11 News Article 06/18/2015 Outside Source

George K. Baum & Comparry
April
14, 1999
CORE LABORATORIES N.V.
CLB-$13.31-BUY
Janice Rudd
Vice President
281t872-2054
8001228-0701
(Ctosing price as of 4tr3/99)
Core Lab's services cater to a ..protected nichett of oil company
spending. The information provided by the company leads to better
drilling decisions, reducing risk and providing tremendous value added.
Core Lab's services were among the last to feel the oil companies, budget
axes when oil prices fell.
In
1998, more than 80% of Core Lab's revenues were derived from
production-related sources. To date, oil company spending cutbacks
have impacted exploration most.
The company has more than tripled its annual revenue since 1995
through a combination of internal growth (2|o/o in 1998) and
acquisitions. The company is constantly working on new technologies,
often in partnership with clients.
With the stock cut in half by a gloomier outlook for its services, we
believe the downside risk to the stock price is minimal. core Lab is likely
to be one of the first oil service companies to experience a rebound in
demand when activity picks up and oil companies realize that recent
layoffs have left them short of personnel to provide these crucial services.
We are initiating coverage of CLB with a BUY rating and a 12- to 18month price target of $18 under our no oilfield activity recovery
scenario.
NYSE Price (4/13/99)
52-Week Price Range
Shares Outstanding
Estimated Float
Market Capitalization
Institutional Ownership
*Normalized 1999-2001
Dec
FY
19984
1 999E
$13.31
$30-$1 1
29 mil
23 mil
$397 mil
42.4o/o
EPS
PIE
$0.E4
15.9x
22.3x
16.6x
$0.80
Dividend Yield
ROE 1998A
Revenue (LTM)
Est 3-Yr Growth *
LT DebUTotal Cap
Target Price
EBITDA/Sh
None
10.2%
$286 mil
15o/o
19.6%
$18
EV/EBITDA
s&P 500
8.0x
34.4x
30.4x
$1.82
8.5x
$2.'t7
7.1x
The infomation wt forth hercin is based on sources we believe to be rcliable. Historical figures and projections are not guaranteed.
George K. Bam & Compmy, its omcers or employees may have a position in the security deicribed herein and may make
puchases or sales while this report is in circulation. This is not m offer to sell or a solicitation ofm offer to buv secuities.
Top Five Institutional Holders
L Franklin Resources, 6.0% stake
2. AIM Management, 4.6oh
3. William Blair, 4.0o/o
4. Lord Abbett & Co., 3.4%o
5. American Express, 3.2olo
*As of l2l98
Source: Technimetrics, Inc.
Jan96
ffpr
oct tr.n97 Rpr
tru
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oct Jangg Rpr
Ju
l
oct lan99
fipr
Company Description
Core Lab provides laboratory and field ser-vices to oil companies. The
companyts data, analysis and recommendations lead to better decisions on
where to drill, how to complete and how to produce a well. Core Lab helps oil
and gas companies maximize hydrocarbon output over the life of the field.
Founded in 1936, Core Lab now has over 70 offices in 50 countries covering
all major producing areas. From 1987 until September 1994, Core Lab was a
division of Western Atlas International, which merged with Baker Hughes
(BHI-$24.44) last year. ln 1994, a management-led group of investors
purchased Core Lab from Western Atlas for $38 million in a leveraged
buyout (LBO). The company went public one year later.
Recent Developments
The resilience of Core Lab's business made CLB one of the best-performing
stocks in the oil service group since the price of oil began to fall in late 1997.
Howevef, the stock has lost close to half its value since March 25'h. Fourth quarter
1998 earnings were moderately disappointing and came with a warning that its
clients' lower capital expenditure levels were hurting business. On April 6*,
management made an even stronger warning, predicting only slight revenue growth
in 1999 and lower earnings. In addition to the $2.2 million charge for the
integration of acquisitions taken in the fourth quarter, Core Lab will take a $3.5
million charge for expenses related to the failed merger with GeoScience Corp.
(GSCI-$5.25) and a one-time $6.5 million charge for restructuring. The
restructuring will include: asset writedowns, severance payments, facility closures
and other expenses. Investors should take note that in spite oftoday's higher oil
prices, f rre Lab's customers are not indicating any plans to boost E&P
spendinl Jo management must take these steps to cut costs.
t
Core Lab vs, S&P Drilling & Equipment Index
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Experts estimate that only 35-40% of oil and gas reserves in place can be produced
under conventional methods. Any incremental recovery can have very compelling
economics. Core Lab provides the understanding of the reseroir that will
optimize production through technology for reservoir description, production
enhancement and reservoir management.
