Q4 2023 Core Laboratories Inc Earnings Call

Participants

Larry Bruno; Chairman, President, & CEO; Core Laboratories Inc

Gwendolyn Gresham; Senior Vice President - Corporate Development and Investor Relations; Core Laboratories NV

Chris Hill; SVP, CFO; Core Laboratories Inc

Patrick Ouellette; Analyst; Stifel Financial Corp.

Don Crist; Analyst; Johnson Rice & Co.

Presentation

Operator

Good morning, and welcome to the Core Laboratories fourth-quarter 2023 earnings conference call. (Operator Instructions) Please note this event is being recorded.
I would now like to turn the conference over to Larry Bruno, Chairman and CEO. Please go ahead.

Larry Bruno

Thanks, Andrea. 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' fourth-quarter 2023 earnings call. This morning, I'm joined by Chris Hill, Core's Chief Financial Officer, and Gwen Gresham, Core's Senior Vice President and Head of Investor Relations.
The call will be divided into six segments. Gwen will start by making remarks regarding forward-looking statements. We'll then have some opening comments, including a high-level review of important factors in Core's Q4 performance. In addition, we'll review core strategies in the three financial tenets that 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, Gwen will provide some comments on the company's outlook and guidance. I'll then review Core's two operating segments, detailing our progress, and discussing the continued successful introduction and deployment of Core Lab's technologies, as well as highlighting some of Core's operations and major projects worldwide. Then, we'll open the phones for Q&A session.
I'll now turn the call over to Gwen for remarks on forward-looking statements.

Gwendolyn Gresham

Before we start the conference this morning, I'll mention some of the statements we will 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 those directly comparable GAAP financial measures is included in the press release announcing our fourth-quarter results. These non-GAAP measures can also be found on our website.
With that said, I'll pass the discussion back to Larry.

Larry Bruno

Thanks, Gwen. Moving now to some high-level comments about the fourth quarter of 2023 core continued to build on the operational momentum established over the past few quarters, revenue was up 2% compared to Q. three softness in U.S. land completion activity late in the quarter, along with disruptions to the demand for crude oil assay work in response to the Middle East conflict that emerged in Q4 produced headwinds offsetting those headwinds. We saw continued improvement in the demand for Reservoir core and fluid analysis. And there was a rebound in both international product sales and the demand for completion diagnostic services for Production Enhancement compared to the third quarter ex items, operating income for the fourth quarter was $15 million and operating margins were 12%, down slightly from 13% in Q3 of 2023, fourth quarter 2023 operating margins. Ex-items remained strong in Reservoir Description at 15%, although were down from 17% in Q. three due to increased labor costs. As noted, demand for reservoir rock and fluid analysis across our global client base continues to rise and more projects are progressing from the planned and committed phase and into the early stages of execution demand for Reservoir Description, assay work on crude oil and derived products was somewhat uneven during the fourth quarter as geopolitical conflicts in both Ukraine and the Middle East impacted maritime, hard hydrocarbon cargo movement and trading patterns. We anticipate volatility and uncertainties to remain in the demand for these laboratory services as these conflicts continue.
Production Enhancement revenue, operating income and margins all improved sequentially, but U.S. land completion activity, particularly in December, was below our earlier expectations. For Q4, operating margins, Production Enhancement ex-items were 6% up from 4% in Q3, in line with our stated financial strategy, core dedicated free cash to reducing debt by $15 million in the fourth quarter, accounting for approximately 8% of our outstanding debt balance, we will continue to focus free cash on reducing debt and strengthening our balance sheet.
Lastly, for the full company, EPS was $0.19 per share. Ex-items compared to $0.22 in Q3, reflecting both increased labor costs and higher interest expense in Q4. As we look ahead, Qorvo 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. We achieved strong quarter-over-quarter improvements, cash from operations and free cash flow in the fourth quarter, our leverage ratio was reduced to 1.76, the lowest level since Q2 of 2019 and a meaningful step in strengthening our balance sheet and advancing to our stated goal of achieving a leverage ratio of 1.5 times or lower as we continue to reduce debt or we'll also review various options for returning value to our shareholders through the use of excess free cash.
Now to review Core Lab's strategies and the financial tenets 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 in the operational review section of the call while we navigate through the current challenges and pursue growth opportunities, the company will remain focused on its three long-standing long-term financial tenets, 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 our employees for their dedication, loyalty and adaptability in meeting all of our client needs and to the commitment that many have shown as we navigate the current challenges and prepare for a more active market.
I'll now turn it over to Chris for the detailed financial review.

