Core Laboratories N.V.'s Results Continue Heading in the Right Direction
Core Laboratories' (NYSE: CLB) financial results maintained their upward momentum in the second quarter as both revenue and earnings rose sharply. However, the quarter still wasn't quite as good as the company initially expected because the recovery in the offshore drilling market hasn't developed as fast as anticipated. It expects it to pick up by year-end, though, leaving Core Labs bullish about what's ahead.
Core Labs results: The raw numbers
Metric | Q2 2018 | Q2 2017 | Year-Over-Year Change |
|---|---|---|---|
Revenue | $175.5 million | $158.2 million | 10.9% |
Adjusted net income | $26.2 million | $21.3 million | 23.1% |
Adjusted earnings per share | $0.59 | $0.48 | 22.9% |
Data source: Core Labs.
Image source: Getty Images.
What happened with Core Labs this quarter?
Core Labs benefited from an uptick in shale drilling:
Revenue came in just above the top end of the company's revised $174 million to $175 million guidance range, which was down from the initial forecast of $177 million to $179 million it provided at the end of the first quarter due to delays in the recovery of international oil-field development activities. Earnings, meanwhile, hit the high end of its updated forecast of $0.57 to $0.59 per share. That was below its initial outlook of $0.64 to $0.66 per share due to the same issues.
However, while results weren't as good as the company had initially hoped, they were still much better than the second quarter of last year. Driving those gains was its production enhancement segment, where revenue jumped 36.1% year over year to $73.4 million. This segment benefited from the continued rebound in shale drilling.
That helped more than offset some weakness in Core's reservoir description business where sales slipped 2.1% to $102 million. This segment primarily focuses on international and offshore drilling activities, which experienced some delays in development activity during the quarter.
Core generated $19.5 million in free cash flow during the quarter, which it used to pay its quarterly dividend.
What management had to say
One thing management highlighted in the earnings press release as a key driver during the quarter was that the company's operating margin improved 170 basis points to 19.4%. That's "the result of higher-technology services and products being requested by Core's technologically sophisticated client base and increased utilization of the Company's services and products, particularly in the U.S market." It noted that this is due to a notable shift within the industry to drill to earn returns on capital as opposed to boosting production as much as possible. Because of that, the company believes it will continue to see margins improve in the future, which should enable earnings to keep expanding faster than revenue.
Looking forward
While the oil market is clearly improving, there are a couple of near-term headwinds that will keep the rebound to a more moderate pace over the next few months. Offshore and international customers are still slowing ramping back up, which will yield lower-than-expected growth in the third quarter. Meanwhile, pipeline issues in the Permian Basin will force drillers to slow their red-hot pace. As a result, Core only expects a modest improvement in the third quarter, with revenue rising to a range of $177 million to $179 million while earnings should come in between $0.64 to $0.66 per share. However, the company expects the industry's pace to pick up toward the end of this year and into 2019, which should fuel accelerated revenue and earnings growth next year.
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Matthew DiLallo owns shares of Core Laboratories. The Motley Fool recommends Core Laboratories. The Motley Fool has a disclosure policy.
