EUR 850.00 For Business Accounts Only

Morningstar | Core Lab Posts Solid 3Q Results; Share Price Has Tumbled This Month, Converging on Our FVE

Wide-moat Core Laboratories released solid third-quarter results, with revenue increasing 4% sequentially and adjusted operating margins flat at about 19%. The revenue increase came almost entirely from the production enhancement segment, which experienced a 7% increase owing to market share gains for the company's premium perforating products like HERO PerFRAC. However (and similar to last quarter), increased sales of "premium" products did not lead to higher margins. Instead, production enhancement segment operating margins dipped to 24.5% from 25%. Although management denied an adverse role for pricing in the quarter's results, we think that at least parts of this segment (which has long generated very high returns on capital) are probably experiencing increased competitive pressures.

Management provided updated guidance for the fourth quarter, largely confirming the picture painted by the preliminary guidance issued at the beginning of October. Owing to temporary headwinds in U.S. shale completion activity (stemming from oil pipeline takeaway constraints in the Permian), revenue is likely to fall about 3% sequentially and operating margins are likely sink to 17% from 19%.

Core Lab's shares have tumbled 30% over the past month, outpacing an already severe rout for the oilfield services industry in general, and are now trading nearly in line with our $80 fair value estimate. Our bearish thesis has centered on a view that Core Lab will continue to generate very high returns on capital, but nevertheless growth expectations will fall far short of the market's erstwhile very ambitious expectations. It is unclear whether the market is permanently recalibrating its views regarding Core Lab or overreacting to purely near-term developments. For now, however, our long-held bearish view is playing out for Core Lab.