Core Lab Q1 2010 Earnings Call Transcript

123jump.com Staff
08 Jun, 2010
New York City

Revenues rose 5.3% to $188.3 million and net income rose 10.3% to $32.2 million or $1.38 a share. Cost of sales in the first quarter were 67.3% of revenues versus 74.6% in last year''s first quarter and 74.6% also for all of 2009. First quarter EBIT represents operating margins of 27.3%.

Core Laboratories ((CLB))
Q1 2010 Earnings Call Transcript
April 29, 2010 8:30 a.m. ET

Executives

David M. Demshur – Chairman, President and Chief Executive Officer
Richard L. Bergmark – Executive Vice President and Chief Financial Officer
Monty L. Davis – Senior Vice President and Chief Operating Officer

Analysts

James West – Barclays Capital
Neal Dingmann – Wunderlich Securities
Robert MacKenzie – Friedman Billings Ramsey Group
John Daniel – Simmons & Company
Victor Marchon – RBC Capital Markets
Blake Hutchinson – Howard Weil Incorporated

Presentation

Operator

Good morning. My name is Stephanie, and I will be your conference Operator today. At this time, I would like to welcome everyone to the Core Lab Q1 2010 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers'' remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I will now turn today''s conference over to Mr. David Demshur. Please go ahead, sir.

David M. Demshur

Thanks, Stephanie. I would like to say good morning in North America, good afternoon in Europe and good evening in Asia-Pacific. We would like to welcome all of our shareholders, analysts and most importantly our employees to Core Laboratories first quarter 2010 earnings conference call. This morning I am joined by Dick Bergmark, Core''s Executive Vice President and CFO. Also this morning, we are again joined by Core''s COO, Monty Davis, who will present the detailed operational review.

The call will be divided into five segments. Dick will start by making remarks regarding forward-looking statements. Then we''ll come back and give a pre-investor update and highlight the three financial tenets by which the company''s executive management executes the company''s growth strategies.

We believe these three tenets have produced industry-leading returns on invested capital, which have resulted in industry-leading shareholder returns. We will also discuss Core''s long-held philosophy of returning excess capital back to our shareholders. Then Dick will come back and give a detailed financial overview and additional comments regarding Core''s second quarter 2010 revenue and earnings targets.

Then Monty will go over Core''s three operating segments, detailing our progress and discussing the continued successful introduction of new Core Laboratories technologies and services, and then highlighting some of Core''s operations and major projects, and then we''ll open the phones up for a Q&A session. I''ll turn it back over to Dick for remarks regarding forward-looking statements.

Richard L. Bergmark

Thanks, David. Before we start the conference this morning, I''ll mention that some of the statements that we make during this call may include projections, estimates, and other forward-looking information. This would include any discussion of the company''s business outlook. These types of forward-looking statements are subject to a number of risks and uncertainties relating to the oil and gas industry, business conditions, international markets, international political climate and other factors including those discussed in our ''34 Act filing that may affect our outcome. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in the forward-looking statements.

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. For a more detailed discussion of some of the foregoing risks and uncertainties, see item 1-A, risk factors in our annual report on Form 10-K, for the fiscal year ended December, 31 2009, as well as the other reports in the registration statements filed by us with the SEC. Now, with that said, I will pass the discussion back to David.

David M. Demshur

Thanks, Dick. I would like to give a brief investor update. The first quarter of 2010 marks Core Laboratories'' 59th quarter of being a publicly traded company, during which time Core Lab shares have advanced over 25-fold from $5.85 per share on our IPO to approximately $150 per share this morning.

Our growth strategies and the execution by our operating units have served our clients, our employees and our shareholders well. Core''s continued focus on international crude oil-related developments over North American natural gas markets and the continued internal development of new technologies and services have lead to sustained growth and increased profitability.

Over the last decade, Core''s 10-year, 5-year, and 3-year annualized total shareholder returns have outpaced all major oil field service companies, as recently listed by Bloomberg Financial. Core has followed and will continue to follow three key investment tenets that have lead to these industry-leading returns. These three tenets are, number one, maximize free cash flow through fiscal discipline.

Core follows a strict discipline for allocating capital for investment in our growing business. Unless certain return on invested capital standards are met or exceeded, the capital expenditure is disallowed.

On average, over the past 30 years, the company has determined that appropriate capital allocation generally equals the amount of annual depreciation, currently at approximately $23 million to $24 million per year or about $1 per diluted share. Potential acquisition opportunities must pass the same high standards.

This discipline produced an all-time quarterly high of free cash flow per share in the first quarter of $2.40, which was one of the highest, if not the highest, for all oil field service companies for this quarter. Core will continue to demonstrate strict fiscal discipline in 2010 and beyond.

The second tenet is maximizing return on invested capital. Core''s Board of Supervisory Directors, has initiated a set of compensation program for Core''s executive and for Core''s senior management teams based on the company producing a return on invested capital in the top decile of it''s oil field service peers.

