Q1 2023 Core Laboratories NV Earnings Call
Speaker 1: and a strong Q4 2022 performance, which was led by seasonal international sales.
Speaker 2: was 60 for the turns. Inventory turns for the quarter were 1.9 down from 2.1 last quarter, 1023 and beyond.
Speaker 2: term debt. We anticipate finalizing that process in the next several weeks.
Speaker 2: The company will continue applying free cash flow towards reducing debt.
Speaker 2: Looking at cash flow, for the first quarter of 2023, cash flow used in operating activities was $3.2 million. And after paying for $2.2 million of capex for the quarter, our free cash flow was negative $5.4 million.
Speaker 2: Cash used in operations this quarter was primarily associated with the building working capital. For the first quarter, as I stated earlier, it is fairly common for us to see some building working capital. However, some additional factors associated with accounts receivable and inventory were also highlighted earlier. After shirt US deficibilit max mortgage tax return – $TI
Speaker 2: Additionally, first quarter cash from operations also includes costs to finalize the exit of certain facilities as we continue to optimize our operational footprint.
Speaker 2: Additionally, the first quarter includes payments for liabilities associated with certain employee retirement plans and an annual prepayment for the company's corporate insurance programs.
Speaker 2: The annual payment for our corporate insurance programs would have typically occurred in the fourth quarter. The annual payment for our corporate insurance programs would have typically occurred in
For the full year 2023, we expect capital expenditures to be in the range of $12 million to $15 million.
Core will continue its strict capital discipline and asset light business model with capital expenditures, primarily targeted at growth opportunities and initiatives.
Core lab's operational leverage continues to provide the ability to grow revenue and profitability with minimal capital requirements.
Capital expenditures have historically range 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 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 looking forward, we see crude oil macro fundamentals continuing to support and multiyear recovery cycle for the oil and gas industry for the remainder of 2023, despite recession concerns for key economies around the world.
We also see supply and demand balance tightening as the year unfolds.
Demand for 2023 as forecast by the International Energy Agency in April 2023 is projected to be a record 101 9 million barrels per day as consumption in China continues to grow.
As crude oil demand is projected to exceed pre COVID-19 levels crude oil supply is projected to Titan.
With the recently announced OPEC plus production cuts crude oil supply will be on a decline for the remainder of the year.
In addition to the OPEC plus production cuts production growth in other areas continues to face constrained due to pro long underinvestment in many regions around the globe as well as natural decline of production from the existing field as a result, we continue to expect international operators.
Can expand their upstream spending plans for 2023 by mid teens compared to 2020 team. This supports our outlook for continued improvement in international onshore and offshore activity with projects emerging and underway, most notably across the middle East Lat.
And America, and West Africa regions.
Turning to the U S.
The us land activity was somewhat weaker than expected in the early part of 2023.
Lower than expected activity growth is associated with weak natural gas prices.
However, we see ongoing challenges with crude oil supply, which should require increased spending by operators to grow and replace production while operators remain focused on capital discipline 2023 forecast continued to indicate upstream spending will increase approximately 15%.
Year over year.
In summary, we project reservoir description second quarter 2023 revenue to increase by low single digits.
<unk> volatility with crude oil trading patterns may impact our reservoir description segment international growth within its question Ukrainian and European operations.
<unk> enhanced segment's revenue is estimated to increase by mid single digit.
We project second quarter 2023 revenues to range.
From $130 million to $135 million and operating income of $14 5 million to $17 5 million, yielding operating margins of approximately 12%.
For the second quarter of 2023 is expected to range from 'twenty to 'twenty four.
The company's second quarter 2023 guidance is based on projections for underlying operations and excludes gains and losses and foreign exchange second quarter 2023 guidance also assumes an effective tax rate of 20%.
Now I will pass the discussion back to Larry.
Thanks Glenn.
First I'd 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 is the foundation of core lab's success.
Turning first to reservoir description for the first quarter of 2023 revenue came in at just over $80 million up 3% compared to Q4 and up 7% year over year.
Operating income for reservoir description ex items was $7 8 million and operating margins were 10%.