Core Lab's customers range from small independent oil and gas producers to the
majors and national oil companies. No single customer accounts for more than
1002 of revenue. While worldwide exploration and production (E&P) spending
plummeted with oil prices, Core Lab's business remained fairly insulated until
recently. Oil companies were reluctant to cut such high-value-added services.
However, the drop-off in drilling activity worldwide reduced the demand for Core
Lab's lower-technology services. We believe that oil companies will continue to
spend on the high-potential, high-profile fields. With exploration spending
receiving the deepest cuts, management expects more than 80% of 1999 revenue to
be production related.
Revenue Sources 1999E
Production
Enhancemen
t
25o/o
Reservoir
Management
15o/o
Reservoir
Description
60%
Source: George K. Baum & Co. estimates
To Provide For The Life Of The Field
Core Lab uses information to solve some of the industry's most expensive
problems, including poorly located wells, faulty completions, formation
damage and ineffective stimulation and enhanced recovery programs. Royal
Dutch/Shell (RD-$51.88, SC-$39.94), for example, estimates that formation
damage costs it $l billion a year. Applying this to total worldwide production
losses from these problems would be staggering.
George K. Baum & Company
Core Lab's goal is to provide its customers with a broad range of capabilities
from the early stages ofexploration to the depletion ofthe reservoir.
1. Scott Pickford, Andrews Group International (AGD and Inte$a provide
seismic processing and interpretation to help oil companies decide where
to drill.
2. Stim-Lab can recommend drilling and completion fluids.
3. Core Lab, Stim-Lab and Saybolt can perform analyses on the core and
fluid samples taken from the well.
4. StimGunrM can be used to perforate the well and perform a mini-frac job.
5. Scott Pickford and AGI can re-evaluate seismic and other data to model
6.
and simulate reservoirs.
ProTechnics and Stim-Lab, in conjunction with Scott Pickford and AGI,
can help choose, design and evaluate secondary or tertiary recovery
programs, and hydraulic fracturing or acid stimulation jobs.
The oil service industry has long suffered from the oil companies' "low-bid"
mentality. Oil companies historically have been more concerned with finding the
lowest price equipment or service instead of the highest value-added one. Oil
Core Lab must battle a
cost-conscious industry to
sell its long-term benefits.
service companies continually introduce new products that may cost more up front,
but save money in the long run by lasting longer, increasing output, saving time,
etc. Oil companies' resistance to paying for technology has lessened, partially due
to the increasingly difficult environments where today's drilling is done. Most of
Core Lab's services must show their value over time through increased production
even though payment for the service is made up front. Core Lab's biggest
obstacle is overcoming inertia within the oil companies and demonstrating the
long-term value of its expertise. Scientific papers and word of mouth on project
results build awareness, but under today's lower E&P spending levels,
commitments
will
be slower.
Field Of The Future
Technology developments
will shape the oil and gas
field ofthe future.
Core Lab's management shares a vision with many in the industry of what the oil
and gas field of the future will look like. The driver behind this vision is the power
of information to lower finding and lifting costs. The field of the future will have
not only production wells, but wells drilled solely to install seismic receivers
and electromagnetic (EM) monitoring equipment. Permanently installed seismic
receivers will allow new 3-D data to be shot at any time (4-D data). A seismic
vessel, vibroseis truck or downhole energy source will supply the sound waves that
travel through the earth's crust and back up to the receivers. Placing the receivers
in the earth also improves the clarity of the signals. Smaller, more durable and
cheaper receivers still need to be developed. EM tools measure the pressure and
temperature downhole. The information provided by EM tools, old and new
seismic data, well logs, production histories and core samples would be integrated
so the progress of the reservoir's depletion can be monitored. With this arsenal of
information, proper steps to keep the oil and gas flowing can be taken using frac
jobs, stimulations, waterfloods, etc.
George IL Baum & Company
Strategy for Growth
In order to
increase revenue and earnings, Core Lab is broadening its product
offerings through acquisitions and internal research and development, often
sponsored by an oil company. A wider range of products attracts new customers
and, more importantly, creates additional sales to existing clients.