Core''s Board believes that Core''s stock price performance over time is directly related to this return on invested capital. Based on the most recent calculations available from Bloomberg Financial, Core''s return on invested capital of nearly 29% was almost 22 percentage points higher than the peer group average listed by Bloomberg and was four times the peer average listed by Bloomberg.

Investors should also note that some oil field service companies have had returns below their weighted average cost of capital, a product of over investment in their company or overpayment for perceived growth via acquisition.

Core strives to have an industry-leading return on invested capital through continued execution of our growth strategies, coupled with our strict capital discipline. We believe our commitment to both in 2010 will result in a continued superior share-price performance for Core''s shareholders.

The third tenet is return excess capital to our shareholders. Since 2002, Core Laboratories has returned excess capital to our shareholders in the form of share repurchases, dividends and special dividends. Since 2002, Core has returned over three quarters of a billion dollars or almost $33 per diluted share to our shareholders.

With year-over-year cash balances continuing to grow and being mindful that our outstanding exchangeable notes have now gone current, Core''s shareholders can expect more capital to be returned in 2010 via dividends and possibly more share repurchases and special dividends. We will continue to follow these three key investment tenets throughout 2010 and beyond which should enable Core to continue to produce industry-leading returns for our shareholders. So now I''ll turn it back over to Dick for a detailed financial review.

Richard L. Bergmark

Thanks, David. Looking at the P&L, if we look at revenues, they were $188.3 million in the first quarter, versus $178.9 million in the first quarter of last year, and $181.6 million last quarter. So our revenues were up more than 5% year-over-year.

Sequentially, our revenues were higher by almost 4% as opposed to following the more typical seasonal patterns with the first quarter, usually being lower than the prior fourth quarter. Of these revenues, services for the quarter, $143.4 million was actually up year-over-year, when compared to $141.7 million in last year''s first quarter, an increase of $1.7 million or 1.2%.

Product sales for the quarter, though, were $44.9 million, up 20.7%, when compared to $37.2 million in last year''s first quarter. Strong international sales created the majority of this positive variance.

Moving on to cost of services for the quarter, off slightly to 66.5% from 62.3% year-over-year first quarter. Cost of sales in the first quarter were 67.3% of revenues versus 74.6% in last year''s first quarter and 74.6% also for all of 2009. This decrease in cost of sales is reflective of higher product sales being run through our manufacturing cost structure.

G&A at $6.4 million was down from last quarter''s $7.8 million and $9.3 million in the prior year due to lower compensation expense. For 2010, we expect G&A to come in around $32 million.

Depreciation and amortization for the quarter was $5.8 million, virtually unchanged from last year''s first quarter. We expect depreciation in 2010 to total approximately $24 million.

Other income this quarter in the amount of $800,000 which compares to a loss of $1.2 million in last year''s first quarter, which was primarily related to foreign exchange losses.

EBIT for the quarter was $51.4 million, which was about 10% higher than our initial guidance for the quarter and better than our first quarter earnings in 2009 of $46.6 million.

So now let''s talk about margins. Our first quarter EBIT represents operating margins of 27.3%. Year-over-year they are higher than the 26.1% in last year''s first quarter. The industry group, however, has reported, on average, margins that contracted, not expanded.

Interest expense was $4.1 million for the quarter with $3.8 of that being non-cash. We expect interest expense in 2010 to be approximately $16.5 million with $15.8 million or $0.42 per share of that being non-cash.

Income tax expense was $15.1 million which is an increase over the prior year''s first quarter expense of $13.6 million, primarily due to higher taxable earnings in this quarter. Our tax rate in the quarter was 31.8%. We expect our effective tax rate for the remainder of 2010 to be in the 31% to 32% range.

Net income for the quarter was $32.2 million, ahead of last year''s first quarter net income of $29.2 million. Earnings per share was $1.38, compared to the $1.26 earned in the first quarter last year and $1.25 earned in the prior quarter. So earnings are up almost 10% year-over-year.

And since we''re talking about shares, I would like to point out that we have asked our shareholders to vote on a resolution at our June 10 annual shareholders meeting to split our stock on a two for one basis. If that is passed we expect the split to occur on or about July 8. Now, if we go on over to the balance sheet, year-over-year first quarter cash balance has increased by $65 million to $138.8 million.

Compared to the prior year-end balance, dash was down by $42.2 million as we used our cash in the quarter for continuing our stock repurchase program, paying cash dividends to our shareholders, and acquiring a small technology business. Receivables stood at $131 million, down from $133.8 million at the prior-year end, primarily due to improved collections this quarter.

DSOs in the quarter remained strong and were 63 days, as compared to 66 days for the fourth quarter of 2009. Inventory was up slightly from our year-end balance of $32.2 million, as product sales have increased over last year.

Other current assets decreased from year-end balances by $10.2 million, primarily due to the utilization of an income tax receivable. And there were no material changes in PP&E. Intangibles, goodwill and other long-term assets are up $9.9 million, primarily as a result of that small acquisition that we made in the production enhancement segment.