Margins ex items expanded approximately 200 basis points sequentially, and 450 basis points year over year.
The segment's financial performance was underpinned by improving international client activity as well as indications that crude oil trading patterns had started to stabilize late in the first quarter. Following sanctions that were imposed on Russian crude oil shipments late in 2022.
We do see the Russia, Ukraine conflict is still posing volatility and uncertainties for growth in our European Russian and Ukrainian operations.
The IAA recently updated its forecast for crude oil demand for 2023 to an average record high $101 9 million barrels per day up by $1 9 million barrels per day from 2022, even after assessing global financial forecasts. This bodes well for growing demand for the reservoir.
Scripture services that will be required to grow production and replace the natural decline of existing producing fields.
As we look ahead, we see the growing international rig count over the past year 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 as well as most of the regions.
Early movers in the oilfield service sector that are more exposed to well construction have already felt the impact of this cycle shift as.
As projects progress into field appraisal field development and eventually production demand for core Lab's reservoir description services will rise accordingly.
Now for some operational highlights from the first quarter core Lab's reservoir description services were employed on both U S and international projects to help our clients evaluate their assets and develop programs to optimize production.
During the first quarter of 2023 core Lab's advanced Technology Center in the United Kingdom progressed, the analytical program on reservoir core and fluid samples from the Orange basin offshore Namibia.
Several hundred feet of conventional core from multiple wells were recovered from various targeted reservoir intervals.
These conventional cores are being scanned using core lab's proprietary noninvasive testing and reservoir optimization technologies branded as Nitro in advance of an extensive program of traditional physical measurements.
A comprehensive laboratory analysis program is also underway on the reservoir fluids collected from these wells. This analytical program includes detailed determination of contamination levels from oil based drilling mud filtrate and compositional analysis of compositional analysis of the hydrocarbons. In addition, the full suite of physical prop.
These are the hydrocarbons all at various reservoir pressures and temperatures are being measured.
This extensive reservoir rock and fluid laboratory program will provide critical hard data points around which the operator will build a reservoir model.
Also during the first quarter of 2023 under the direction of a middle East National Oil Company core lab successfully completed a large multi well formation damage study.
Core lab specialists delivered laboratory data to the National oil company that will be used for planning and implementing a large scale waterflood enhanced oil recovery program.
Waterflood EUR involves injecting water into an oil reservoir to increase hydrocarbon recovery the.
The laboratory work core lab provides is used to ensure that the injection water is compatible with both the reservoir rocks and reservoir fluids. The water used for injection programs must undergo analysis to determine what steps will be required to prepare the water for field scale injection potentially costly process filtration disinfection.
<unk> and chemical treatment are very large water volumes once a sample of the proposed injection water has been properly prepared in the laboratory. It is then used for rock fluid and fluid fluid compatibility testing at reservoir temperatures pressures all under controlled conditions.
Core lab team of specialists are helping the operator to optimize the injection water properties to enhance crude oil recovery reduce associated water processing costs and mitigate damage from fines migration.
This project illustrates our core lab uses innovative laboratory technologies to enable operators to recover incremental barrels of oil from existing fields barrels, which can be among the most profitable of any produced over the life of the field.
In other news from the first quarter core lab is pleased to announce that two additional client members have joined its growing joint industry carbon capture and sequestration consortium.
Or welcomes EQT production company and BK Vd carbon ventures LLC to the consortium.
The carbon capture and sequestration consortium, which is being done in collaboration with Dr barrels <unk> of the University of Houston was formed to support global energy transition and Decarbonization efforts. The analytical study studies being conducted in the consortium are currently focused on seal integrity and containment.
As a carbon capture and sequestration consortium momentum continues to build multi.
Multi client studies and other proprietary carbon sequestration laboratory projects are growing in both the U S and internationally.
Moving now to production enhancement or core lab technologies continue to help our clients optimize their well completions and improved production.
Revenue for production enhancement came in at $48 2 million down approximately 3% sequentially. After a very strong Q4, but up 19% year over year.