Core Lab is an active acquirer. Management's guidelines for identifuing targets
include:
o
o
r
e
Attractive price-usually privately held companies
Strong management
Accretive to earnings
Consolidation opportunities
Core Lab Acquisitions
(dollars in millions)
Annual
Company
Year Revenue*
996
997
ProTechnics
Saybolt
Scott Pickford
Stim-Lab
Andrews Group
Integra
Owen Oil Tools
Petrak Group, S.A"
997
99758
998
998
998
ee8
George
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year's revenue at time
Price
ofpurchoe. Source ompany documents
Baum & Company
r8.2
72
l0
15
16
2.6
35
1.6
g.
181.6
Total
rPrior
7
100
14
55
t
201.2
GeoScience
On January 19, 1999, Core Lab announced an agreement to merge with
GeoScience Corp., a leading seismic acquisition equipment maker. On March
72, Core Lab announced that it believed the representations and warranties made by
GeoScience in the merger agreement were not true, prohibiting completion of the
deal. On March 24, the companies announced the termination of the merger. In
effect, Core Lab paid a $3 million breakup fee by forgiving an equivalent amount of
working capital advances. Core Lab will take a one-time $3.5 million charge in the
first quarter of 1999 to cover the advances and merger-related fees.
The failed GeoScience
merger still allows
R&D cooperation.
The impetus for the deal was the application of Syntron's seismic acquisition
equipment product line to 4-D seismic data acquisition. With 4-D seismic, oil
companies permanently install seismic arrays in the field so that 3-D seismic can be
acquired at various points in time over the life of the field. Core Lab's vision of the
field of the future is still intact. The companies agreed to work together on 4-D
products despite the failed merger.
Reservoir Optimization
Core Lab helps operators
choose from the many
methods to increase output.
Optimizing a reservoir is quite different from maximizing current production. An
oilfield can go through a number of recovery phases with many choices for field
operators. Core Lab analyzes the available infonnation and helps determine not
only the best method, but also the design. Core Lab can also evaluate the results.
Hydraulic fracture-a
proppant (such as sand
or small ceramic spheres)
suspended in a gel is
Primary Recovery
Primary production is when the natural formation pressure pushes the oil and
natural gas into the well. If the well is produced too quickly, the pressure will
drop, reducing production and possibly damaging the reservoir permanently.
Where and how the well is drilled and how it is completed can have a tremendous
pumped into the
impact on its productivity.
formation at high
pressure to create and
keep open new fractures
which will allow the oil
and gas to flow into the
wellbore, bypassing the
damaged channels.
Acid stimulationhydrochloric or
hydrofluoric acid is
pumped into the
formation to dissolve
the blockages and allow
the oil and gas to flow
into the wellbore.
Some hydrocarbons will flow out of the well just because the well provides an
outlet for fluids previously held under pressure. Afterwards, pressure for primary
production can come from natural gas or water. Gas that is dissolved in the oil
makes the oil lighter and causes it to flow into the wellbore. If the natural gas is
sitting on top of the oil (a gas cap), the gas will expand into the area of reduced
pressure as the oil is depleted. Water drive works on the same principle-the water
under the layer of oil will flow into the lower pressure area as the oil flows out.
Artificial lift equipment, such as electric submersible pumps (ESPs), gas lift, and
pumpjacks, can be installed when there is no longer sufficient pressure to force oil
that enters the wellbore to flow up to the surface. Hydraulic fracturing can be
used to open up more pathways for oil and gas to flow into the wellbore. Acid
stimulation is used to dissolve blockages that impede the flow of oil and gas
around the wellbore.
George IL Baum & Company
Secondary Recovery
secondary recovery takes place when fluids are pumped into the formation to
increase pressure and revive oil flow. The most common technique is
waterflooding. Injection wells are drilled in other parts of the field, and thenwater
is pumped into the formation to force oil out of the pores and to the well and up to
the surface. Waterflooding usually only recovers another 5-10% of the oil
originally in place.
Enhanced (Tertiar.v) Recovery
More expensive tertiary techniques can be used to further increase recovery.
Steam injection is used to make heavy oil less viscous. In-situ combustion also
tries to improve recovery by heating the oil. Instead of using steam, in-situ
combustion burns part of the oil in place to heat the oil and make it flow. Carbon
dioxide, nitrogen or flue gas can be injected into the formation to drive oil to the
wellbore. Water-soluble polymers or surfactants can be added to injected water in
order to dislodge oil. Polymers also can be used to seal off depleted zones and
redirect the waterflood. New technology is being developed whire microbes are
injected into the formation to produce gases or chemicals that increase oil mobility.
of these tertiary techniques to date, only steam injection and carbon dioxide
flooding have proven economically feasible for broad use in North America.
