.
The normal dividend.
Buybacks or special.
Special dividend.
Generally your thoughts around shareholder returns would be great.
Sure I don't think that has really changed we've tried to message that consistently so I think when we think about raising the dividend we want to do that in a way where we think it's sustainable.
So I think as we get into a recovery.
The way, we would return share.
Cash to shareholders through our buyback program.
Initially it does provide a little bit more flexibility, if you will versus committing to a dividend, but I think once we get the leverage ratio down and that sort of not.
A consideration with respect to that and we're comfortable with the forecast you would see us start to consider to raise the dividend.
Great that's really helpful color and then.
So on the press release that you guys, making.
We're making progress in the <unk>.
Yes.
<unk> added two members of my team.
Just wondering if you could give us an update.
So the opportunities that youre seeing.
And the Ccs space.
Hum.
And if you could remind us anything you've said kind of on the what.
Medium or longer term prospects could be.
That market. Thank you.
I think it's very early in the process I think.
Core lab focused on maybe not.
Getting out over our skis in this we wanted to wait until we were actually generating revenue.
Profitably.
On.
This activity and so we took a multi pronged approach.
If you go back and look at our.
The earnings release from a little while ago Youll see we we.
We signed a strategic alliance with <unk>.
I think the Telus is well positioned to be a leader in Ccs projects going forward and we had a great relationship with them through our activity on there.
Upstream production oil and gas production.
Syed and so that was a natural fit for US and then we put together a consortium in collaboration with the University of Houston to really focus on where core lab.
It's applicable expertise and that is in understanding what happens when we when people try to.
Put for 30, 40, 50 years or longer try to put large volumes of cotwo ground, that's going to react with the pore fluids is going to react with the rocks.
If you'd bubble cotwo through water the water gets more acidic and thats going to create rock fluid and fluid fluid compatibility issues. So that's kind of the technical side of of what we're.
<unk>, our engagement on evaluating the seal rock and containment and <unk>.
Formation sensitivity to injecting this year too so from a dollar perspective.
We're still saying that as this matures, we see that this could become 5% to 10% of core lab's business overtime, not there yet but I.
I think we are in a more concrete position that some companies that are talking about future engagement, there, we're actually doing projects and.
See more projects building, we've got more projects on our board now than we've done to this point, let's put it that way.
Great.
Thanks.
Glen I will turn it back.
Okay, you're welcome Dan Thanks, Dan.
Thank you.
The next question comes from David Smith from becoming Energy Advisors. Please proceed.
Hey, David Good morning.
Good morning.
Thank you for taking my question.
So apologies I jumped on the call a little late so sorry.
Alright, if I missed that.
I hear that U S production enhancement.
Revenue was up 19% sequentially or was that just a reference for energetics.
The reference for energetic.
Okay.
The U S product sales were up 20 plus percent, yes Julien.
Okay.
Yes, I was just wondering if you gave any any details on the total U S Bank.
Sequentially.
Even.
Even that level of product growth.
Yes.
Decline in total international.
For the segment and I was just wondering if that maybe lines up with.
The FX impact.
Yes. So this is Chris so U S was up over 20% sequentially, but <unk>.
International product sales at a p/e were down this quarter and when we talk about that those are larger bulk orders and they can be a little lumpy from quarter to quarter. So and those are not as subject to the FX impact like our service revenues that are coming through Europe and whatnot. Those are usually billed in dollars. So.
Theres not as much currency impact in our production enhancement segment.
So.
Put that in perspective, the international product sales were up 16% year over year, they're just down it can be a little lumpy quarter to quarter. When you look at when you are looking sequentially.
Got it makes perfect sense. Thank you.
Follow up question.
Solid incremental margins for production enhancement this quarter is that a function of better mix.
The energetics growth is that just the segment getting to the kind of incremental margins you would normally expect.
I think we had a really nice pickup in the U S, which is the primary market for the manufacturing. So some nice manufacturing efficiencies and we have had some pricing traction I would say the pricing isn't keeping up with inflation, but it's a combination.
<unk> effects efficiencies as product.
Product manufacturing expands, but then also some benefits from some pricing picking up.
We don't model that kind of incremental margin going forward, but when we have a nice quarter. It can get up to those levels.
Think more consistently.
We would look at margins on the manufacturing side on the on the product side of.
The company, which is almost entirely in p/e.
Look at that for 25%, 35% incremental margins right.
And our services side of that segment also had some nice growth too so when they start when they start to pick up we talk about on the service side the incremental margins can be stronger so it can actually improve the sector. So.
<unk> incremental margins for the segment as well right so to be clear our production enhancement that incremental margin is a blend of the manufacturing margins in the service margins.
Got it thank you.
If I could sneak one more in did you provide any characterization of the MSA work in Q3 relative to Q2.
The modest improvement referenced in the press release, but just wanted to ask if you could provide any rough numbers on the revenue improvement.
Yes.
Up mid single digits.
Alright.
Great. Thank you so much sure sure.
Thank you.
The next question comes from Samantha Hoh.
Please proceed.
Hey, guys.
Real quick little housekeeping, the Capex guide it seems like.
Kind of just worked its way down from the initial 15 to 18 million guide for the year.