Operating income ex items was $6 million operating margins were 13% for the first quarter of 2023 down 300 basis points from Q4 of 2022, following a quarter with strong seasonal international sales at the end of last year.
Year over year operating margins were up 490 basis points.
Now for some operational highlights during the first quarter of 2023 under the direction of our Permian Basin, operator, Core's production enhancement experts were engaged to deploy core lab's proprietary rapid deployment system for well remediation project.
The rapid deployment system offers a cost effective perforating solution for meeting for Remediated wells when third party artificial lift equipment has encountered failing valves or when the tubing string has become filled with sand or otherwise inoperable.
<unk> client utilize the rapid deployment system technology to remedy it tubing string that had malfunction and become plugged with sand preventing the tubing from draining properly during workover operations. The rapid deployment system allowed the client to quickly create perforations that drain the working strength.
This process was accomplished without the need for an electrical wireline unit and with only a single field service engineer.
In doing so the rapid deployment system cost effectively eliminated the environmental and safety hazards associated with pulling a wet pipe.
Conventional remediation methods would've required mobilizing a wireline unit and a multi person field crew to the well site, resulting in lost time and increased cost to the operator.
Based on the success of the rapid deployment system, the client as standardized as methodology for all future wells remediation projects.
In the reservoir description operational update provided earlier I described how core Lab's laboratory analytical technologies are being leveraged on a large scale waterflood EUR project.
Core's production enhancement team also has a role to play and waterflood EUR projects recently core spectral flood traces were utilized in an enhanced oil recovery project for a client a very large field in the middle East <unk>.
<unk> experts are being engaged to inject multiple diagnostic tracers into dozens of water injection wells in turn water samples are being collected from hundreds of producing wells and will continue to be collected over the next several years.
Samples will be analyzed to detect for the injected tracers.
The objective of the tracer diagnostics program is to follow and map the path of the injected water as it sweeps oil across the reservoir and the process specific quantitative information about the reservoir will be revealed including communication patterns between injection wells and producing wells horizontal vertical program will aid.
And the critical identification of natural fractures these zones and out of pattern communication.
This will allow the operator to target on swept areas for future infill drilling.
Ultra low tracer detection limits provide significant enhanced data resolution, which the operator uses to optimize field economics that concludes our operational review. We appreciate your participation and Danielle we will now open the call for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
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The first question comes from Samantha.
<unk> of Evercore ISI. Please go ahead.
Hey, guys good morning Samantha.
Ronnie.
I Love all the information about this.
Technical progress that you guys are making.
I was wondering for reservoir description it kind of looks like things have turned a corner with <unk>.
International and maybe offshore starting to try some lift on the revenue growth here.
Are there really any reasons why revenue keep growing sequentially.
And I was wondering if you could actually all the way and just sort of.
What youre seeing on the exploration activity side, I mean, clearly <unk> benefit here.
What is it further.
So it is a little bit more inbounds on exploration work.
Yes, good morning, Samantha Yes, great question.
Thank so much as we would all like to see linearity and the simplicity of Y equals <unk> plus be forecasting I don't think theres quite.
Backlog and advancement of projects too.
And really see the I'll call it a <unk>.
Confidence in the inflection point.
Sequentially longer term no doubt about it it's definitely building and so we're a little bit of caution there. The other thing I would add and I think Glenn and Chris and I all touched on it here is we do have some uncertainties about the crude oil assay work, that's a little bit of a <unk>.
Uncertainty in terms of reservoir description performance, but long term the pattern is clearly very strong and up for reservoir description you saw some very nice year over year results there.
Moving along in the right direction on the exploration side, we do see projects emerging in a number of places around the planet.
Historically core lab's wheelhouse is not exposure to exploration projects.
For a variety of reasons coring and fluid sampling early and exploration projects.
Is complicated and not often done at high levels. The wheelhouse for reservoir description is when we get into field appraisal field development and into production and as so as projects move out of exploration and last year 2022 was the biggest year in a decade for exploration spending the.
Next steps will be those will move into appraisal development and eventually production that's really the wheelhouse for reservoir description. So again, a little bit later in the cycle.