Reservoir Description
core Lab's name comes from the rock samples, or cores, taken from the well.
Techniques for taking cores are still being improved, lowering the cost. In early
1996, Baker Hughes introduced a coring-while-drilling bit that saves significant
tripping time. Measurements on the cores are taken to determine the physical
characteristics of the formation. Measurements of porosity (indicating how
much room there is to store oil and gas) and permeability (indicating how the
oil and gas will flow out of the rock) were once the bread and butter of Core
Lab's business, but now have shrunken in importance.
Lab analysis creates
a
better understanding of
reservoir characteristics.
Fluid analyses are also performed to describe how oil, natural gas and water will
behave and interact during production. Core Lab can also re-create the downhole
pressure and temperature, making predictions of behavior more accurate.
Understanding where the water/oil and oil/gas contact lines are and how the fluids
will interact is crucial for determining the proper completion method and any
production enhancement method.
Reservoir
Rock
Properties
Fluid properties
Storage capacity (porosity)
Fluid phases
Flow capacity (permeability) Fluid qualities
Log
calibration
Reservoir type
Fracture profile
Seismic
properties
George IC Baum & Company
Resistivity profile
Initial recovery
Fluid compatibility
Fluid densities
Core Lab's data
becomes even more
powerful when
integrated with other
available information.
Lots of information can be obtained from the wide range of logging tools now on
the market. Measurements are taken during drilling (logging-while-drilling or
LWD) or by removing the drill string and lowering tools into the well by wireline
or slickline. Logs are even more powerful when calibrated with the results of core
analysis. The same is true of seismic data.
Savbolt
In May 1997, Core Lab acquired the Dutch company Saybolt International
B.V. for $72 million, its largest acquisition to date. Saybolt describes the
characteristics of petroleum and petroleum products. Saybolt performs a broad
range of measurement and analytical services, sometimes for clients outside
the E&P industry. Octane testing and additive and blending analysis for refiners
are all less commodity-price dependent. Saybolt also provides various quantity and
quality evaluations on oil shipments. Saybolt provided Core Lab with a substantial
presence in the former Soviet Union, where Core Lab's other services are badly
needed.
Saybolt was chosen as the monitor for the UN's oil-for-food arrangement with Iraq.
While this contract is a strong endorsement for Saybolt's technology, its financial
impact is not significant for Core Lab.
Saybolt's legal
problems have been
settled.
Prior to its acquisition by Core Lab, Saybolt was notified it was under criminal
investigation by the U.S. Environmental Protection Agency and the Department of
Justice for failing to report accurate reformulated gasoline test results to customers
and the EPA. On January 8'n, 1999, Saybolt pled guilty and was fined $3.4 million.
Also that month, Saybolt pled guilty to violating the Foreign Corrupt Practices Act
and the Travel Act and was fined $1.5 million for making an illegal payment to
Panamanian officials in 1995. After the acquisition, Core Lab imposed stringent
controls on Saybolt to assure that no new incidents would occur. The previous
owners were responsible for all financial penalties.
Petrak
In the third quarter of 1998 Core Lab purchased Petrak. Based in Zug, Switzerland,
Petrak provides quantity and quality control for oil and petroleum products in
West Africa, the former Soviet Union, Europe and the Middle East. Petrak has
a 60oh market share in its niches. Management was attracted to the target because
deepwater West Africa is one of the most exciting drilling areas today, and Petrak
can be used as a marketing foundation for Core Lab's other services (especially
Saybolt). Petrak currently provides services to the United Nations for Iraqi oil
exports from Turkey.
Production Enhancement
Production enhancement is Core Lab's fastest growing business and has the
highest margins. The company takes the reservoir description, prescribes a
production enhancement program and evaluates the results.
Secondary recovery projects can benefit from Core Lab's attention. Waterflood
recovery projects can be evaluated by pumping a tracer into the water and
measuring its appearance in the producing wells. This determines the direction and
George trL Baum & Cornpany
speed that the water is flowing underground. with tracer technology, Core Lab can
discover if areas are being missed and thus reducing the effectiveness of the flood.
Estimates are that only one-third of 10,000 fracturing jobs performed each year are
effective. More information and better planning can reducl the failure rate. StimLab can aid in the selection of proppants, gels, and acids used in stimulations.
