Core Laboratories, N.V.
/ (CLB-NYSE)/ Equity Research / CLB | Page 2
Current Recommendation / UNDERPERFORM
Prior Recommendation / Neutral
Date of Last Change / 01/08/2015
Current Price (01/07/15) / $113.73
Target Price / $103.00
SUMMARY
We are downgrading Core Laboratories to Underperform from Neutral in a weak crude pricing environment as the business of oil field services companies is directly correlated to the commodity price. The price of crude has tumbled more than 50% since last June owing to ample supply of the commodity and lackluster global demand. On top of that, oil price is anticipated to remain low in 2015 too. Hence, we don’t expect the company to earn considerable cash flows in the coming months. Core Laboratories has also lowered its fourth-quarter 2014 earnings per share (EPS) guidance from its previous projection to $1.53 to $1.56. As a result, we see the company as a risky bet that investors should exit./ Equity Research / CLB | Page 2
SUMMARY DATA
52-Week High / $216.5152-Week Low / $110.04
One-Year Return (%) / -36.51
Beta / 0.94
Average Daily Volume (sh) / 595,499
Shares Outstanding (mil) / 44
Market Capitalization ($mil) / $4,981
Short Interest Ratio (days) / 4.12
Institutional Ownership (%) / 98
Insider Ownership (%) / 1
Annual Cash Dividend / $2.00
Dividend Yield (%) / 1.76
5-Yr. Historical Growth Rates
Sales (%) / 10.4
Earnings Per Share (%) / 20.6
Dividend (%) / 54.0
P/E using TTM EPS / 19.8
P/E using 2015 Estimate / 19.6
P/E using 2016 Estimate / 19.1
Zacks Rank *: Short Term
1 – 3 months outlook / 5 - Strong Sell
* Definition / Disclosure on last page
Risk Level * / Average,
Type of Stock / Large-Growth
Industry / Oil-Field Svcs
Zacks Industry Rank * / 245 out of 267
OVERVIEW
Amsterdam, Netherlands-based Core Laboratories N.V. (CLB) is an oilfield service company that provides reservoir management and production enhancement services to the oil and gas industry on a global basis. The company operates in over 50 countries and divides its operations in three principal business lines: Reservoir Description, Product Enhancement, and Reservoir Management.
Ø Reservoir Description: The Reservoir Description segment is responsible for analyzing core samples of reservoir rocks in order to determine the quantity and quality of hydrocarbons present. This helps determine the rates at which oil and gas can be produced from the reservoir. During 2013, the Reservoir Description segment generated approximately 49.0% of the company’s revenues and 44.0% of its operating income.
Ø Product Enhancement: The Product Enhancement segment is engaged in helping operators increase oilfield recovery. Most of the company’s clients in this business are located in the Middle East, North Africa, and the Asia Pacific regions. A vast majority of Core Laboratories’ Product Enhancement products are patented. This segment contributed 42.0% of revenues and 47.0% of operating income in 2013.
Ø Reservoir Management: The Reservoir Management segment serves to integrate both reservoir description and product enhancement practices in the most productive way possible. The company manages several large scale reservoir production projects using its technical proprietary analysis to ensure that every economical barrel of oil and thousand cubic feet (Mcf) of gas is recovered. In 2013, the Reservoir Management segment accounted for 9.0% of the company’s revenues and 9.0% of its operating income.
REASONS TO SELL
Ø WTI Crude oil price fell more than 50% since Jun 2014 owing to plentiful supply of the commodity in the face of lackluster global demand. Moreover, oil price is expected to stay low throughout 2015. Since the business of oil field service firms are positively correlated to the price of crude, we don’t expect Core Laboratories to earn considerable cash flows in the coming months.
Ø Core Laboratories reduced its fourth-quarter 2014 EPS guidance to the range of $1.53 to $1.56. The lowering from the prior guided range was prompted by lower profitability from Russia, termination of work in Kurdistan and reduced activity in Southern Iraq.
Ø Core Laboratories relies on its ability to develop and acquire essential products and technologies that drive its operational performance and growth. If their technologies and/or products become obsolete or cannot be brought to market in a timely and competitive manner, they may face severe operational and financial dilemmas.
Ø Core Laboratories has historically acquired businesses that are complementary to its existing technologies, operations and assets. The company may find it difficult to complete accretive transactions in the future, which could negatively impact its growth rate.
Ø The use, storage and disposal of chemicals inherent in Core Laboratories’ analytical technologies may leave them vulnerable to strict laws and regulations in compliance with environmental safety. Restrictions and laws enforced by the government may require the purchase of costly equipment, or it could involve steep fines and suspension of operations for non-compliance. The trend toward tougher environmental regulations will continue into the future.
RISKS
Ø Core Laboratories’ deep portfolio of proprietary products and services position it well to operate successfully in the environment of low commodity prices and growing maturity in the global hydrocarbon reserve base. This would lead to steady growth rates going forward. Success on this front may adversely affect our recommendation.