And folks that are involved in say geophysics.
Seismic analysis, well construction will be a little later in the cycle, but you can start to see.
The foundation for core labs engagement on those projects really starting to gain traction.
Okay and then the next thing I was kind of curious about with since the inventory build for the.
The large.
In international projects.
How is the pricing of that.
Do you think there was that much product I mean that sounds like more product driven.
Can you maybe talk a little bit about more about that I mean is it associated with all the water.
The projects that Youre working on.
Amanda This is Chris so when you think about international and product sales for us.
Would put those into two categories a lot of times, we're manufacturing that stuff in bulk orders here in the U S. And then it shifts and those can those can happen a couple of times a year and they kind of will swing production enhancements results from quarter to quarter. This is a little bit different where it's a longer term.
Arrangement and there will be a more steady supply of products in the region.
And then to support that we're actually having to build some inventory in those locations. So that it's not being shipped it's going to be shipped maybe on a quarterly basis, but the supply to the customer is going to be done from that international locations. So we're having to build some stock in that location and you see that.
Happening this quarter.
In our release, we gave some details on one of those big projects Thats in Thailand, New relationship there should serve us very well over the next several years and I think beyond.
And then in addition to that what I would add is a little slower we saw the frac spread drop off call. It. The back ended of November really take a hard hit in December we had anticipated a bit quicker snapback early into the year.
It was slower to recover it really lasted until.
The only building started kind of late February and then March was pretty strong so a bit of inventory build on the product side there too.
Maybe just last one if I could squeeze that in since we're talking about right now.
That's a bit of a debate in terms of whether or not.
Yes.
Completions level were thank.
It keeps growing.
Or at least sort of turning over production growth.
What are your takes on that.
This.
Completion activity type level that we can keep growing.
To play here in the U S.
Yes.
Before I answer that one other point on that we're still facing some supply chain uncertainties.
Uncertainties, we're having to operate.
<unk>.
Inventories on a just in case, rather than adjust in time mentality, especially for some specialty steels and things like that to your broader question about completion levels. We think they have to go up.
<unk>.
Again some.
Neither in familiar or notoriety maybe for saying that phrasing. It this way that.
Unconventional are very unforgiving treadmill. The decline rates are so quick on these wells that you have to keep drilling wells and the more wells you have the you have to spool up more wells to maintain that level of production. We think that drilling has to pick up we think that completions has to pick up if we are going to maintain.
And certainly if we're going to try to grow production in the U S.
Thanks, so much.
But I wouldn't I would add to that.
I would add to that that not will not within core lab, but within the folks that are involved in drilling and completing the wells the actual heavy duty hardware, we're still seeing some physical.
Physical limitations on the availability of that heavy hardware that may be a constraint, but when our clients are ready to complete wells will be ready to provide products.
No doubt.
Thanks, so much for your time today.
Okay. Thanks anthem.
The next question comes from John Daniel of Daniel Energy Partners. Please go ahead.
Hey, good morning, John Good morning, guys.
Just two the first is a quick one following humana Larry.
Alluded to some still some of the supply chain headwinds I'm curious.
When you see that being relieved if at all.
Yes.
I've got some thoughts on our Chris May add on it John .
John I think the way to look at that as well.
It was a three or maybe four months lead time to get some specialty steels, we're still running into cases, where the.
The providers of steel are calling us up and saying Hey, we're going to do a run now and delivery is going to be nine months out. So we're having to keep more of that type of steel in stock than we might then certainly than we want to but more than we would normally have to when we had a shorter delivery I think there is there are signs that.
Those are improving there are fewer of those obstacles out there, but when you're dealing with specialty products should kind of.
At the whim of.
Alright, when the supplier says they're going to do a run.
The only thing I would add is that just.
In general.
Just normal deal not even the specialty stuff the lead times are much longer than they used to be and we're not really seeing that change right now so.
I don't know if we'll get back to pre Covid kind of lead times are not so we've just sort of adjusted ourselves to this 12 month or 12 month plus lead time, just about on anything like that whether it.
