EUR 850.00 For Business Accounts Only

Morningstar | Core Lab Still One of Highest Quality Oilfield Service Companies

We have long believed that Core Laboratories is one of the highest-quality oilfield service companies. For one, with a wide-moat rating, Core Lab possesses the strongest moat across our entire oilfield service coverage. The company’s foundational core analysis business in the reservoir description segment, in particular, has been virtually unchallenged over the past three decades. The business passes the Buffett quality test whereby even an "idiot" could likely run the business with some profitability. Yet, Core Lab has long been managed with the utmost of skill, in our view. Management’s 1998 acquisition of Owen Oil Tools and subsequent repositioning of the business to offer high-quality solutions for fast-growing U.S. shale markets was a stroke of brilliance. Overall, this potent combination of topnotch management plus a strong underlying business has delivered unrivaled levels of returns on capital over the past two decades.The downturn in oil and gas activity beginning in late 2014 has continued to depress financial results for most oilfield service companies, and Core Lab certainly hasn’t fully escaped the effects of the downturn. Comparatively, however, the company has fared well because of its focus on both lower-cost U.S. shale in its production enhancement segment, as well as its pivot to both U.S. shale and international mature fields in its reservoir description segment. Overall, we think the company’s financial results will recover within range of 2012-14 average levels, exceeding the rebound to be experienced by many peers.Generally, markets have recognized the sterling quality of Core Lab’s existing businesses, and therefore the company’s attractiveness from a valuation perspective has generally depended on the company’s growth prospects. Yet as of now, we don’t see any compelling factors that would propel Core Lab’s revenue and profitability far above the prior cycle (2012-14) average levels. While Core Lab is likely to deliver continually high profitability in existing businesses, as reflected in its wide moat, that strength doesn’t translate into growth in other new, similarly profitable business lines.