Traditionally, pressure and temperature is calculated from other available data, not
directly measured, and can have a significant margin of error. If the downhole
pressure is miscalculated, the frac job could be much less effective. Core Lab's
electromagnetic (EM) wireless communications tools measure the actual
conditions. Like all downhole equipment, reliability and durability are crucial.
ProTechnics
To boost its presence in this market, Core Lab purchased ProTechnics at the end of
1996 in exchange for Ll million shares. This division is the in-the-field
counterpart to the existing labs. ProTechnics is the market leader in radioactive
tracers, including Zerowash@ (for deepwater diagnostics) and
spectrascan@. Since acquiring Tracer ScanrM from Halliburton (HAL-$36.75),
ProTechnics can provide the tracers and logging services to properly evaluate
waterflood, hydraulic fracturing or acidizing programs.
EM Tools
The Telemetry Acquisition system (TAS) is designed to monitor downhole
conditions and send results to the surface and store data in memory. TAS is
ideal for use during frac jobs. Downhole pressure can be continuously monitored,
making sure that the proper pressure is maintained for the most effective frac. TAS
is being marketed with NorthStar Drilling (NSD-C$1.05 Alberta) for use in
measurement-while-drilling appl ications.
The Production Acquisition Tool (PAT) is designed to be semi-permanently
installed in the well, sending information back to the surface between one and
three times a day. Current battery life is between 9 and 13 months. PanCanadian
is using the PAT to maintain interactive control of artificial lift equipment-a first
generation of smart completions.
Owen Oil Tools
In June 1998, core Lab purchased owen oil Tools for $55 million. owen oil
Tools is a provider of well perforating systems, bridge plugs and setting tool
systems and the exclusive manufacturer of stim-GunrM. core Lab expanded
owen's production capacity for Stim-GunrM, but is negotiating with other service
providers that may require further expansion.
StimGunrM
The latest addition to core Lab's production enhancement arsenal
is
stimGunrM. StimGunrM was developed by owen in partnership with Marathon
oil (MRo-$28.25), computalog (CLTDF-$3.63) and HTH Technical Services.
Marathon holds the patent. Halliburton and Computalog hold licenses to use
StimGunrM, but Core Lab is the sole manufacturer. StimGunrM contributed
about $2 million in revenue in 1998 after its third-quarter introduction. We
expect that figure to rise to $3 million in 1999. while significantly more
expensive than traditional perforating guns, damage to the formation is
George IL Baum & Company
eliminated, quickly recouping the additional cost through extra hydrocarbon
production.
Perforatin g gun-is used
to punch holes in the
production casing and
cement. The gun is
lowered (usually on
wireline) into the
producing zone of the well,
then the gun is fired and
shaped-charge explosives
are forced through the
walls. Oil and gas can then
flow into the well and up to
the surface through the
production tubing.
A conventional perforating gun explodes, sending shrapnel through the casing
and cement and into the formation at 2 million pounds per square inch.
StimGunrM uses small, shaped charges that pierce the casing and cement.
Propellant gases from ignited rocket fuel follow the charges into the formation,
rapidly expanding and fracturing the formation with only 15,000 psi of force.
In essence, StimGunrM performs a mini-frac job, improving the ability of oil
and gas to flow and without clogging the pores. Debris from the StimGunrM
completion also cleans up quickly and easily when the well is put into
production. Conventional wireline perforations generally reach only 4 feet
beyond the wellbore. StimGunrM can reach out to 15 feet. StimGunrM also is
being developed for use as a downhole energy source for shooting 4-D seismic.
uns
StimGun
Pressure (pounds per square inch)
Penetration from wellbore (feet)
r:poo
Wireline
2,000,
l5
Average damage to formation:
scale
of 1 to l0 (10 being the most damaging)
Price tag
-l
15-40 times conventional
Jaex Internqtional
In the third quarter of 1998, Core Lab purchased the remaining 50o/o of Jaex
S.A. de C.V. that it did not receive through its purchase of Owen Oil Tools.
Jaex provides well completion and production enhancement technology in
Mexico. Management plans to offer Stim-GunrM in Mexico. Core Lab's
revenue in Mexico reached $30 million in 1998 and could grow to $40 million
in 1999 by expanding the presence of Jaex and other recently acquired
businesses.
