Q3 2023 Core Laboratories Inc Earnings Call
Good day and welcome to the core laboratories third quarter <unk> 23 earnings conference call.
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After todays presentation, there will be an opportunity to ask questions. Please note. This event is being recorded.
I would now like to turn the conference over to Larry Bird now chairman and CEO of core laboratories.
Please go ahead.
Thanks Barclays.
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 2023 earnings call. This morning, I'm joined by Chris Hill, Core's, Chief Financial Officer, and Gwen Gresham core senior Vice President.
And head of Investor Relations.
The call will be divided into six segments.
I'll start by making remarks regarding forward looking statements will then have some opening comments, including a high level review of important factors and of course Q3 performance. In addition will review core strategies and the three financial tenets at the company employs to build long term shareholder value.
Chris will then give a detailed financial overview and have additional comments regarding shareholder value.
Following Chris Gordon 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.
Then we'll 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. We make during this call may include projections estimates and other forward looking information.
This would include any discussion of the company's business outlook. These types of forward looking statements are subject to a number of risks and uncertainties 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 us with the SEC.
We undertake no obligation to publicly update or revise any forward looking statements, whether as a result of new information future events or otherwise.
Our 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.
Moving now to some high level comments about the third quarter of 2023 core continued to build on the operational momentum established over the past few quarters, while revenue was down slightly compared to Q2, we achieved sequential and year over year improvements in operating income operating margins and earnings per share.
Ex items operating income for the third quarter was $16 million up 2% sequentially and up 20% year over year.
Operating margins were 13% up from 12% in Q2 of 2023 and up from 11% in Q3 of 2022.
Third quarter 2023, operating margins as well as year over year and sequential incremental margins were particularly strong in reservoir description, where demand for rock and fluid analysis across our global client base continues to rise.
Items operating margins for reservoir description improved to 17% the highest since Q2 of 2020. These.
These improvements in reservoir description were partially offset by declines in revenue and operating income in production enhancement.
Largely reflecting lower than anticipated U S land completion activity, which was down 10% sequentially along with some project delays in the Gulf of Mexico, and some international product deliveries that were pushed into Q4.
Production enhancement operating margins ex items came in at just over 4% for the third quarter, which was down both sequentially and year over year.
Demand for reservoir description assay work on crude oil and derived products continued to stabilize throughout the quarter as trading patterns have realized in response to sanctions. However, the ongoing Russia, Ukraine conflict and associated sanctions as well as the emergent to political turmoil in the middle East that began in early Q4.
Still leave volatility and some uncertainties in the demand for these laboratory services.
Lastly for the full company EPS was <unk> 22 per share ex items up from 21 cents in Q2 of 2023 and up from 18 in Q3 of 2022.
As we look ahead core will continue to execute on its key strategic objectives by one introducing new product and service offerings 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 in the financial tenants that core has used to build shareholder value over our 27 plus year history as a publicly traded company.
The interest of our shareholders clients and employees will always be well served by core lab's 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 and the operational review section of this call.
While we navigate 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 or 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.
Additionally, the financial results for the third quarter of 2023 include a charge of $1 1 million associated with the termination of our ATM program, and secondly facility exit costs, which are aligned with our continuing efforts to improve operational efficiencies. These items have also been excluded from the discussion of our financial result.
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So now looking at the income statement revenue was $125 3 million in the third quarter down 2% compared to the prior quarter and flat year over year.
Activity associated with international upstream projects continue to expand however, lower than expected activity in the U S and a lower level of product sales to international clients has offset the growth in other regions.
Okay.
Of this revenue service revenue, which is more international was $92 9 million for the quarter flat sequentially and up 6% from last year.
Committed walk work volumes for traditional reservoir rock and fluid analysis as well as carbon capture and storage projects continued to build across our global our global Laboratory network.
However revenue from our diagnostic services were down this quarter due to a decrease in U S onshore activity and some projects in the Gulf of Mexico, moving from the third quarter into the fourth quarter.
Additionally service revenue associated with crude assay work was stable during the third quarter of this year, but down a little when compared to the third quarter of last year, which was elevated in our European operations ahead of the sanctions that became effective late last year.
Product sales, which is more equally tied to the U S and international activity were $32 5 million for the quarter down 6% sequentially and down 15% from last year.
Despite the decrease in U S onshore activity during the third quarter of 2023 product sales in the U S were flat sequentially.
The sequential decrease in our product sales in the third quarter is primarily associated with lower international product sales the.
The year over year decrease is due to lower sales in both the U S and international markets.
Some international product sales scheduled to be delivered in the third quarter of 2023 were delivered in October. Additionally.
Additionally, in 2023, some recurring international product orders, which typically fall in the third quarter are planned for the fourth quarter.
