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Core Laboratories Underwhelmed in Q2

Matthew DiLallo, The Motley Fool

The oil market remained volatile during the second quarter, with crude prices crashing by more than 20% for the second time in a year. That slumped caused oil companies in North America to slow their activity levels, which weighed on service providers like Core Laboratories (NYSE: CLB). Because of that, the company's second-quarter earnings came in below its expectations. Given the oil market's continued volatility, Core anticipates this sluggishness to continue in the third quarter.

Core Labs results: The raw numbers

Metric

Q2 2019

Q2 2018

Year-Over-Year Change

Revenue

$169 million

$175.4 million

(3.7%)

Adjusted net income

$20.7 million

$26.2 million

(20.9%)

Adjusted earnings per share

$0.46

$0.59

(22%)

Data source: Core Labs.

What happened with Core Labs this quarter?

While international activities are improving, North America was under pressure again:

  • Core's revenue not only declined year over year but also came in below its $172 million to $175 million guidance range. Though that's due in part to the sale of a non-strategic business in Asia-Pacific, which shaved $2 million off its top line during the period.
  • The company's reservoir description business performed well during the second quarter. Revenue reached $105.6 million, which was up 2% from the first quarter and 8% year over year despite the sale of that business. Operating earnings, meanwhile, jumped 30% sequentially and 23% from the year-ago period. The main driver was an improvement in international and offshore activities.
  • Revenue from Core's production enhancement business, on the other hand, declined 4% sequentially and 14% year over year due to weakness in the U.S. onshore market. The company did, however, post an 18% increase in the sales of its high-end perforating systems as customers increasingly adopt more advanced products to improve returns.
  • Adjusted earnings per share declined more than 20% year over year, mainly because of the weakness in the production enhancement business where operating income plunged 43%. As a result, the company's results came in a bit short of its guidance range of $0.47 to $0.50 per share.
  • Core Labs generated $10 million of free cash flow during the quarter. That marked the company's 71st straight quarter of producing excess cash.
Silhouette of an offshore oil rig at sunset.

Image source: Getty Images.

What management had to say

As Core Lab's management team wrote in the earnings press release, "Improvement in year-over-year and sequential financial performance in reservoir description is a result of increased international and offshore client activity." That's because the offshore drilling market is finally starting to rebound after years of steadily declining. Oil companies have approved new projects in key markets such as the North Sea, Brazil, and the Gulf of Mexico, which is driving the need for Core's services. For example, the company noted that it's working with Talos Energy to provide wellsite and laboratory services for its Zama Project in the Gulf of Mexico. The companies captured more than 700 feet of core samples to analyze, which will help Talos develop this area on Mexico's side of the Gulf.

Looking forward

Core Labs noted that healthier crude oil market fundamentals would continue to drive international activity levels, which should keep improving during the third quarter. However, it expects drilling activity in the U.S. to decline as oil companies remain focused on producing free cash flow. That mixed outlook leads the company to estimate that its revenue will only improve slightly during the third quarter to a range of $171 million to $175 million. In the meantime, it sees earnings coming in between $0.48 and $0.52 per share.

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Matthew DiLallo owns shares of Core Laboratories. The Motley Fool recommends Core Laboratories. The Motley Fool has a disclosure policy.