Chris Hill

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.
So now looking at the income statement. Revenue was $128.2 million in the fourth quarter, up 2% compared to the prior quarter and flat year over year. Activity associated with international upstream projects and product sales to international clients continues to expand. However, the growth was partially offset by lower level of product sales in the US land market. Additionally, laboratory services associated with crude assay analysis have been adversely impacted in certain regions due to the ongoing conflict in Ukraine, Russia and the Middle East causing disruptions to the trading and maritime movement of crude oil of this revenue.
Service revenue, which is more international, was $94.7 million for the quarter, up 2% sequentially and up 6% from last year. During the quarter, committed work volumes for traditional reservoir rock and fluid analysis, as well as carbon capture and storage projects continue to build across our global laboratory network Additionally, we experienced nice sequential growth in revenue from our well and completion diagnostic services associated with both international and Gulf of Mexico projects. However, sequential growth in service revenue was partially offset by lower levels of crude assay work due to the disruptions caused by the ongoing ongoing conflict previously mentioned.
For the full year of 2023, service revenue of 371.9 million was up over 7% compared to $347 million in 2022. As Larry mentioned earlier, client activity levels associated with international upstream projects improved nicely in 2020 23 and are expected to continue building throughout 2024. Product sales, which is more equally tied to US and international activity were $33.5 million for the quarter, up 3% sequentially, but down 13% from the same quarter in 2022. Product sales to international markets were up 18% sequentially with strong sales during the quarter and a couple of sales that were originally scheduled for the third quarter, which were delivered in the fourth quarter growth in international product sales was partially offset by the decrease in US onshore activity and associated U.S. product sales during the quarter. For the full year of 2023, product sales of $137.9 million were down a little over 3% from $142.8 million in 2022 primarily associated with activity decline in the U.S. onshore market for the onshore rig count in the U.S. decreased by approximately 20%.
Moving on to cost of services, ex-items for the quarter was approximately 75% of service revenue comparable to the prior quarter and an improvement of 78% compared to the fourth quarter of 2022 over 80% of the Company's personnel support our services business and the Company implemented its annual merit cycle, October one, which increased personnel costs for the fourth quarter. Additionally, the service side of our business has been more impacted by the geo geopolitical conflicts and disruptions with the associated crude assay laboratory services. However, reservoir rock and fluid analytical programs associated with international upstream projects have not been impacted by these conflicts and continue to build outside of the temporary disruptions. We continue to see improvements in absorption of costs and utilization of our global laboratory network and anticipate additional improvement with continuing growth in service revenue.
For the full year of 2023, cost of services ex-items was approximately 76% of service revenue, an improvement from 79% last year. Cost of sales ex items in the fourth quarter was 91% of revenue compared to 85% in the prior quarter. The increase this quarter is primarily due to reduced manufacturing efficiencies associated with lower US onshore sales. The Company anticipates that US onshore activity levels will remain at similar levels for 2024 as such, we are finalizing plans to improve profitability and manufacturing efficiencies.
G&a ex-items for the quarter was $8.7 million, a decrease from the prior quarter, which was 9.5 million. Full year 2023. G&a ex items was 36.6 million compared to $39.3 million in the full year of 2022. For 2024, we expect G&A to be approximately 40 to 44 million. Depreciation and amortization for the quarter was $3.9 million, flat compared to the last quarter. Ebit ex-items for the quarter was 15 million, down 1 million from last quarter, yielding an EBIT margin of 12% year over year. Ebit ex-items for the fourth quarter was relatively flat to last year. Our operating income for the fourth quarter on a GAAP basis was 14.6 million. Full year 2023 EBIT ex-items was $61.2 million, up 36% from $44.8 million in 2022. On a GAAP basis, EBIT was $54.6 million for 2023 and $41.5 million in 2022. Interest expense of $3.6 million increase this quarter when compared to $3.1 million in the prior quarter, despite reducing our debt by 15 million during the quarter. As discussed during the last call, $75 million in senior notes matured on September 30th, of 2023, which carried a fixed interest rate of 4.1%. We used the borrowing capacity under our 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, our interest expense increased for the fourth quarter of 2023 income tax expense and an effective tax rate of 20%, and ex-items was $2.3 million for the quarter. On a GAAP basis, tax expense was $4.3 million for the quarter, which was primarily impacted by an additional adjustment of deferred income taxes associated with the redomestication of our parent company from the Netherlands to the US for the full year.