Stim-Lab
In December 1997, the company acquired Stim-Lab in a pooling of interests. Core
Lab issued 459,000 shares to Stim-Lab's owners. Stim-Lab performs log
interpretation, core analysis, well completion testing, reservoir analysis, and
fracing and acidizing simulation. Stim-Lab provides an independent opinion on
the many choices of drilling and completion fluids, and gels, proppants and acids
for well stimulations. Stim-Lab heads five oil industry consortia that are evaluating
completion and recovery techniques. Core Lab has spread this expertise beyond
Stim-Lab's core of Texas and Oklahoma and into the North Sea and the Middle
East. The Grid Oriented Hydraulic Fracture Extension Replicator (GOHFER) is an
industry-leading fracture simulator that was developed by Stim-Lab with Marathon.
George IL Baum & Company
Reservoir Management
Reservoir management integrates core Lab's reservoir description and
production enhancement with seismic data, well logs and production histories
to maximize the field's value. Management believes this business will evolve
with the addition of four-dimensional seismic, which allows the operator to see how
fluids migrate underground as the field is produced.
As part of the reservoir management offerings, Core Lab processes and interprets
seismic data. The acquisitions of Scott Pickford, rntegra and the Andrews
Group brought this expertise to the company. Burlington Resources (BR$41.75) chose core Lab to process the world's largest land 3-D seismic survey,
The data was acquired in Algeria, where large sand dunes create difficulties in
providing a clear picture of the subsurface. Scott Pickford's proprietary SANDIT
3-D refraction statistics package is being used to solve the problems.
Scott Pickford
In March 1997, core Lab acquired Scott Pickford pLC for $15.1 miltion.
Based in London, scott Pickford is a provider of reservoir management,
geoscience, geophysical and engineering services. The company provides
software and database management services. Scott Pickford utilizes Coie Lab's
and ProTechnics' petrophysical and phase behavior data to provide large field
studies and equity determinations, primarily for clients operating in the North Sea.
Scott Pickford can aid the oil company by designing the well completion,
stimulation or enhanced recovery project, or by measuring field performance.
Since oilfields know no national borders or lease divisions, determining each
company's or nation's stake in an oilfield can be very contentious. Scott
Pickford can integrate all existing data-seismic, well logs, permeability,
petrophysical and fluid phase behavior-to accurately model the reservoir and
determine each stakeholders' share. The same technology can be used for asset
valuations and audits.
Integra Geoservices
in October 1998 to add to Scott
Pickford's reservoir management offerings. rntegra's strengths are special
amplitude versus offset (AVO) and inversion techniques on seismic data used
to characterize reservoirs. when other Core Lab data is added, better
stratigraphic modeling and more accurate prediction of reservoir quality is possible.
Calgary-based Integra Geoservices was acquired
The Andrews Group
Last December, core Lab merged with the Andrews Group International (AGI).
Total consideration was $14 million-715,000 common shares and the assumption
of $2 million of debt. AGI provides a variety of
seismic-related services
including: 2-D and 3-D seismic shoot design, data processing and interpretation, 4D seismic consulting, geologic modeling, reservoir simulation, reserve evaluation,
economic evaluation and risk analysis. This acquisition increased Core Lab's
exposure to Latin American markets. Mexico is AGI's largest market with several
large field studies underway. AGI's services complement Scott pickford's
reservoir management expertise. Specializing in seismic processing and
interpretation, AGI's work can be combined with other Core Lab services to help
optimize current hydrocarbon production and total field recovery.
George trL Baum & Company
Competition
No one company competes against Core Lab in all its product lines. Some
competitors are parts of larger companies; others are independent, regional
companies. In Reservoir Description, low-tech rock analysis is done by small,
regional competitors and is the most price sensitive part of Core Lab's business.
Technology drives the customer's choice in other product lines. Higher technology
rock and fluid analyses are done by major oil companies' research centers and a few
larger, regional firms. There are a number of petroleum engineering firms that
compete with Core Lab on the Production Enhancement side of the business. In
Reservoir Management, Core Lab competes with oil companies' in-house expertise,
petroleum engineering consultants and Schlumberger (SLB-$S
8. I
3
).
Iligh Value Added
The data and analysis provided by Core Lab companies can have tremendous
rates of return. Usually expenditures can be quickly recouped with the
incremental oil and gas production resulting from Core Lab's expertise. With
infrastructure already in place, increasing the recovery rate can have very
compelling economics.
The lowest price service is around $50.00 for a basic commodity check. The
average sale is $50,000. A high price tag often meant the oil company would try to
use in-house expertise. We believe that recent oil company layoffs will make
this an option in fewer instances going forward.
