Morningstar | CLB Updated Forecasts and Estimates from 12 Oct 2018
Core Lab released essentially flat second-quarter results, with revenue increasing 3% but operating margins slipping to 18.9% from 19.1% previously. Our fair value estimate and wide moat rating remain in place. The company still looks very overvalued to us, trading almost 40% above our fair value estimate.The revenue increase was accounted for entirely by the production enhancement segment, which focuses mostly on provided products and services for U.S. shale well completions. The 7% sequential increase in segment revenue slightly outpaced U.S. horizontal completions growth of about 5%, signifying some likely market share gains as Core Lab’s Hero PerFrac product gains further acceptance among customers for its ability to deliver higher oil production via higher perforation quality. However, margins in the segment deteriorated slightly, despite the premium pricing on the Hero PerFrac product, confirming our caution on the limits of Core Lab’s pricing power in this business.
We remain skeptical about whether Core Lab can generate the requisite growth in the production enhancement segment to justify its very high-priced valuation. Going forward, stagnating U.S. shale activity will provide a strong headwind, and Core Lab will need to branch out into other successful new products beyond Hero PerFrac.
Meanwhile, both top-line and bottom-line results in the reservoir description segment were flat, owing to still-flat activity levels in international oil and gas development. Management is now guiding for an uplift in results to proceed in 2019, lagging a few quarters behind an expected uptick in international activity levels. We think Core Lab will eventually achieve a solid improvement in this segment.
Core Laboratories is a holding company. Co. is a provider of reservoir description, production enhancement and reservoir management services to the oil and gas industry. Co. has three segments: reservoir description, which encompasses the characterization of petroleum reservoir rock, fluid and gas samples; production enhancement, which includes products and services relating to reservoir well completions, perforations, stimulations and production; and reservoir management, which combines and integrates information from reservoir description and production enhancement services to increase production and improve recovery of oil and gas from its clients' reservoirs.
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