Now, if we go to the liability side of the balance sheet, our accounts payables were $36.5 million, up from the prior year-end balance, primarily due to the increase in business activity. Other current liabilities increased to $79.4 million from the year-end balance of $73.4, due primarily to an increase in unearned revenue and income tax payable.

Our senior notes, as David mentioned, are now characterized as current rather than long term. This reclassification happens in any quarter when our share price exceeds the conversion premium by 30% over 20 of the last 30 trading days of the prior quarter.

This reclassification is merely an accounting presentation matter and does not impact any of our banking covenants. It also means that the notes are exchangeable in the second quarter. So note holders, if they choose, can send their notes to the trustee, and we will buy back their notes.

Long-term debt now stands at zero, as a result of our senior notes going current. Other long-term liabilities ended at $58.6 million, similar to the year-end balance of $60.9 million. And shareholders equity ended the quarter at $226.7 million, down from the prior year-end balance of $281.8 million, and this decrease was caused in most part from our $86.5 million worth of share repurchases, which was partially offset by net income generated during the quarter.

Using annualized net income for the first quarter, our return on equity is approximately 57% and this is certainly one of the highest returns earned in the industry. For the full year, 2009, our return was about 40%, and first quarter a year ago, the annualized return was about 56%.

Capital expenditures for the quarter were $6.2 million, up from $2.7 million in the prior year''s first quarter. And we expect CapEx for the full year, 2010, to be approximately $20 million to $24 million, reflecting the expected increase in industry activity.

Looking at cash flow, cash from operations in the quarter was $62.4 million. And after paying for our $6.2 million in CapEx, our free cash flow was $56.2 million, which is up over 18% from $47.5 million in free cash in the prior year''s first quarter.

On a per share basis our free cash flow for the quarter equaled $2.40 per share, and that''s up from $2.04 per share in the first quarter of 2009. The annualized per-share yield at quarter end on this quarterly cash flow was 7.3%.

During the quarter, we used our free cash flow to pay $2.7 million in dividends to our shareholders, repurchased $86.5 million in shares and paid approximately $9 million for technology acquisition.

Okay. Now let''s touch on our targets. We believe that for the second quarter of 2010, we should expect revenue to range between $185 million to $190 million with EPS between $1.39 and $1.44 per share. These results reflect the traditional seasonal conditions in Canada and the anticipated slowing of North American natural gas drilling and completion activities.

The midpoint of this guidance would result in operating margins of approximately 28% equaling the highest ever reported by Core with year-over-year quarterly incremental margin of up to approximately 35%. The second quarter 2010 guidance excludes any gains and losses that may originate from the repurchase of outstanding debt, any affects of foreign currency translation and assumes an effective tax rate of approximately 31% to 32%.

In addition, second quarter 2010 EPS guidance does not consider shares that may be repurchased by our company or shares that may be added to the share count, relating to our senior exchangeable notes and warrants. We are unable at this time to provide full-year 2010 guidance with a high degree of confidence.

Now with that, I''ll turn the call over to Monty, who will go into further detail on our strong operational

Monty L. Davis

Thanks, Dick. The first quarter of our 2010 was our best first quarter ever. Revenue grew 5% over Q1 2009. And we improved operating margins 125 basis points to 27%. I commend our employees for an excellent quarter of providing our customers with the best service and products in the industry. We have the best, most dedicated people in the business, and we are proud of them.

Our Reservoir Description revenues of $104 million were up 1.5% over Q1 2009, while operating earnings of $25 million yielded 24% margins equal to Q1 2009. Areas of strongest activity included deep water Gulf of Mexico, South Atlantic margins, Europe, the Middle East and Asia-Pacific.

Analysis of both Core''s and reservoir fluids to help our oil company clients optimize production and recovery from their reservoirs continued to be strong, particularly in the oil reservoirs. Production Enhancement revenues grew 9% over Q1 2009 to $69 million, generating $12 million in operating profits for 30% margin, which is an improvement of 100 basis points.

U.S. gas and oil shale activity increased in Q1 with demand increasing for our Spectrascan, SpectraStim and Spectrachem services to maximize fracture efficiency. We have performed extensive completion diagnostics in both the Montney and Muskwa gas shale plays in Canada. These are being used by our clients to better understand the complexity of stimulation of these formations to optimize their fracture programs and modify their stimulation and/or drilling programs. All of the results are proprietary at this time.

In the quarter, we completed the acquisition of a technology that is supportive to further development of our existing fracture diagnostic services with a very small established revenue stream. We increased our market share on perforating systems with our high-efficiency, reservoir optimization systems leading the way.

Sales of our high-efficiency reservoir optimization perforating systems increased 48% from Q1 2009 to Q1 2010. This suite of technology is capturing market share and far outpacing market growth.

Reservoir management revenue grew 16% over Q1 2009 to $15 million, with margins reaching 36%, which is better than any quarter in 2009. Our gas shale studies continue to be very strong with 11 new EMP companies in our global gas shale project, nine new members in our new Montney regional gas shale study.

Our North American gas shale study now has 69 member companies, 39 companies in the Haynesville study, 42 in the Marcellus shale study, 27 in the Eagle Ford Gas shale study, and 13 companies have purchased our Granite Wash type gas sand study.