Income tax expense on a GAAP basis was a small benefit, primarily due to the tax benefit of $11.6 million associated with the redomestication transaction effective tax rate will continue to be somewhat sensitive to the geographic mix of earnings across the globe and the impact of items discrete 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 $8.9 million, down from $10.3 million in the prior quarter and $9.3 million from the same quarter last year. On a GAAP basis, we recorded net income of $6.5 million for the quarter for the full year 2023 net income ex items was $37.8 million, up 42% from $26.6 million last year. And GAAP net income for the full year 2023 was 40.9 million. Earnings per diluted share ex-items was $0.19 for the quarter, down from $0.22 in the prior quarter and $0.2 from the same quarter last year. On a GAAP basis, earnings per diluted share was $0.14 for the quarter. For the full year 2023 earnings per diluted share. Ex-items was $0.8, up 40% from last year. And on a GAAP basis, full year 2023 was $0.86.
Turning to the balance sheet, receivables were 109.4 million, an increase of approximately $5.3 million from the prior quarter. Our DSOs for the fourth quarter were at 71 days and comparable to the prior quarter. Inventory was 71.7 million at the end of this quarter, a decrease of approximately $3.4 million from last quarter end.
Inventory turns for the quarter improved to 1.7 from 1.5 in the last quarter. And with a focused effort effort for improvement in our inventory management, we anticipate inventory turns will gradually improve and inventory levels to decline as we progress into two 2024.
On the liability side of the balance sheet, our long-term debt was 166 million at December 31st, 2023, a reduction of 15 million this quarter. Considering cash of $15.1 million, net debt was one $50.9 million, down from 164.4 million at the end of the prior quarter. We remain focused on reducing debt and improving the leverage ratio the company. Free cash flow generated during the quarter was during the quarter was primarily used to reduce debt. Our leverage ratio improved considerably to 1.76 from 1.92 in the prior quarter. Our debt is currently comprised of our senior notes at $110 million and $56 million outstanding under our bank credit facility. Our credit facility has a borrowing capacity of $135 million, of which approximately 69 9 million was still available at December 31st. Bill announcing the company's commitment and focus on reducing debt in the fourth quarter from since announcing from the fourth quarter of 2019, we have reduced our net debt by almost 50% the company will continue applying free cash towards reducing debt until we reach our target ratio of 1.5 times or lower.
Looking at cash flow for the fourth quarter of 2023. Cash flow from operating activities was $19.4 million and after paying for 2.7 million of CapEx during the quarter, our free cash flow was 16.7 million. The fourth quarter's cash flow includes the receipt of a tax refund of approximately $7 million. However, it's also a reflection of improved profitability and inventory management looking ahead to 2024, we are forecasting cash from operations to improve compared to 2023, and we will continue to manage investment in working capital during a period of growth. Additionally, we expect CapEx to remain aligned with activity levels. And for the full year of 2024, we expect capital expenditures to be in the range of 14 to $16 million. Projected CapEx for 2024 also includes approximately $2 million associated with consolidation of some operational facilities in Houston, which will reduce long-term operating costs once complete CORE will continue its strict capital discipline and asset-light business model with capital expenditures primarily targeted at growth opportunities. Core Labs operational leverage continues to provide the ability to grow revenue and profitability with minimal capital requirements. Capital expenditures have historically ranged from 2% 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 and projecting company's financial results, particularly for those shareholders who utilize discounted cash flow models to assess valuation.
I will now turn it over to Gwen for an update on our guidance and outlook.

