Core Laboratories: Gushing Profits

Core Laboratories' (CLB) mission is to enable oil exploration and production companies to get the most out of their aging petroleum reservoirs. The company, which operates in more than 50 countries, analyzes petroleum reservoir rock and fluids, helping oil companies determine how much gas or oil is present in their reservoirs and how quickly it can be extracted. After oil and gas well analysis, Core Laboratories offers hydraulic fracturing and field flooding (forcing water, carbon dioxide, or hydrocarbon gases into a well to push out oil and gas and boost production). The company also provides reservoir management services.

Headquartered in The Netherlands, Core Labs helps oil companies get more oil out of the ground and more profits to their bottom lines. In 2006, 75% of revenues came from the sale of services to petroleum producers and 25% from actual product sales. 53% of sales come from U.S. producers. The phones are busy at Core Labs. In the first 6 months of this year, it's made more money than any other year in its history except for 2006. With oil above $70 a barrel, there's no shortage of clients wanting to extract the last drop of oil from their holdings. Earnings should reflect the demand.

Analysts are looking for more than a 50% increase this year, to $4.75, up from $3.07 last year. In 2004, they were 97 cents a share, then $1.27. Revenues are growing as well but not as quickly. Last year they totaled $575.7 million. Analysts think this year will show $675 million followed by $775 million next year. Going forward, predictions are for earnings to grow, on average, 27% a year while sales ramp by 15.5% a year, on average, over the next 5 years. Because of the long term nature of contracts for Core Labs, earnings for the next several years is highly predictable.

The stock reflects this good news. Starting at a low point of $7.90 in 2002, it recently hit an all-time high of $108.90. It's now down about 8%. But it may be that all the goodness isn't baked in. While the going forward growth rate is predicted to be 27%, the Price to Earnings ratio (P/E) is only 22, based on this year's earnings. It's even lower when using next year's earnings, closer to 17.5.

Core Labs has a stronghold in two of the world's largest oil producing areas: Saudi Arabia and Canada. The first has traditional, in the ground oil. The second has the huge oil-sands projects that are economically viable when oil is at current levels. The oil sands of Canada are the second largest oil reserves in the world, behind only Saudi Arabia.

One of the products Core Labs offers is a specially designed explosive charge for natural gas fields which opens hard to get gas-shale reservoirs. After the charge, metal liners are used to provide a debris-free channel for the gas to flow into. There is an ever increasing market for this device as drilling in shale is becoming more widespread.

More numbers to consider: Clearbridge Advisors holds a 17% stake in Core Laboratories. Officers and directors own 10%. Net profit margin should be 17% this year, up from 14.4% last year. Debt is 80% of capital. There are only 23.56 million shares outstanding but the market cap is $2.4 billion. There is a convertible bond outstanding, convertible at $94.76 a share, suggesting that more shares are forthcoming from a conversion, depending on the covenants of the issue.

Core Labs is an interesting play in the oil industry. It doesn't directly produce oil. It doesn't drill for it. It doesn't refine it. But it does offer a lot of oil services that companies want and are will to pay highly for. As long as the price of oil stays high, Core will continue to generate great profits. But watch out if the price of oil heads the other way.

Disclosure: none