Q1 was a very good quarter for installation of our permanent reservoir monitoring systems in Canada. Core Lab is providing our patented more CEX system of sensors, external to the casing, to assist operators in the shale gas plays in northern Alberta.

The down hole permanent pressure and temperature data from our proprietary electronic resonating diaphragm sensors are being used to help operators understand the reservoir''s draw down and communication between zones. Seven of the eight well programs have been completed with 10 to 14 sensors on the outside of casing to monitor reservoir pressure in the Montney shales, including measuring the pressure during the fracture stimulation.

Operators believe through science and technology, they will be able to economically find and develop these massive plays. Those of you who have seen our corporate presentation know that reservoir optimization means increasing production from the reservoir by using Core Lab Technologies to change the decline curve.

An excellent example of this is the results of laboratory measurements, production analysis, and stimulation evaluations in our various gas shale consortium. Core Lab has been working with our clients on improving their decline curves, and resulting estimated ultimate recovery.

Petrohawk announced results of their field test of the methodology developed from these studies in mid-April. Preliminary field results have been very encouraging, showing dramatic flattening of decline curves and projections have increased estimated ultimate recovery by one to three BCF per well. This truly illustrates the value of our consortia to our clients and how Core Laboratories helps our clients optimize their reservoir and alter their decline curves.

We''ll now open the call for questions.

Question-and-Answer Session

Operator

Thank you. As a reminder, in order to ask an audio question, please press star one on your telephone keypad. We''ll pause for just a moment to compile the Q&A roster. Your first question is from the line of James West.

James West – Barclays Capital

Hey, good morning, guys.

Richard L. Bergmark

Good morning, James.

James West – Barclays Capital

Dave or Monty, you mentioned in the press release you talked about, really, unprecedented demand for some of the pressure diagnostic technologies that you guys provide. I guess I have two questions around that. Number one what is driving that demand? Is it just the rebound in North America or is it really a mindset shift amongst the producers? And then number two, what are the competitive products out there. I know the fracturing companies have some low-tech products, but on the higher end that would be competitive with your products, what is available in the marketplace?

David M. Demshur

Yeah, James, looking at first the question of what is driving that demand, if you look at our job count, it actually is down on the number of jobs run. However, the jobs we are on are seeing longer laterals and many more frac stages. We would not be surprised over the next couple of months that we would see two 10,000 foot dual laterals drilled in the Bakken, in the middle Bakken and Three Forks, followed by as many as 50 to 60 frac stages within each of those laterals. So we''re seeing a lot of experimentation trying to optimize the length of the lateral, and the number of stages therein. We''re using a lot of our rock mechanics data and core analysis data to try to determine the length of each stage and the positioning of each stage.

So when you combine those technologies along with the fracture diagnostics technologies, we''re seeing certainly increased demand. Another example would be a project where we looked at six parallel horizontal wells in the Marcellus, that we used some of our Spectrachem technology, not to monitor the efficiency of those six frac jobs, but to look at the directional movement of fluids, not in those six wells, but in well bores that surrounded those six wells drilled by our leading operator up in the Marcellus in Pennsylvania.

With respect to what is available from a competitive standpoint, certainly it''s a space that we do dominate and own at this period. You are correct, some of the frac -- some of the pressure-pumping companies do own micro seismic technology, which we actually feel is complementary to our down-hole technology that can determine where the profit has been placed and successfully stimulated zones.

Also, when you look at Core Lab, with respect to the pressure pumpers, I think we are viewed as an independent arbitrator of how well and how efficient and effective the fracture stimulation job was actually performed, where maybe some of the pressure pumping companies that have some of the tilt meters and surface technology, maybe appear to be a bit biased. So hopefully those answers got both of your questions.

James West – Barclays Capital

Yeah, that was very helpful. And then the technology acquisition you made, was it similar products that you have today in the marketplace or it is something new?

Monty L. Davis

It''s going to be slightly complementary, James. That''s at a very early stage, and we will develop that over time.

James West – Barclays Capital

Okay. Okay. Great. That''s all I had. Thanks, guys.

Operator

Our next question is from the line of Neal Dingmann.

Neal Dingmann – Wunderlich Securities

Good morning, guys, excellent quarter. Question on the Production Enhancement in reference to the HERO, it really seems like in addition to North America, you mentioned that the HERO technology really taking off in the Middle East and Asia-Pacific. Just wondering if you can give us color what degree or how much more that can continue to climb there and just do you see that continuing in -- basically all of the international regions?

Monty L. Davis

Anywhere you have carbonates, we think this is going to be a key technology. We think there is a lot of room for growth outside of North America for the product. We have been suite of products, it''s not just one. We have been seeing growth in that. That''s now 63% of everything, all of the perforating targets we sell. So we have been very successful at delivering the value through the high end to our clients. You are going to see more and more of this, particularly in the Middle East and in the Asia-Pacific regions, where we expect to see a lot of growth for the HERO products.