Gwendolyn Gresham

Thank you, Chris. For 2020 for the Company will continue to execute our strategic plan of technology investments targeted to both solve client problems and capitalize on Core's growth opportunities. As part of the strategic plan, the company will remain focused on generating free cash, reducing debt and maximizing return on invested capital. We maintain our constructive outlook on international upstream projects for 2024 and anticipate sustainable activity growth in the years ahead to support crude oil demand and energy security. Crude oil demand increased in 2023 and is anticipated to continue growing in 2024. Consequently, increased investment in the development of onshore and offshore crude oil fields will be required to maintain and grow hydrocarbon production in the near term, global crude oil market may remain volatile due to global recession fears and the uncertainties related to the ongoing conflict in Russia, Ukraine and the Middle East. As the international recovery continues committed long term upstream projects from the Middle East, South Atlantic margin, certain areas of Asia Pacific and West Africa support year-over-year growth for Core Lab as customary with typical seasonal patterns will cause activity in the first quarter 2024 to decline in some regions. As such, the Company anticipates reservoir descriptions first quarter revenue to be down low to mid single digits. Increased client activity in some regions may help mitigate the typical seasonal decline. The geopolitical situations in Russia, Ukraine and the Middle East continue to create volatility with respect to trading patterns in maritime transportation of crude oil and derived products along with the associated laboratory assay services that we provide.
Now turning to the U.S. onshore drilling and completion activity in 2024 is anticipated to be flat compared to 2023. However, market penetration of Core's proprietary energetics system and completion diagnostic service technologies are projected to outperform activity levels for the first quarter of 2020 for onshore drilling and completion activity was adversely impacted by extreme freezing conditions in January. However, activity is expected to improve as the quarter progresses as a result of these factors, reservoir descriptions, first quarter revenue is projected to range from 80 million to 84 million and operating income of 10.1 million to 11.9 million. Core's production enhancement segment first quarter revenue is estimated to range from 42 million to 44 million and operating income of 1.5 million to $2.2 million.
In summary, the company's first quarter 2024 revenue is projected to range from 122 million to $128 million and operating income of 11.8 million to 14.3 million, yielding operating margins of approximately 10%. Eps for the first quarter is expected to range from $0.14 to $0.18. The company's first quarter 2024 guidance is based on projections for underlying operations and excludes gains and losses in foreign exchange. Our first quarter guidance also assumes an effective tax rate of 20%.
And now I will pass the discussion back to Larry.