Sales
Core Lab sells analytic equipment to universities and research centers run by
major and national oil companies.
1998, Core Lab sold two packaged analyzer units to ABB (ABBBY$13.00) Process Analyics for $4.1 million. Core Lab took a one-time $3.4 million
charge on the sale. This sale marked Core Lab's exit from the slow-growth, low-
In April
margin process evaluation business serving the refining, petrochemical
and
chemical industries.
Financial Review
Financial Position
We believe Core Lab's balance sheet provides sufficient flexibility even under
today's reduced E&P spending. Long-term debt is less than 20o/o of total
capitalization. Core Lab had $65 million in working capital at the end of 1998 and
should generate about $30 million in cash flow this year. Core Lab's businesses
require only $5 million in maintenance capital expenditures. Lines of credit should
allow the company to pursue any attractive acquisition.
Equitv Offerins
ln the fourth quarter of 1997, Core Lab split its stock 2-for-1 and issued an
additional (sptit adjusted) 2.96 million shares of stock (including the
underwriters' overallotment) at $18.00. Most of the $50 million of proceeds were
used to repay debt associated with the Scott Pickford and Saybolt acquisitions; the
George trL Baum & ComFany
rest was added to working capital. Another 2.3 million shares were offered by
existing shareholders. First BritanniaMezzanine N.V., an original LBO investor,
sold 2.1 million shares, reducing its stake by half. Management expects First
Britannia to cash out completely in the next few years.
Insider Holdines
Management owns 7%o of Core Lab shares. As the share price rose with improved
industry conditions in 1997 and early 1998, several insiders reduced their stakes.
We believe the selling was primarily driven by portfolio diversification. After the
recent stock price fall, several members of management purchased shares. The
company's stock option plan has about 1.7 million shares outstanding, of which
800,000 are exercisable.
Business Environment
on March 25, 1999, disappointing fourth quarter earnings and caution about
demand for low-end services caused core Lab shares to drop 27%o. The April6
announcement that Core Lab experienced very weak demand in the first quarter and
expects flat revenue lower earnings this year erased 29%o of the stock's value. Most
of the weakness stems from lower-end technology serwices, which are the most
directly tied to drilling activity.
core Lab's high value-added services protected business from the oil
companies' budget axes longer than almost any other company in the oil
service business. Even the deepwater drillers, who still have long-term contracts at
high dayrates, are being pressured by customers. Some offshore construction
companies have the benefit of sizeable backlogs and have been able to secure new
orders for the development of large fields discovered when oil prices were higher.
Management's most recent guidance that 1999 revenue should be about the same
level as 1998 is impressive given today's operating environment.
Most of Core Lab's reductions will be in the U.S. and Canada, where marginal
field economics cause the largest spending cutbacks. In contrast to most
businesses, Core Lab moved assets to Asia in 1998. Governments needing to earn
hard currency sought Core Lab's expertise for multiyear, multiphase projects. With
costs in local currency, sales in U.S. dollars, and frequent payments, risks were
minimized. Surprisingly, Jakarta is doing well in spite of Indonesia's political
unrest. Kuala Lumpur, Malaysia has not been as fortunate.
Investment Onipion
While reduced oilfield activity is finally having an impact on Core Lab's sales,
we believe the fundamentals are in place for long-term growth. With oil
companies' reduced stafFrng levels, the demand for outside expertise like Core Lab
provides should increase. The thousands of layoffs in the industry over the past
year mean that the pool of experienced personnel is greatly depleted, and the trend
toward outsourcing should continue. Oil companies are relinquishing more and
more of their traditional roles to the service companies. The E&P industry's
understanding of the value of information grows daily. With 3-D (and some 4-D)
seismic data, core and fluid samples, mud logs, wireline logs, data from loggingwhile drilling, production histories and other types of information available,
operators must put it all to its most effective use. Core Lab is building the
company to collect and analyze this data.
George I(. Baum & Company
It
we
believe core Lab will be one of the first service companies to see its
business recover for the same reasons it was one of the last to be hurt high
value-added services. After the shock of the recent disappointments wears off
and the Street adjusts its expectations, Core Lab should begin to trade like
other oil service stocks. Unfortunately, that witl likely rneao vol"tility from oil
prices gyrations. From today's prices, we see litfle downside risk for CLB.
unlike most other stocks in the industry, which seem to discount a meaninqful
recovery in E&P spending. As stated in our February 5th, 1999 Industry
Outlook, oil companies must believe higher oil prices aie sustainable before
increasing budgets. Core Lab's customers are not beginning to discuss higher
budgets, so management must downsize operations.