Neal Dingmann – Wunderlich Securities

Okay. And then over on the reservoir description, I really seems like things are humming along in Iraq. Wondered if you could give us an idea of the color on the number of orders out there now and kind of the bids or how much more than can continue to increase latter part of this year into next year in both northern and southern?

David M. Demshur

Yeah, as you point out, Neal, we can bifurcate the country because we are looking at a little bit different geological provinces. In the north, we''re mostly working for smaller independent companies. These jobs relate to reservoir description and some reservoir fluids work, primarily done up in our Aberdeen facility that''s doing a great job there. And unlike some other service companies, that are operating in Iraq, we do know what our operating margins are for those projects, and they are incremental to the company''s overall margins. To the south, little different, a lot of that work is being done in our Middle East operations, down in Abu Dhabi, we''ve got an advanced technology center there. This work is mainly for the multi-nationals. Again, these are primarily reservoir description and reservoir fluids work, trying to characterize where these reservoirs stand in age with respect to the redevelopment owing to these recent licensing rounds. These tend to be larger jobs.

In some cases, over a mile of core has been described, and looking at where we stand with respect to the reservoir fluids and how those fluids are going to be produced. The key to the south is, these reservoirs have relatively low recovery rates, let''s say in the low 20 percentile. Hopefully, if we can increase those into the upper 20 percentile of recovery, all of these licenses will be successes, so a little bit different in both. We expect this level of activity to continue, maybe picking up a bit in the south as more as more activity occurs there. To the north, we expect that to grow, but not as rapidly as maybe some of the work that we''ll be doing in the south.

Neal Dingmann – Wunderlich Securities

Got it and last question for Dick. Not to leave him out. Dick, on the senior changeable notes, I think you previously if I remember right, had an agreement with Lehman to basically take care of those when they are converted. Going forward, now that those can be converted, what is going to be done with those notes?

Richard L. Bergmark

Yeah. Your reference to Lehman was we had a call and a warrant contract with Lehman. Given their bankruptcy, the call as we disclosed on prior call, we formalized the amount of the claim and then sold that claim and received cash at year-end for that. So the call option has been terminated. We received value for it. So they will not be providing any shares to us.

On the warrant, which was an asset of theirs, they sold it to a third-party dealer, so that''s now in the hands of another party. Remember, we were paid money in 2006 for that warrant, so we received value. It will now be up to us to deliver shares to that contract party, based on certain share prices beginning around $125 a share and those shares, you see in our diluted share count.

So the thing that will happen, Neal, on the end of 2011, is that our diluted share count will become our basic share count. Because those shares will already be in our EPS calculation, but on that date in 2011, November, we will actually then distribute those shares to the counter party.

Neal Dingmann – Wunderlich Securities

Got it. That clears it up. Thanks, guys. Good quarter.

Operator

Your next question is from the line of Rob MacKenzie.

Robert MacKenzie – Friedman Billings Ramsey Group

Good morning, guys.

David M. Demshur

Good morning, Rob.

Robert MacKenzie – Friedman Billings Ramsey Group

David, I had a question for you actually, first on your guidance going forward and your inability to forecast the full year. You guys referenced in your press release and in your comments your uncertainty or your expectation that the gas rig count is likely to decline. Is that specifically targeting your expectation that the shale gas count will decline or is that a more generic comment, reflecting Wall Street concerns or industry concerns about the overall gas rig count and not specifically directed at the different shale plays?

David M. Demshur

Yeah, that is generic, Rob and when we look at, we said the anticipated slowing of North American natural gas drilling and completion activities. Again, that would be targeted mainly at more of the less economical plays, so a lot of the vertical wells that have been drilled, we feel those are rapidly becoming uneconomical and just with low $4 natural gas prices, our view is that we cannot continue to see the increasing number of horizontal rigs being added as well. And I think over the last couple of weeks, we have seen a tempering, even in the number of horizontal rigs that were being added to the fleet.

Robert MacKenzie – Friedman Billings Ramsey Group

Right. Right. In terms of the more marginal vertical-type wells, what percentage would you say that represents of your revenue?

David M. Demshur

Well, if we look at North American natural gas, and we say that, that is 30% of our revenue total company, I would probably split that right now being about two thirds horizontal, one third vertical.

Robert MacKenzie – Friedman Billings Ramsey Group

There would be a margin difference between either of those revenue splits?

David M. Demshur

Correct. Because you are going to have the service intensity and the use of our industry-leading technology in the horizontal wells as opposed to the vertical wells.

Robert MacKenzie – Friedman Billings Ramsey Group

And how much offset, if any, or growth would you expect to see from some of the more liquid plays, Granite Wash, et cetera. And do you think that should offset or shouldn''t that offset some of the decline in the low margin vertical work?

Richard L. Bergmark

Yes, I think that is correct, Rob, as we point out in our narrative, or actually in our press release, focus now on the Eagle Ford, the Bakken, and next the Niobrara which we think has some potential because it does have some natural fracturing occurring in it will get more attention from us, I think almost to the exclusion of some of these vertical natural gas wells. So there will be some replacement there.