Larry Bruno

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.
Looking at the macro outlook, the IEA recently updated its forecast for crude oil demand for 2024 to average a record high 103.5 million barrels per day. That's up by approximately 1.2 million barrels per day from 2023, even after assessing current global financial forecasts. This continues to bode well for the increasing demand for Reservoir Description services that will be required to grow production and replace the natural decline of existing producing fields.
As we look ahead, we see the rising international rig count over the past 1.5 has a harbinger of an improving landscape for Reservoir Description, a trend that we project will play out for the next several quarters, particularly in the Middle East, North and South America as well as most other regions. Production Enhancement, in addition to its exposure to the US land market also has expanding opportunities in international areas such as with unconventional plays in the Middle East and emerging conventional plays in a number of regions. Furthermore, core continues to expand its line of innovative offerings for plug and abandonment programs in mature offshore basins around the globe. Now let's review the fourth quarter performance of our two business segments. Turning first to Reservoir Description, for the fourth quarter of 2023, revenue came in at $84.6 million flat compared to Q3. Operating income for Reservoir Description, ex-items was $12.3 million and operating margins were 15%, while still strong, margins were down approximately 200 basis points compared to Q3 due to increased labor costs. For the full year 2023 Reservoir Description revenue was up 8% compared to 2022 and margins ex-items were 14% for 2023, up from 8% in 2022. For the segment ex items, full year incremental margins were over 85%, nicely reflecting both our strategic focus on improving operational efficiencies and the strong operational leverage available in our business model as client activity picks up.
Now for some operational highlights from reservoir description in the fourth quarter of 2023 core, we've initiated a reservoir characterization research program at our state-of-the-art reservoir rock and fluid laboratory in Rio de Janeiro, Brazil. This project in collaboration with an international operating company focused on 600 feet of conventional core recover from the Santos Basin, specifically targeting deepwater pre-salt formations. Central to the evaluation of these rocks was Core Lab's dual energy CAT scan technology. The CAT scan data enabled the identification of depositional textures and sedimentary structures and also delineated diet genetic variables that control reservoir quality. This cutting-edge digital technology seamlessly complements other rock characterization tools, along with the traditional physically measured core analysis datasets employed in the project Core Lab advances in applying CAT scan technology to Reservoir Description projects are being used to improve and accelerate analytical programs across our global lab network.
Also during the fourth quarter, Core Lab's Colombian operation conducted an enhanced oil recovery project in the Laos Piedemonte Basin of Colombia. The project objective was to maximize hydrocarbon production and identify the optimum enhanced recovery mechanism for these aging fields study included a full suite of tests such as pressure volume, temperature or PVT testing, hydrocarbon swelling, multi contact tests and asphalt in onset pressure determination, core leverage the internal expertise and capabilities of several of its advanced technology centers to accelerate the delivery on this time sensitive project.
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 $43.6 million, up approximately 8% sequentially. Operating income ex items was $2.4 million and operating margins were 6% for the fourth quarter of 2023, up from 4% in Q. three. Sequential incremental margins were over 20%. These quarter-over-quarter improvements reflect higher US and international demand for completion diagnostics, along with a rebound in international product sales.
Now for some operational highlights in the fourth quarter of 2023 and operating in the Rocky Mountains approach, Core Lab's production enhancement team for recommendations on how to meet specific reservoir treatment rates and pressures for their ongoing plug-and-perf completions. Core's production enhancement team employed proprietary modeling software to predict perforation hole requirements for a given treatment pressure treatment rate and whole size consistency. Core Labs team provided the client with the optimum solution with computational results verified by direct physical measurement conducted a core lab testing facility. The solution utilized Core's industry-leading Hero per frac family of consistent hole size, shape charges to achieve the treatment rates and pressures the operator desired for their completion design EUR per frac shaped charges aid in reducing both treatment rates and pressures as well as reducing costs by achieving industry leading whole science consistency. After deploying the HERO per frac shaped charges and a series of wells. The operator achieved the desired rates and pressures which align with those predicted by both the laboratory physical tests and the computational models at Core Lab provided Core's collaboration led to successful field trials. Subsequently, the operator specify the core laboratories here are perfect. Payroll per frac family of consistent hole shaped charges will be utilized for all of their 2020 for completion needs.
Also during the fourth quarter of 2023, core diagnostic technologies were employed to assess high-profile sand control well completions in both the US and international offshore markets. In the Gulf of Mexico, a deepwater operator needed to diagnose the competency of their frac pack completion, Core Lab's proprietary Spectre stim, proppant tracing, SpectraScan gamma ray logging and pack scan density logging technologies were brought to the task after processing logs. Core's engineering team determined that there was an effective annual a gravel pack. However, the diagnostic technologies also revealed that there was insufficient proppant placement across producing zone to ensure the long-term stability of the completion that would be required to maintain optimum hydrocarbon production rates. The operator executed a cost effective remediation re-frac pack to top off the interval, thus averting a costly completion failure in the future.
Also offshore Trinidad, Core's proprietary logging technologies were used to determine the competency of an open-hole gravel pack course pack. Scan log revealed an annual avoid in the lower portion of the sand control screen with careful measurement and calculation. Core team determined that there was a sufficient profit reserve above the top of the screen to fill in this void. Core technical team recommended that the operator slowly bring the well on production. So as to allow the void to be gradually filled from the profit reserve. The operator followed Core's recommendation and the well generated sand free hydrocarbon production. The operator shared that had it not been for Core's recommendation, they would have flowed the well hard as per their standard practice and the completion would have likely failed.
That concludes our operational review. So we appreciate your participation and Andre will now open the call for questions.