Ø Core Laboratories’ results are positively related to oil and gas prices, which are inherently volatile and subject to complex market forces. Realized prices could differ significantly from our estimates, thereby affecting the company’s revenues, earnings and cash flows.
Ø Core Laboratories provides services to more than 30% of the total oil fields worldwide. Hence by diversifying business all over the world, the company is capable of surviving well in a low commodity pricing environment. Hence, Core Laboratories’ shares could outperform our target price.
RECENT NEWS
Fourth Quarter 2014 Results Announcement
Core Laboratories plans to release its fourth quarter 2014 results on Jan 28, 2015 after the closing bell.
Third Quarter 2014 Results
On Oct 22, 2014, Core Laboratories reported third-quarter 2014 adjusted diluted earnings of $1.53 per share, beating the Zacks Consensus Estimate by $0.02. The bottom line also improved from the year-ago quarter adjusted earnings of $1.36 per share. Higher sales from the newly introduced technologies and services led to the beat.
Total quarterly revenue of $276.1 million was about 1% higher than the prior-year quarter. However, reported revenues failed to meet the Zacks Consensus Estimate of $285 million.
Segment Performance
Reservoir Description: Segment revenues were $131.4 million, compared with $131.5 million in third-quarter 2013. The flattish results reflect the almost same amount of international and global deepwater activity as last year.
Operating income (excluding foreign exchange losses) for the unit was almost flat year over year at $36.3 million. Operating margin for the quarter was 28%.
Production Enhancement: Segment revenues were approximately $122.2 million in the reported quarter against $119.5 million in third-quarter 2013. Increased sales of higher-margin technology and services aided the results.
Operating income (excluding foreign exchange losses) increased 25% year over year to $46.7 million. Operating margin for the quarter was 38%.
Reservoir Management: Segment revenues of about $22.6 million were up 2.1% year over year. An expansion of the company’s Joint Industry Projects supported the increase.
Operating income (excluding foreign exchange losses) increased 18% year over year to $7.6 million, resulting in the most profitable third quarter for the company. Operating margin for the quarter was about 34%.
Balance Sheet & Free Cash Flow
As of Sep 30, 2014, Core Laboratories had cash and cash equivalents of $25.3 million. Capital expenditures for the third quarter were $7.8 million. The company generated free cash flow of almost $66.6 million.
Quarterly Dividend & Share Repurchase
On Oct 6, 2014, the company’s board of directors declared its quarterly cash dividend of $0.50 per share ($2.00 per share annualized). The new dividend will be paid on Nov 25 to shareholders of record on Oct 17.
During the reported quarter, Core Laboratories bought back 563,000 shares, reducing its outstanding diluted share count to 44,155,000, a 16-year low for the company.
Guidance
For the fourth quarter, the company expects EPS in the $1.53–$1.56 range, down from $1.56 to $1.61 projected earlier. Lower profitability from Russia, termination of work in Kurdistan and reduced activity in Southern Iraq are reflected in the new guidance.
Core Laboratories expects fourth-quarter revenues in the range of $275–$280 million.
The company foresees higher North American activity in emerging unconventional oil plays. Meanwhile, in unconventional tight-oil and gas plays, activity is expected to remain stable. Core Laboratories’ deepwater Gulf of Mexico coring programs should further support growth. In the international market, the company anticipates a flattish trend in the remainder of the year, based on weak Brent oil prices.
VALUATION
Being an oil field service company, the company’s business is highly correlated with crude prices. Hence we can’t expect the company to earn significantly in the coming months amid weak crude pricing. Moreover, Core Laboratories expects its fourth-quarter 2014 EPS in the range of $1.53 to $1.56, lower than its previous guidance.
These factors are reflected in our new Underperform recommendation on Core Laboratories.
Core Laboratories’ current trailing 12-month earnings multiple is 19.8x, compared with the 18.4x industry average and 18.4x for the S&P 500. Over the last five years, shares of Core Laboratories have traded in a range of 21.1x to 37.2x trailing 12-month earnings.
Our $103 price objective reflects a 2015 P/E multiple of 17.8x, which is within historical trading ranges.
Key Indicators
Earnings Surprise and Estimate Revision History
DISCLOSURES & DEFINITIONS
The analysts contributing to this report do not hold any shares of CLB. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1105 companies covered: Outperform - 15.3%, Neutral - 78.6%, Underperform – 5.9%. Data is as of midnight on the business day immediately prior to this publication.
Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company’s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock’s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.
Analyst / Nilanjan BanerjeeEditor / Sudipta Mukherjee
QCA
Lead Analyst / Nilanjan Choudhury
Nilanjan Choudhury
Reasons for Update / Earnings Update
/ Equity Research / CLB | Page 2