Robert MacKenzie – Friedman Billings Ramsey Group

Can you give us a feel for, David, where things stand in terms of growth of international, particularly shale gas now activity in Europe or elsewhere? How is that growing? Is that kind of meeting your expectations ahead of it? Behind it right now?

David M. Demshur

Yeah. I think all over growth for international earlier in the year, we talked about our expectation all over would be 5% or 10%, give us one more quarter and we will calibrate that for you. I think that''s playing out as referenced on some other industry conference calls, that we expect industry international growth to be nearing the 10% level as we go near the into the second half of this year.

With respect international shale gas activities, as we mentioned before, right now we are active in several of the drilling projects in central Europe. There is a drilling project in China. Those are very small efforts at this point. We don''t really see any ramp in that until these are evaluated from a scientific standpoint. And I think we''re still probably six to eight quarters away from that.

Robert MacKenzie – Friedman Billings Ramsey Group

Okay. That''s fair on that. I guess my final question in terms of this line of questioning is coming back to something we have talked about before and that''s service intensity. And I know you guys have talked about it in the past, doing analysis work on frac jobs of over 30 stages. How would you characterize how the intensity of work has changed? And is it continuing to increase and where should we expect that to go over the next several quarters?

David M. Demshur

Yeah, I think that continues, Rob. In talking to our production-enhancement guys, just over the last week, they are looking at their job counts being down rather dramatically but revenue levels holding the same or increasing. So that would suggest to me that we are seeing intensity increase and just from a couple of the jobs that I had mentioned earlier in the Q&A session, we are seeing many more stages and longer laterals. That plays to all of our fracture diagnostics technology, it plays to all of our HERO-charge technology, and also plays to using core analysis and rock mechanics. So, we look at these as a scientific laboratory that is well suited for all of the technologies that we bring to bear on the development of these interesting and complicating shale plays, whether they be natural gas or now we are seeing more direction toward the natural gas liquids or light oils associated with these plays.

Robert MacKenzie – Friedman Billings Ramsey Group

Thanks. Actually, I have one more follow-up if you don''t mind. It''s related to a lot of the talks we are hearing about in Washington about potential risks to drinking water due to hydraulic fracturing. Have you guys been involved or been asked about contributing input to any kind of study on the safety of hydraulic fracturing vis-à-vis drinking water, and ultimately from my standpoint, it may be somewhat naïve, it seems that, that would be ultimately a great business for the tracer technology to help prove or disprove any risk?

Richard L. Bergmark

Yeah, that is correct, Rob. If you look at our Spectrachem technology, that can be utilized and are being utilized up in the Marcellus in Pennsylvania to be able to prove that the return of frac fluids with our tracers in them are not from fresh water zones. And so it can be a definitive data set to show that there has not been contamination of fresh-water zones via fracing. If we look at the history of fracing in this country, there have been over 1.5 million wells that have been fraced and we are not knowledgeable of one area where a fracture has resulted in the contamination of fresh drinking water.

Robert MacKenzie – Friedman Billings Ramsey Group

Okay. Thank you, guys.

Operator

Your next question is from the line of John Daniel.

John Daniel – Simmons & Company

Good morning, guys and good quarter again.

David M. Demshur

Thanks, John.

John Daniel – Simmons & Company

I just wanted to quickly follow up on Rob''s question if I may. I understand the visibility is somewhat limited, but it sounds like second-half results should probably trend higher versus flattening from the Q2 guidance. Is that reasonable?

Richard L. Bergmark

I think that''s reasonable.

John Daniel – Simmons & Company

Okay. One of the things you noted before is that the HERO charges increase the ultimate recovery on these wells. Can you give us a sense as to how much that increase is, and what you are seeing sort of transpire over the last year or two as the products have been developed?

Monty L. Davis

We see a couple of different things. If you are not fracturing the well, this gives you a cleaner, longer perforating tone, which increases the flow to the well. That gets you beyond the well bore damage and out into the virgin formation, without further damage. If you are going to fracture the well, which is the vast majority of what is happening now, is that you will be able to fracture with lower horsepower because of those clean perforating tones. If you have a conventional perforating charge, you are going to have debris in the tone. That debris can be significant in many cases.

John Daniel – Simmons & Company

Okay.

Monty L. Davis

And can actually block the tunnel at some point in the tunnel, not giving you the full effect, the long, clean tunnel. So we''re looking at 20% deeper penetration. That''s a lot more virgin formation that has opened up to flow. So it''s a fairly significant difference.

John Daniel – Simmons & Company

Okay. When you talk about the charges helped lower the horsepower requirements that are needed? Can you quantify that? Is it one or two pumps or 10,000 horse power? Are you able to determine that?

Monty L. Davis

It''s widely dependant on the formation, and how deep, how long the well bore is.

Richard L. Bergmark

Yeah, John, we have seen that range from lowering breakdown pressures from the teens to as much as 50%.

John Daniel – Simmons & Company

Okay.