The contents that go into making the explosives or whether it's the steel that goes into making begun systems or any other components that are going downhole.
Okay got it and then thank you guys for that second question totally unrelated.
And lots of people, writing and talking about the whole concept of tier one inventory.
Yes.
Estimate how much more do we have.
The implications I am just curious Larry if you could outline for a few minutes on.
Your views on tier one inventory in the U S.
The runway.
And then when we got runway starts.
Come to an end if you will the implications for core and the opportunities.
Yes so.
I think theres less tier one property out. There then is often discussed are described.
It's a bit of a gray area because as technology advances.
Quality of the quality of rock.
Acceptable results.
Over time has gotten a little bit lower in other words, they're able to complete more efficiently and lower quality rock and get similar results with more investment in the completion process.
John This is going to sound a bit cheeky, but the reality is we haven't really good view I think of tier one properties, who are multi company consortium studies that we do but quite frankly some of that data.
And so don't want to get too much detail on that I do think I do think it's fair to say, though that we have seen production rollover and some of the larger basins in the U S.
The operators have done by and large have done exactly what you are I would've done during challenging times.
Went to their most productive gardens and pick the vegetables and fruit out of that they use their best quality properties.
So I think.
Over the over the next three to five years I think that becomes even more apparent that tier one properties are getting consumed what it means for core lab I think on the production enhancement side completion intensity will have to go up so.
Longer laterals continued more product sales more diagnostic sales to make sure that these more challenging completions are executed properly and then on the reservoir description side, we have a number of clients that we've done a proprietary study and we've got a multi company consortium study on EUR opportunities, where we use a combination.
<unk> of vaporization and condensation injecting engineered gases to increase production from these unconventional wells you can't use a waterflood or a suite flood like you historically, what in a conventional reservoir, but the technologies that we've demonstrated to work in the laboratory are being utilized <unk>.
Now by some clients I think that's going to be a growing topic.
Specifically EUR on unconventional where containment exists that's going to work.
Okay.
Tom this down because I'm not that right, but it just seems to me that.
The need for more.
Hence study.
Roes over time.
Wrong on that.
Yeah.
Yes, I mean, we've established for.
For those that are have.
Engaged with us on this and bought our laboratory testing we've demonstrated.
That they can get substantial improvements in <unk>.
Ultimate recoveries, if they if they can make these EUR processes work containment is a big issue for example.
Some operators have put away oceans of of blended gases into some.
Fields and got nothing back, including the gas that they injected has just gone.
And so containment is a little bit out of core labs.
Real House, if you will thats more of an oil company looking looking at their size, but looking at fractures.
Fault patterns and things like that but.
But we do know that there are a number of places where <unk> is being successfully deployed.
Following the lead that we've demonstrated in the laboratory or what types of gas and how to injected at what rates and things like that it's a multi cycle process.
Fair enough Im just trying to reeducate myself, thanks, guys for taking okay. John question. Thanks, I appreciate it thank you.
The next question comes from Don Crist of Johnson Rice. Please go ahead.
Good morning, everybody good morning.
One I just wanted to ask one follow up on the answer you just gave to John's questions.
Where are we from a basin perspective, I know, it's probably too early in the Permian, but in the Bakken and the Eagle Ford are you starting to see some.
Engagement prior to re fracs or kind of EUR discussions there or when does that kind of time cycle start from your perspective, when theyre going back in.
Short answer is yes, we are seeing engagement there.
We've done a number of projects.
In those areas and others.
I think the.
The time from <unk>.
Proof of concept if you will in the laboratory to deployment, that's really out of our control our engagement does not take the processes to the field, that's where the operators they are better at controlling pumps and compression and delivering gas supplies to the wells that then we are we valve.
Date in the laboratory that if you use this recipe of gases U can increased production over multiple cycles of injection, which lead to.
Vaporization of oil into the gas thats been injected and then when that gases enrich gases withdrawn dropped the pressure and liquids fallout and so that's really more of a question I think for the operators about what their what their plans are and where theyre going with it we just tell them if you'd put this gas in this rock.