Question and Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions) Patrick Ouellette, Stifel.

Gwendolyn Gresham

Morning, Patrick.

Patrick Ouellette

Hey, good morning. I'm on for Stephen Gengaro. Thanks for taking the time John, could you give us an update on the competitive landscape for the U.S. perforating markets? And do you have any thoughts on the potential sale of DynaEnergetics and the impact that has on competition?

Larry Bruno

Yes. I mean, I think it's a crowded market.
This is no other way to look at it. There's been a lot of entrants into the field. I think Core Lab's perspective, we still maintain a strong competitive edge in the shaped charge and energetics that are used to perforate the wells that's always has been our wheelhouse and we offer competitive preassembled gun systems and a variety of other products into that market that we think offer a highly competitive set of solutions. And yes, the data folks, I mean, I think that's a question best asked to the good folks up there. And I think there you may be seeing some reflection of the landscape that that they see that there's alternative products including core labs that are gaining traction.
Chris or Glenn, you want to add anything to that now?

Chris Hill

I mean, I mean, when we look at it from the outside, it makes sense what they've announced. So it doesn't surprise us that they they are looking at how to best maximize the businesses that they have in the shareholder value. So it makes sense to us that they're divesting some of the businesses that it looks like they projected, they want to go with Arcadia.

Larry Bruno

So yes, they make good products for completions. And no question about it highly regarded. They weren't ready to shop there, and we'll see how that plays out.

Patrick Ouellette

Great. Okay. Thanks for that. And then could you talk about margin progression in Reservoir Description and any thoughts around potential incrementals in the second half of 2024?

Larry Bruno

Yes. I think that that segment is highly exposed to international activity, which we see that progressing call it low double digits next year. Again, I mean, I think we have full year incremental margins in 2023 for Reservoir Description of over 85% as pretty lofty number there.
And so whether we can maintain that, that exact number might be a little bit challenging, but it's going to be high modeling that out it at greater than 50%, 60% incremental margins on growth there on incremental revenue, I think is a is very achievable for us, um, and some are we always look at the our goal of getting back to that 20% increase of 20% operating margin as sort of the baseline that we'd like to see in a normal environment.
And then up from there and we get kind of close in Q3. It was timely to do some merit increase at the beginning of Q4 that raised our labor cost, but we felt was needed to be done too with for our staff. So little bit of a step back from 17% to 15% there, but we think it will progress up. And I think dialing in that low double digit growth for international and applying a 50 60% incremental margins and probably toward the higher end of that is a good basis for coming up with a model for forecasting Reservoir Description performance.

Chris Hill

The only thing I would add that's a little bit of a headwind for us is and we mentioned it because it's real disruptions from the geopolitical. And when these happen, it's very difficult for us to adjust our costs. So the impact, it's not just to revenue, it does impact the margins as well. And sometimes they're temporary. So you just have to kind of manage your way through that with your cost structure. So that's a little bit of a headwind.
Yes.

Larry Bruno

So for example, one of the things we dialed into our thoughts about Q1 was we saw a pickup in the conflict in Russia, Ukraine. And of course, the focus of a lot of that conflict has been on infrastructure that deals with the maritime transportation of hydrocarbons kind of and I think Core Lab, maybe among our peer group, a little bit unique and heavy exposure to that, um, that those laboratory services that are that are needed for that cargo transportation. So it kind of lands on us a bit, and we dialed that into our thinking from seeing what happened both in the Red Sea and across some of the Russian ports.
And so it's hard to predict that. And to Chris's point, it's also hard to manage your costs there. You don't want to reflexively start slashing costs if it's going to be a temporary disruption.
So we'll make the right decision over time on those, and we'll keep our costs aligned but it's very hard to make those cost adjustments real time when things are unfolding at an unpredictable pace, if that all makes sense.