Richard L. Bergmark

So we''re talking about significant savings here on the amount of horsepower needed on the surface and that can certainly offset the increased costs that the operators see for these charges.

John Daniel – Simmons & Company

Right. But if the…

Richard L. Bergmark

So when you look at the return on their investment for those charges, it far outweighed the price that they pay, it''s far outweighed by the savings that they get at the top from reduced horsepower needed for the breakdown pressure of the formation.

John Daniel – Simmons & Company

Right. I''m not questioning the returns. I''m just trying to better understand if it was say 50,000 horsepower to frac a well in the Haynesville back six months ago, the improvements of your technology, is it now making it 40,000 or 45,000?

David M. Demshur

It''s a multi-varying equation, because if you have a longer lateral, you might actually…

John Daniel – Simmons & Company

Need more horsepower

David M. Demshur

Need more horsepower to service, but net-net, it would be lower because you are using the super HERO-plus charge.

John Daniel – Simmons & Company

Okay. All right. Just a couple of quick ones and then I’ll turn it back over. Can you give us a sense or quantify how many charges you typically sell per quarter, and given the growth in the business, is there any risk that you are running up against manufacturing constraints?

Monty L. Davis

We are not running up against manufacturing constraints. We have in the first quarter added staff to increase our shift size. We have opportunity to add further as needed, and in fact, we''re growing our manufacturing capability, but we have the ability to grow that with the current plant that we have.

John Daniel – Simmons & Company

Okay.

Monty L. Davis

We''re the largest independent supplier in the world of perforating charges, so we''re in a good position to supply the market. We did bring it down, our shift size and eliminated shifts in ''09 as was needed at the time, and we have reversed that and we''re going the other direction at this time to meet the demands of our customers.

John Daniel – Simmons & Company

Okay. All right. Thanks, guys. Good quarter.

David M. Demshur

Thanks, John.

Operator

Your next question is from the line of Victor Marchon.

Victor Marchon – RBC Capital Markets

Thank you. Good morning, guys.

David M. Demshur

Good morning, Victor.

Victor Marchon – RBC Capital Markets

Most of mine have been asked. Just wanted to, just ask one or two -- as it relates to Production Enhancement, the push to international and the opportunities you see there, I was just curious if there''s any pricing differential or revenue differential for production-enhancement products international versus domestic?

Richard L. Bergmark

There''s not really. The products, we value sell and that''s how we price our products, so it''s not a difference in the international and domestic and many of the perforating charges that are used internationally are sold here to one of the major perforating companies and they take them abroad. So it''s a pretty level on pricing.

David M. Demshur

And it''s an interesting view because if you look at Production Enhancement here in North America, a lot of it related to natural gas. When you look at 33% of that business, because this quarter 33% of production enhancement was outside of the U.S., most of that is oily. So it is a bit of a different product mix and a different application, but as Monty said, very consistent with pricing, really, across the globe.

Victor Marchon – RBC Capital Markets

And that was my next question, you seemed to have answered and that is there any pricing differential of service intensity between oil and gas as it relates to the HERO products or is it about the same?

David M. Demshur

Well, you are going to have that because just statistically, reservoirs outside of North America are much more effective -- or a much more efficient reservoir, because you are still dealing with reservoirs that have relatively high amounts of porosity and permeability. Whereas if you look in North America, the reservoirs we are exploiting here, outside of the deep water Gulf of Mexico, let''s just say orders of magnitude, less efficient in their productive characteristics than that here in North America, let''s say, outside of the deep water Gulf of Mexico.

Victor Marchon – RBC Capital Markets

Okay. And the second one I had was just on the deep water as well. You guys talked about North America on shore a little bit? And just wanted to see if you guys could talk about what you were seeing on the deep water side and if that is going to show growth this year, versus ‘09 or just your general thoughts on the deep-water market for the rest of this year.

Monty L. Davis

We, as I mentioned, were very active in the deep water in the first quarter. We expect deep-water activity to remain strong. It''s hard to project if it''s going to grow from where we were in the first quarter, but we think that it''s going to remain a pretty strong area and based on that, it could grow through the year.

David M. Demshur

Yeah. Offshore production represents about 30% of the global supply of crude. It is a revenue intensity of about 40% for Core Laboratories. We like the deep-water markets. Certainly, our 2009 annual report just printed highlights the deep offshore Atlantic margins off Eastern Brazil and West Africa. And so those areas will continue to be big areas for us and yes, we expect those areas to certainly grow through 2010 and into 2011.

Victor Marchon – RBC Capital Markets

Thank you, guys. That''s all I had. I''ll turn it back.

David M. Demshur

Thank you, Victor.

Operator

Your next question is from the line of Blake Hutchinson.

Blake Hutchinson – Howard Weil Incorporated

Good morning, guys.

David M. Demshur

Good morning, Blake.

Blake Hutchinson – Howard Weil Incorporated

Quick question, I just wanted to drill down a little bit more on the reservoir management segment. We saw a nice uptick in top line there. You cited the initiation of consortium studies in the Montney and Niobrara, but I''m imagining that didn''t necessarily flow through the first quarter. Are there other studies that are reaching critical mass that drove the bump in top line there?