Moving on to cost of services ex items for the quarter, whereas approximately 74% of service revenue an improvement from 76% in the prior quarter and 77% compared to the prior year.
We continue to see improvement in absorption of cost and utilization of our global Laboratory network and anticipate additional improvement with continuous growth in service revenue.
Cost of sales ex item in the third quarter was 85% of revenue compared to 84% last quarter, which increased slightly this quarter due to reduced manufacturing efficiencies associated with lower international sales.
G&A ex items for the quarter was $9 5 million a slight increase from prior quarter, which was $8 7 million.
For 2023, we expect G&A ex items to be approximately $38 million to $39 million.
Depreciation and amortization for the quarter was $3 9 million flat compared to last quarter.
EBIT ex items for the quarter was $16 million, an increase of over 2% compared to last quarter, and yielding an EBIT margin of 13%, which expanded approximately 60 basis points sequentially.
Year over year, EBIT ex items increased $2 7 million or up 20% and EBIT margins expanded 220 basis points.
Our operating income for the quarter on a GAAP basis was $14 7 million.
Interest expense of $3 1 million was relatively flat compared to $3 2 million last quarter.
On September 30 of 2023, the company retired $75 million in senior notes, which carried a fixed interest rate of four 1%.
We used $71 million or the borrowing capacity under our bank credit facility to partially fund the maturity of these notes.
The credit facility has a variable interest rate and currently the borrowing rate under the facility is approximately 8%.
As such we expect interest rate interest expense to increase approximately 600000 next quarter.
Income tax expense at an effective tax rate of 20% and ex items was $2 6 million for the quarter on.
On a GAAP basis tax expense was $2 3 million for the quarter, which was also at an effective tax rate of 20%.
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 company's effective tax rate to be approximately 20%.
Net income ex items for the quarter was $10 3 million up from $9 8 million last quarter and $8 2 million from the same quarter last year.
On a GAAP basis, we recorded net income of $9 3 million for the quarter.
Earnings per diluted share ex items was 22 for the quarter up from 21 last quarter and up from 18 cents compared to the third quarter of last year.
On a GAAP basis earnings per diluted share was <unk> 19 for the quarter.
Turning to the balance sheet receivables was $104 1 million and decreased approximately $2 8 million from the prior quarter.
Our dsos for the third quarter improved slightly to 71 days from 72 days in the last quarter.
Inventory was $75 1 million at the end of this quarter up approximately $3 4 million from last quarter end.
Inventory turns for the quarter decreased to one five from $1 seven last quarter.
The increase in inventory this quarter is the combined effect of a slowing U S land market.
<unk> building of stock in certain international locations to service some long term international contracts and some delays in delivery of bulk international sales as I mentioned earlier.
And now the liability side of the balance sheet. Our long term debt was 181 million at September 30.
And considering cash of $16 6 million net debt was $164 4 million or up $5 6 million from last quarter.
We remain focused on reducing debt and improving the leverage ratio of the company.
Our leverage ratio increased slightly this quarter to $1 92, we have made considerable improvement from a leverage ratio of 229 at December 31 2022.
We will continue applying excess free cash towards the reduction of debt and anticipate the leverage ratio will decrease in future quarters.
At the end of the quarter, we retired and fully settled the $75 million of 12 year senior notes that were issued in 2011.
As I stated earlier, we used $71 million or the borrowing capacity under our bank revolving credit facility to partially fund the maturity of these notes.
Therefore at September 30, our debt is currently comprised of our senior notes at $110 million and with 71 million outstanding under our bank revolving credit facility.
Our credit facility has a borrowing capacity of 135 million of which approximately $56 million was still available as of September 32023.
Looking at cash flow for the third quarter of 2023 cash flow used in operating activities.
Was approximately 200000 and after paying for $3 5 million of Capex during the quarter, our free cash flow was negative $3 7 million.
<unk> from operations for the third quarter of 2023 was negatively affected by a build in working capital of $14 million.
The build in working capital was primarily due to an increase in inventory and carrying a lower level of accounts payable at September 30th.
The change in working capital also includes $11 3 million in cash tax payments during the quarter, which will partially be recovered in the fourth quarter.
The company is expecting to receive approximately $7 $1 million in tax refunds during the fourth quarter of 2023.
Looking ahead to the fourth quarter, we are forecasting cash from operations to be much improved and positive with working capital remaining flat and additional cash in excess of $7 million associated with the tax refunds.
We will continue to manage investment in working capital during a period of growth and Additionally, we expect capex to remain aligned with activity levels and for the full year of 2023, we expect capital expenditures to be in the range of 11% to $12 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 bid.
The ability to grow revenue and profitability with minimal capital requirements.
Capital expenditures have historically range from 2% to 4% of revenue even during periods of significant growth.