And this oil.
And cycle it.
May we suggest you can increase recovery by this much.
Okay, but its safe to say, it's probably not in the first five years or so Michelle worldwide.
Well actually so there are some traditionally Don that's a very good question traditionally EUR projects come in very late in the life of a conventional field.
There are some companies that are trying to maybe see whether that couldnt be cost effective.
Processes now that that can be cost effective earlier in the life of the field. The thing about these unconventional wells with a steep decline curves.
Not going to be a five year period before they say, hey, I'd like to get a little more out of these with.
With 60, 70% drop off early on they're going to be thinking about that earlier in the life of the wells.
Okay.
And one kind of follow up unrelated obviously, you had the $1 7 million charge in the first quarter for facility exit consolidation I'm, assuming that was was in Europe , just given the flow of the <unk>.
Trading of oil patterns have changed but.
Kind of building on that and the re domestication.
Of the company in a couple of days.
Can you just talk about costs going forward, obviously, there is a lot of moving pieces there but.
I'm, assuming that the re domestication is going to help with cost coming down and then some facility exits will probably help as well.
Yeah, So Don no the facility costs that we talked about in the release were.
In the Americas, and North America, specifically.
And a lot of that was just consolidation we had some leases that were winding down we accelerated some of those and move people into vacant space in other facilities. So just cleaning those things up we will do those as quickly as we can as cost effectively as we can.
We've relocated some people and some lab operations into Houston.
Making use of unused space, we had here. So a variety of knobs were always looking to turn those we'd like to go we would have liked to have gone faster on some of those.
But.
Some of the leases were.
Challenging to.
I'll call it escape from.
And so we've got more of those in the queue.
But I think a nice step taken.
A good investment and getting costs down going forward I think we're talking about somewhere between over $1 billion of half a year in annual savings from the facilities that we that we exited in the first quarter. So I think good use of of cash to get out of those buildings clean up some of the leases.
I'll, let Chris talk a little bit about the re domestication cost right.
And so we've talked about this a little bit dawn and.
It's probably between one five and $2 million of annual savings when we get everything completed that's not a 2023 number its probably more a 2024 number and beyond so.
Think about we had we had a double a small corporate office and in.
In Europe in the Netherlands, Thats going away.
We had to do audits.
At the consolidated level for both the U S and Europe . So FRS one of those is going away.
But it's not just that it's the savings of potential future costs going forward as well as regulations and reporting requirements around ESG get elevated they're accelerating fast in both Europe and the U S and theyre not aligned so youre, having to dance to two sets of <unk>.
<unk> and that's on every front, whether it's tax laws reporting laws things like that so.
It's not just what we've experienced in the past, it's reducing the potential elevation of future costs as well.
Yes.
Add on to that.
Just to add onto that concept Don so during COVID-19 we.
We actually had to take down some of our.
I'll call it.
<unk> presence in the Netherlands, we were going to have to rebuild that and that was going to be costly.
Proposition for us to get back to what it was pre COVID-19. So by doing this we've we've cut some costs, but we are also limited cost that would've been coming back into the system and I think that adds up more into the $3 million to $4 million a year, but when we look at what that what it would have cost us to get back to full compliance.
I appreciate all the color I'll turn it back thanks.
Okay. Thanks, Dan Thanks, John .
This concludes our question and answer session I would like to turn the conference back over to Mr. Bruno for closing remarks.
Okay, we'll wrap up here 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 2023, and beyond we have never been better operationally or technologically positioned to help our global client base optimize their reservoirs and to address.
Yes, their evolving needs, we remain uniquely focused and are the most technologically advanced client focus 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 shareholders via growth opt.
<unk> driven by both the introduction of problem solving technologies and new market penetration in the near term, we will continue to use free cash to strengthen this balance sheet, while always investing in growth opportunities. So in closing we thank and appreciate all of our shareholders and the analysts that cover core lab.
<unk> management team and the board of core laboratories give a special thanks to our worldwide employees that have made these results possible.
Proudly, 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.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.