Monty L. Davis

First let''s talk about the study. Initiation of the study is future revenue. The way the studies work, we pitch a study, we get our core group of clients that want that study done, and then they do pay up front, but we do not record that as revenue. Dick mentioned that our unearned revenue balance sheet account increased in the quarter, that''s the way that works.

As the study is performed, and data is delivered, which is a future thing for both of those studies that we mentioned, that''s a future revenue stream, not today''s revenue stream. So the 11 new members in the global gas shale, the 9 in the Montney, those are future revenue to be recorded, even though our clients join and pay up front. A big factor in the Reservoir Management group for this quarter goes to the instrument sales that I mentioned, where we instrumented wells in the shale plays of northern Alberta. And that''s more up and down business, depending on the timing of these instrument sales. So that was a factor in there. The other shale plays, the other consortiums are continuing to be very strong, and are producing the revenue stream that you are seeing.

Blake Hutchinson – Howard Weil Incorporated

So if we think about how revenue progresses from here, maybe we''re better off using a 4Q run rate and then adding these new consortium studies from there and is there anything major in your portfolio that is aged or would be rolling off at the same time?

David M. Demshur

I don''t think we have anything major that''s going to be rolling off. These shale studies, and even deep-water studies, the Atlantic margin studies, those are continuing very strong.

Blake Hutchinson – Howard Weil Incorporated

And are you seeing a trend where upon initiation of the studies, there are more members to the consortium initially than in the past just due to the kind of evolution of the business here and the maturity of the business?

Richard L. Bergmark

Well, I think particularly with the shale studies, we ramped up the Eagle Ford very fast compared to when we kicked off the North America study and you will see that. Those players have all seen the value of our other shale studies and so they are much quicker with entry into this.

Blake Hutchinson – Howard Weil Incorporated

Okay. Great. Just following up on some of the commentary around Southern Iraq, you featured it a little more prominently here. Are we to understand that most of the fields that you feel you will be involved with, you are currently involved with and therefore, that''s running through our revenue stream or with these new awards do you feel there''s a potential to add 5 or 10 major fields and activity on 5 or 10 major fields or something of that magnitude?

Richard L. Bergmark

Yeah. I would say that we do see revenue already running through the revenue stream. Any additions again as it is Core worldwide, will be incremental adds to the revenue that we hope will generate, well that we know will generate incremental margins, that will push our margins. I would be closer to adding an additional five, as opposed to an additional 10 fields over the next year, let''s say. Because we think this process is going to go a bit slower than maybe some of our oil field brethren.

Blake Hutchinson – Howard Weil Incorporated

But safe to say some of the name plate awards we have seen recently are fields you are already involved in?

Richard L. Bergmark

That is correct.

Blake Hutchinson – Howard Weil Incorporated

Or not?

Richard L. Bergmark

That is correct.

Blake Hutchinson – Howard Weil Incorporated

Okay. Great. And then finally, you kind of touched around the efficiencies created by the HERO charge and understanding a lot of this is proprietary, you mentioned the release, the geological versus geometric dispersion issue in the shale plays. What is that telling you today about the volumes of proppant, we''re putting into the wells. Do you eventually, does your diagnostic technique or your charges eventually reduce something like proppant costs as well or is it telling you more that proppant is being misplaced rather than the volumes are simply too large that we''re putting into these wells.

Richard L. Bergmark

Yes. As Monty alluded to earlier when you look at our consortium study in these shale plays, one of the chief concentrations are the completion and stimulation of these well bores. So within each individual study, we will be making recommendations on geologic and petrophysical parameters that are necessary for different types of completion and stimulation processes. And with respect to the amount of proppant that is to be used, we really don''t make a good judgment on that. The type of proppant is we would make a better judgment on that. So, for volumes, hard to see point blank, we still think way too early in this game to tell which way this is going to run.

Blake Hutchinson – Howard Weil Incorporated

Okay. Fair enough. Thanks so much for your time.

David M. Demshur

Very good, sir.

Operator

Once again to ask an audio question, please press star one on your telephone keypad.

David M. Demshur

Okay. Steph, I think we''re going to wrap it up.

Operator

In summary, Core''s operations posted a solid quarter. We have never been better operationally or technologically positioned to help our clients expand their existing production base. We remain uniquely focused and are the most technically advanced reservoir optimization company in the oil field services sector.

This positions Core well for the challenges that further await in 2010. The company remains committed to industry leading levels of free cash generation and returns on invested capital, with excess capital being returned to our shareholders. So in closing, we would like to thank all of our shareholders and the analysts that follow Core.

And as already mentioned by Monty Davis, the executive management of Core and our board of supervisory directors, I’d like to give a special thanks to our 5,000 plus worldwide employees that have made these outstanding Q1 and past results possible. We are proud to be associated with their continuing achievements. So thanks for spending your morning with us and we look forward to our next update. So bye for now.

Operator

Thank you for your participation. This does conclude today''s conference call. You may now disconnect.