That same level of the laboratory infrastructure intellectual property and leverage that exists in the business today.
I will now turn it over to Gwen for an update on our guidance and outlook. Thank you Chris based.
Based on ongoing dialog with our global client base, we maintain our constructive outlook on international upstream activity for 2024 and beyond as increasing levels of investment will be required to maintain and grow hydrocarbon production.
The company anticipates, operator spending on long cycle upstream projects in both onshore and offshore environment. We will continue to expand displaying an added level of sustainability for this up cycle in the near term the global crude oil market may remain volatile due to glu.
Recession fears.
Extent and timing of Chinas economic recovery and the uncertainties related to conflicts in Russia, Ukraine, and the middle East.
Globally crude oil production growth continues to face constrained state of prolong and your investment as well as the loss of production due to natural decline from existing fields.
We continue to anticipate a multiyear international recovery supported by increased spending on exploration in many regions across the globe and expanded development of existing fields to fortify crude oil and natural gas reserves.
This underlies cores outlet for continued improvement in international onshore and offshore activity with ongoing projects around the globe, most notably across the Middle East South Atlantic margin certain areas of Asia Pacific and West Africa.
Turning to the U S.
Onshore activity in 2023 has been lower than expected as reflected by the decreased U S rig and Frac spread count.
Of course, the sequential onshore completion activity to be slightly down due to typical year end seasonality as operators complete their 2023 spending plans.
Based on these factors, we project reservoir descriptions fourth quarter 2023 revenue to range from 84 million to 86 million and operating income of $11 6 million to $13 3 million.
While we expect reservoir description international revenue to increase sequentially in several geographic regions.
The ongoing Russia, Ukraine conflict and more recent conflict in the middle East are causing some disruption to the movement in trade of crude oil.
These two geopolitical situations have created uncertainty with respect to trading patterns of crude oil and derived products and the associated laboratory assay services piece.
These situations has and may continue to adversely impact our reservoir description segment operation in Russia, Ukraine, Europe, and the Middle East.
Despite these geopolitical uncertainties client commitments on long term international projects has improved nicely year over year.
However, the pace at which these long term projects are executed by course client may vary from quarter to quarter as momentum builds.
Shifting to production enhancement.
This segment's fourth quarter 2023 revenue is estimated to range from 41 million to 46 million and operating income of $2 2 million to $4 million.
Both in production enhancement international sales and well diagnostic projects in the Gulf of Mexico are expected to offset a projected decline in U S onshore revenue.
In summary, the.
The company's fourth quarter 2023 revenue is projected to range from 125 million to 132 million and operating income of $13 8 million to $17 3 million, yielding operating margins of approximately 12%.
EPS for the fourth quarter 2023 is expected to range from 17 to 23.
The company's fourth quarter 2023 guidance is based on projections for underlying operations and excludes gains and losses and foreign exchange our fourth quarter 2023 guidance also assumes an effective tax rate of 20%.
Now I will turn 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 is the foundation of core lab's success.
In October the IEA updated its forecast for crude oil demand for 2023 to average a record high $101 9 million barrels per day.
That's up by approximately $2 3 million barrels per day from 2022, even after assessing current global financial forecasts. This continues to bode well for increasing demand for the reservoir description services that will be required to grow production and replace the natural decline of existing producing fields as.
As we look ahead, we see the rising 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 other regions early movers in the oilfield service sector that are more exposed.
Well construction of already felt the impact of this cycle shift production.
<unk> also has growing opportunities in international areas, such as with unconventional plays in the middle East and emerging conventional plays in a number of regions as well as plug and abandonment programs and mature offshore basins.
Now, let's review the third quarter performance of our two business segments, turning first to reservoir description for the third quarter of 2023 revenue came in at $85 1 million up 2% compared to Q2 and up 8% year over year.
Operating income for reservoir description ex items was $14 1 million and operating margins were 17% the highest margins since Q2 of 2020.
Margins ex items expanded approximately 320 basis points sequentially, and 590 basis points year over year incremental margins were over 100% sequentially and over 90% year over year nicely, reflecting the operational leverage in this segment.
The segment's financial performance is an indication of improving client activity across our global network now.
Now for some operational highlights from reservoir description.
During the third quarter core Lab's advanced reservoir characterization team embarked on an expansive multi well study aimed at evaluating a tight carbonate reservoir in the middle East. This comprehensive study entailed a collection of synthesis of substantial volumes of laboratory and well log data.
These datasets within employ to develop Petro physical models, enabling the assessment of production variations across a suite of lateral wells an integral component of this study involve the application of course D Code service.
D code is it proprietary geological and Petro physical modeling application in which readily available drilling data are used to determine key reservoir parameters.