Our model is based on flat revenue in 1999 and l0%o growth in 2000 and the cost
cutting measures recently instituted taking effect. We believe that even with
reduced oilfield activity, these numbers are not too aggressive. CLB currently has
a price to earnings ratio of 16.6 times 2000 EpS and an enterprise value of 7.1
times EBITDA. The oil service industry is trading at 23 times 2000 earnings
according to IBES. With no true comparables, we believe the stock should trade
closer to the industry's average after the repercussions from the recent news fades.
We recommend investors BUY shares of Core Lab and believe the stock could
return to $ 18.00 even without a substantial improvement in oilfield activity.
ADDTTTONAL INFORMATION IS
George IL Baum & Cornpany
AVlU,,{Ble UpoN Rnqunsr
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Core Laboratories N.V.
Balance Sheet
(millions of dollars)
31 Dec.1998
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Accounts receivable. net
lnventories
Prepaid expenses
Deferred income tax asset
Total current assets
PROPERTY, PLANT AND EQUIPMENT
Less accumu lated depreciation
INTANGIBLES AND GOODW|LL, net
OTHER LONG.TERM ASSETS
Totalassets
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt
Shortterm debt
Accounts payable
Accrued payroll & related costs
Taxes other than payroll
Unearned revenue
Income tax payable
Other accrued expenses
Total current liabilities
LONG-TERM DEBT
DEFERRED COMPENSATION
DEFERRED TAX LIABILIry
MINORITY INTEREST
LONG-TERM LEASE OBLIGATIONS
OTHER LONG-TERM LIABILITIES
SHAREHOLDERS' EQUITY
Common shares
Additional paid-in capitat
Retained earning
Total shareholders' equity
Total liabilities & shareholders' equity
8.2
84.3
18.9
9.9
5.2
126.4
68.2
149.5
4.5
348.6
18.4
0.2
18.5
7.1
2.9
0.4
6.1
7.6
61.2
06.z
2.9
4.6
1.1
0.2
13.5
0.5
152.2
44.3
197.0
348.6
uore LaDoratones N.V.
Earnings Model
(in million $, except share data)
Quarter Ended
Fiscal year ends Dec. 31
Year Ended
restateo restateo restateo
esumate estrmate esumate €strmate
3/3u98 6t30t98 9t30/98 r2t3r/98
3/3u99 6130t99 9t30t99
r2t3r/99
reslateo
estlmate esltmate
t2t3u97 r2/3r/98 r2t3r/99 12t31/00
l(evenue
60.0 65.0 72.0
3.0 4.0 4.0
Services
Sales
Total revenue
oz.J
ot. I
/o.o
Operating expense
Cost of services
Cost of sales
General and administrative
Depreciation & amortization
Merger transaction costs
Restructuring costs
Other income, net
Total operating expense
Operating income
Interest expense
Income before tax & extr. item
Income taxes
Income before extr. item
Extraordinary item
Net income
|!rD
EPS excl. extraord. items
ul's lulry dlluted excl. extra.
uash llow per drl. share
ultl I lrA per dll. share
Average shares outstandrns
--rully ollureo
Kat ros
Rev vs. comp period
Gross margin
0.3
49.5 50.7 s4.9
2.9 3.5 3.5
2.5 2.3 2.3
5.2 5.2 5.2
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Income tax rate
LSttmaIeS: \-reorge L. lJaum &. LO., lnc.
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21.6 %
11.8 %
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226.5
29.8
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0.9
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bu.l
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t).6
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168.3 194.4 212.8
15.0 26.1 14.1
6.0
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3.5
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su.Jl
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300.0
ztt.
su.ou $u.u4 $u.6u
$0.uJ $u.rj
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211.4 249.6 274.0
17.7 36.6 16.0
$0.24
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$u.19
$o.t4 $u.zJ $u.29
$u.25 $u.JU $u.4u
77.0
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13.0 o/o
36.0 %
t05.8
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%
%
13.9 Yo
30.0 %
24.9
23.0
tr.z I
Dr.dz
zy.J
yo
Yo
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33.0 0A
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21.7
7.8
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st.o4
iz.t I
zy.J
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10.0 %
23.8
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30.0 %