Patrick Ouellette

Thanks a lot. I'll turn it back to Peter.

Larry Bruno

Thanks, Matt.

Operator

Don Crist, Johnson Rice.

Don Crist

Dan Morris joining us.
In your commentary in the press release, you talked about many of the Middle East projects kind of moving into implementation now, what where are we in the other parts of the world from the implementation standpoint, i.e., is Brazil and beyond really kind of ramping up now in the Middle East in the Far East as well or where we are in the lifecycle of those projects?

Larry Bruno

Yes, John, I'd probably put them in that order Middle East is the tip of the spear, and that's across multiple countries in the region, some and then some And then I'd say South Atlantic margin and picking up for us, I would throw in also some West Africa work as well. And then I would say lagging that a bit is Asia Pac, although we've got some pretty bright spots in Australia and Indonesia.

Don Crist

Okay.
And one question on the US as basins mature, obviously you go towards, you know, from Tier one acreage towards Tier two, Tier three. Where are we in the lifecycle, particularly in the Bakken, but number two in the Permian, are you starting to get some inquiries to evaluate kind of Tier two and Tier three rock in the Permian

Larry Bruno

Yes. I mean, we've got because of the multi-company studies that we've done across all the major unconventional basins in North America and in many cases, other parts of the world, we've got a pretty good sensibility of where the tier one, tier two and tier three rock is. And I have joked in the past that we sell that information with where the good stuff is and where the intermediate does is and where the not-so-good stuff is. And clearly, there's been a progression moving toward the latter stages of Tier one into Tier two and in some cases, lower ends of Tier two rock. And I think if you look at add production in a lot of the fields, the only one that's really in our mind got some growth potential is the Permian. You have to dial that, that rock quality issue in also with things like lateral length expansion, that expansion, that third mile on oil wells, oil producing wells is becoming common practice, but the rock quality, clearly the best of the best has either been consumed or is rapidly being depleted across all of the basins and now it's more of an engineering and completion optimization program, which our production enhancement group will play into trying to get the most out of those rocks.
I'd add a little bit more to that, too and say we do see from time to time, companies taking refreshed looks at restimulation, re-fracs and things like that to tried to go into some of the older legacy wells and to tried to get to unstimulated rock where the stages were very far apart. But I do think the growth rate, but the key point here, Dan is the growth rate that we've seen in production in North America is either not going to continue or is going to be at a much lower pace?

Chris Hill

I think it's fair to say, too, it's still real early, but with some of the focus on capturing CO2 and as that becomes maybe more available, there might be opportunities, better opportunities to look at you know, EOR type projects in unconventionals where the availability of CO2 may have been a limiting factor in that in the past.

Larry Bruno

Right. And are you getting a lot of work in the Bakken to restimulate and trying to go after that, that rock that maybe hadn't been stimulated the first time and less so than in some of the other basins. I say as a generalization, um, and I would add that some EOR programs that we validated in the lab have seem to work better in some of the other basins than in some of the parts of the market.
Okay.
But look, I'm on a market.
So Brock, still a world class on a field of play. And this stratigraphic target is going to be a lot of oil coming out of that. The rate of growth is going to be from where we are today. It's going to be more determined by advancements in completion technologies and things like that, right?
But I think there are the very, very early stages of kind of a refrac program in the basin, if I'm reading that correctly, right.

Don Crist

I think I think that's right. And I think it's highly operator dependent. I don't believe it's proper to characterize that as a broad based approach among a large number of operators to look at restimulation and EOR in that in that area, Bret and I appreciate the conversation.
I'll turn it back.

Chris Hill

Thank you, Dan.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Larry Bruno for any closing remarks.

Larry Bruno

Okay. We'll wrap up here. In summary, Core's operational leadership continues to position the Company for improving client activity levels for 2024 and beyond. We have never been better operationally or technologically positioned to help our client global client base, optimize their reservoirs and 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 growth 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.

Operator

Conference has now concluded. Thank you for attending today's presentation and you may now disconnect.