These high resolution interpreted logs offer a detailed profile of the rock properties and the drilled integrals, which is especially beneficial scenarios, we're obtaining sufficient material for physical laboratory measurements proves to be operational challenging.
Also in the third quarter of 2023 cores middle East clients continue their plans to expand future production capacity, increasing the need for evaluation of complex unconventional reservoirs.
For these unconventional plays determination of the <unk> gas oil ratio was critical.
Given the complex fluid and fluid flow of behaviors of these low permeability reservoirs the gas oil ratio determined from traditional downhole fluid samples may not be representative of the insituform Leeward proportions that exists in the reservoir in line with these challenges and under our collaborative agreement with core side International.
A team of core lab reservoir optimization specialists executed a successful multi well pressure core campaign for our middle East National oil company.
Pressure course allow for intervals of the target reservoir zone to be cut and safely brought to the surface all while maintaining institute reservoir pressure. This technology ensures that all three reservoir fluid phases are captured and maintained at reservoir pressure within our core barrel.
Upon reaching the surface core lab and core side specialists orchestrated a meticulously controlled deep pressurization process, enabling the systematic capture of all reservoir fluids. The captured reservoir fluids within quantified and comprehensive compositional analyses were conducted the process enabled core lab.
Specialists to accurately determine the insert your gas oil ratio as well as other hydrocarbon properties.
<unk> pressure core data will improve reservoir models yield we're accurate reserve calculations and allowed the operator to optimize completion and production strategies.
Now moving to production enhancement or a core lab technologies continue to help our clients optimize their well completions and improved production.
Revenue for production enhancement came in at $40 2 million down approximately 10% sequentially and 14% year over year operating income ex items was $1 6 billion.
And operating margins were 4% for the third quarter of 2023 down from 10% in Q2 of 2023.
As Chris and Glenn mentioned Q3 felt the impact of lower international product sales, which can vary from quarter to quarter and a sequential 10% decline in U S land completion activity along with some Gulf of Mexico work that pushed to the right.
Now for some operational highlights in the third quarter of 2023 cores production enhancement segment was engaged by a client in the north sea to provide plug and abandonment technologies to efficiently perforate Hot heavy walled three in 13, and three eighths inch diameter casing for the cement wash process there.
It is needed for in preparation for the plugging operations required for well abandonment.
Core leverages its expertise and energetics as an alternative to traditional casing section milling, which is both slower and more costly.
Capitalizing on Core's proprietary plug and abandonment perforating system or Pac technology, the company's ballistic engineering design team created a system to address the additional depth of controlled penetration required to create communication in the annulus space between the 13 and three eight inch diameter casing and the <unk>.
<unk> inch diameter outer casing strength.
Core's new pack extended range energetic system successfully accomplish the task importantly, the extended range pack technology was delivered with a four and a half inch gun, eliminating the need to run a secondary retrieval operation to remove the downhole restrictions that would have been required for a larger diameter gun sister.
Of course pack technology successfully created communication between the casing strings maintain the integrity of the 20 inch outer casing and reduced rig time, all while allowing for the efficient recovery of the inner casing.
Also during the third quarter, Core's expertise and completion diagnostics, where employ to assess various re frac methodologies refracts presents an opportunity to cost effectively add hydrocarbon production from under stimulated wells.
Of course completion diagnostic technologies allow operators to assess various refract methods to establish the most profitable and effective approach in a given area.
And operator, we're seeking a method to improve overall zonal coverage in their unconventional reservoir refract treatments treatments.
Treatments that involve adding perforations and then re fracking the entire lateral and a single stage known as bullhead frac known as a bullhead frac, we're unable to effectively stimulate the tow half or the far end of the lateral.
As a possible solution aligner was placed inside the heal half of the original lateral making it possible to refract tow half of the well in multiple stages.
While somewhat successful this option came at a substantial cost alternatively, the operator implemented a treatment design involving the placement of an expandable liner to isolate the heal half of the lateral. This also enabled re fracking in multiple stages.
The operator, unlisted core lab to run its flow profiler engineered oil tracers to assess the post frac oil contribution from each stage of the re frac and to evaluate the effectiveness of this novel hybrid treatment design.
Flowback oil samples analyzed and Coors analytical laboratory indicated overall improved treatment coverage and substantially greater oil contribution from the more economically deployed expandable liner approach whenever innovations in completions and stimulation design or attempted core lab's expertise in completion.
<unk> can be used to better understand how the process actually worked in the subsurface.
That concludes our operational review, we appreciate your participation and more lease will now open the call for questions.
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And again it is.
Star one to answer this question queue.
Yeah.
Since there are no questions posed at this moment I would like to turn the conference back over to Larry Bruno for closing remarks. Please go ahead.
Thanks for release, Okay, well 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 two.
To address 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 both 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 always investing in <unk>.
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.
And the conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect.
Okay.