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Morningstar | Lowering Our Core Lab FVE Chiefly on Heightened Production Enhancement Competition. See Updated Analyst Note from 29 May 2019

We are reducing our Core Laboratories fair value estimate to $67 (EUR 60) per share from $75 (EUR 66). This is due to more pessimistic long-term assumptions, particularly regarding the company's production enhancement segment. Our wide moat rating remains in place.

Most important, we are reducing our midcycle (2023) revenue forecast for the production enhancement segment by 9% to about $370 million, which implies 28% cumulative growth versus 2018 levels. This runs ahead of our forecast for cumulative global capital expenditure growth of about 15%, as we still think Core Lab can generate some share gains via increased adoption of its premium products. Still, we have reduced our share gain expectations to reflect the emergence of increased competition. In addition to the revenue cut, we have lowered our midcycle segment operating margin forecast to 27% from 29%.

Meager segment operating incrementals since the second quarter of 2018 suggest weakening pricing from increased competition. We think the chief culprit is DMC Global's DynaEnergetics segment (not covered), which competes with Core Lab's production enhancement segment in perforating systems. DynaEnergetics has posted steadily increasing revenue, including an impressive 63% year-over-year increase in the first quarter of 2019 on the opening of new production facilities in December (compared with a 5% decline for Core Lab). Customer satisfaction with DynaEnergetics' products is reportedly very strong. However, Core Lab is taking steps to remedy any gaps in its offerings versus DynaEnergetics, mostly importantly by acquiring Guardian Global Technologies in the third quarter of 2018.

Additionally, we've slightly lowered our long-term earnings growth assumptions (model stage II) for Core Lab, following a year in which the company has not made substantial progress in commercializing new product groups, in our view.

After the fair value estimate revision, Core Lab still looks over 25% undervalued. The share price has fallen about 60% over the past year, one of the worst performances among our coverage list. Core Lab's once expensive valuation relative to peers has been erased, and therefore the company has become another good way to play the market's underestimation of global oil and gas capex growth in coming years.