Can you maybe talk to.
What is driving that is a.
Timing issue and some of it rolling into the next year and in two.
It is also where your capex is going towards these days.
Yes, so I don't think any major change there.
Maybe a little bit lighter we are trying to we.
I think as core lab, we are extremely thrifty when it comes to capital investment we have to see.
A very rational reason.
For an appropriate returns to make us move forward, but that being said, having having sort of grown up through the lab network and core lab is by.
So to my responsibilities approved.
Good idea never goes no good idea goes unfunded.
So.
There are we have also rationalized, our geographic footprint and with that consolidated some locations. So that's helped to reduce some of the capex that we might have had to put into facilities.
And so I think no big change in that.
As we it's one of the benefits of staying asset light.
We don't have a lot of rusting metal to replace.
Over time compared to.
Some other types of oilfield service.
Businesses and so.
I think it's a combination of our natural.
Thoughtfulness about capital expenditure trying to be.
Cognizant of.
Free cash that we're trying to generate as we focus on Delevering the company.
And also some operational efficiencies that have come through.
Reorganizing and restructuring.
Re geographically balancing our footprint around the world.
Sam when you when you look at the numbers.
In terms of modeling if you want in terms of where the dollars go to Larry point with no. Good idea going unfunded Theres about two third of that that goes towards new technology, and maybe about one third of it goes towards things that lose their life in the laboratory environment.
Okay, that's super helpful.
Okay. My next question to some of the newer stuff that Youre doing.
On the Cc U S. Congrats Jim.
It's really interesting to see that youre, adding private equity and midstream.
Partners.
If this is sort of like.
If this is something that has happened in the past with some of your other studies were.
Sort of non upstream partners with members get involved early on or do they tend to get involved later after.
Alright projects start to mature and you are actually bringing that project.
Online there, yes, so to be clear. This is the first non upstream consortium projects that we've done everything else that we've done.
Hundreds of of multi company studies that we've done over decades have all been focused on.
Subsurface reservoir characterization seal evaluation.
Some have had implications on on completion design say in the in the Permian Basin, and all evaluating the rocks and fluids and how to how to get the most out of that this is the first one that's not focused on some upstream application. So so like for example, EUR in unconventional <unk> that was a technology star.
<unk>, but it was still focused on upstream oil and gas production. The Ccs consortium is is not focused on upstream oil and gas production, we're very happy to see.
I would call it a very nice blend of some very.
Very well known and respected name plates on the oil and gas operator side that are seeing ccs opportunities either for their own.
Initiatives or to become a player in that arena.
But also getting some private equity in midstream.
<unk> here I think broadens.
The discourse for us on.
How companies are going to.
Develop effective economic models for Ccs.
Projects.
Yes, the only thing I would add is that historically with our traditional projects. There I don't remember any midstream type companies buying in but as assets were changing hands private equity firms have bought those studies in the past that's correct.
Okay.
Thank you.
Thank you.
Bryce I haven't heard you guys mentioned is a geothermal and that does seem to be a trend.
I would think would fit into your wheelhouse.
Can you maybe elaborate.
That is.
Is there an opportunity there for you guys.
Yes sure. So so this could be a long conversation that we wanted a few minutes left but there is really.
Two broad categories of geothermal, there's what I would call the hot rock hot fluid ones and the warm rock warm fluid ones.
The most of the ones over time say like the geysers in California.
Pretty long term geothermal project those are very hot rock projects, so shallow areas, where that are relatively shallow and by this I mean hundreds to thousands of feet deep not tens of thousands of feet deep.
And.
They provide hot.
Fluids from the Earth that allow for warming of water to create a steam environment and generate electricity.
We do on occasion get involved in those hot rock projects.
They tend to so we've done some for example in.
Indonesia.
They tend to be in Tectonically active areas, where those hot rocks are close to the surface.
One of the one of the complications there is it's pretty tough to to core wells when you're talking about seven or 800 degrees.
Temperature and so.
Not a whole lot of coring, sometimes a core on the flanks of those projects and we will evaluate the rocks.
We do so we do have some offerings and theyre looking at fluid and rock compatibility, but not a big business for us.
Okay, great. Thanks, so much guys.
Okay, I think we'll wrap up there.
In summary, Core's operational leadership continues to position the company for improving client activity levels in both the U S and international markets for the remainder of 2022 and beyond we have never been better operationally or technologically positioned to help our client global client base optimize their reservoirs and to us.
Dress their evolving needs, we remain uniquely focused and are the most technologically advanced client focused reservoir optimization company in the oilfield service sector.
The company will remain focused on maximizing free cash and returns on invested capital. In addition to our quarterly dividends will bring value to our shareholders via growth opportunities driven by the introduction of problem solving technologies and new market penetration in the near term core will continue to use free cash to strengthen its balance sheet while <unk>.
Investing in growth opportunities.
So in closing we thank and appreciate all of our shareholders and the analysts that cover core lab, the executive management team and the board of core laboratories give a special thanks to our worldwide employees that have made these results possible, we're proud to be associated with their continuing achievements. So thanks for spending time with us and we look forward to our next update.
Goodbye for now.
Thank you.
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