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Core Laboratories NV (NYSE:CLB)

Q1 2012 Results Earnings Call

April 19, 2012 8:30 AM ET

Executives

David Demshur – Chairman, President and CEO

Richard Bergmark – Executive Vice President and CFO

Monty Davis – Chief Operating Officer

Analysts

Rob MacKenzie – FBR Capital Markets

James West – Barclays Capital

Veny Aleksandrov – Pritchard Capital Partners

Blake Hutchinson – Howard Weil, Inc.

John Daniels – Simmons & Company

Operator

Good morning. My name is Erika and I'll be your conference operator today. At this time, I would like to welcome everyone to the Core Lab Q1 2012 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. (Operator Instructions)

Thank you, I would now like to turn the call over to Mr. David Demshur. Mr. Demshur, you may begin your conference.

David Demshur

Thank you, Erika. I'd like to say good morning in North America, good afternoon in Europe and good evening in Asia Pacific. We'd like to welcome all of our shareholders, analysts, and most importantly, our employees to Core Laboratories first quarter 2012 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'll 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 brief investor update and highlight the three financial tenets by which Core's executive management executes the company's growth strategies.

We believe these three tenets have produced industry leading shareholder returns and returns on investment capital. We will also discuss Core's long health philosophy of returning excess capital back to our shareholders.

And then Dick will follow with a detailed financial overview and additional comments regarding building shareholder value and Core's general industry outlook for 2012, which confirm our confidence in the trends of increasing activities in unconventional oil reservoirs in North and South America and especially international and deep water activities tied to crude oil developments worldwide.

Core cannot give specific Q2 revenue and earnings guidance as the company is in the process of a dual listing of our shares on the NYSE Euronext exchange in Amsterdam. We expect this listing to take place in mid May.

Then Monty will go in Core's three operating segments detailing our progress and discussing the continued successful introduction of new Core Lab technologies and services and then highlighting some of Core's operations and major projects. And then we'll open the call for a Q&A session.

I'll turn it over to Dick for remarks regarding forward-looking statements. Dick?

Dick 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 filings that may affect our outcome.

Should one or more of these risks or uncertainties materialize or should any one 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 more detailed discussion of some of the foregoing risks and uncertainties see item 1A risk factors in our annual report on Form 10-K for the fiscal year ended December 31, 2011, as well as the other reports in registration statements filed by us with the SEC.

Our comments include non-GAAP financial measures, reconciliations to the most directly comparable GAAP financial measures are included in the press release announcing our first quarter results. Those non-GAAP measures can also be found on our website and with that said I'll pass the discussion back to Dave.

David Demshur

Okay. Thanks Dick. I'd like to give a quick investor update. Core's operations produced another solid quarter as the company continued to benefit from our continued focus on and the increase in international and deepwater offshore activities and unconventional oil plays in response to higher oil prices and dwindling global spare oil producing capacity.

The focus on crude oil related projects continued to build in the 2012 as we discussed the projected decrease in natural gas drilling in North America on our three previous conference calls. Therefore, Core's revenue mix now is closer to 80% oil and 20% natural gas, a shift from the previous 70-30 mix that we had last year.

Moreover, most of these natural gas projects related to an emanate from the international theater and are LNG related. This would be in the Eastern Mediterranean, East Africa, and Western Australia.

Turning specifically to our operations, Core's reservoir description results reflected the focus again away from natural gas and the positive increases in both international and deepwater activities which continued to strengthen into 2012. Also our first quarter 2012 results were bolstered by North American activity levels in oil shale reservoirs and increased activities in tight sands in the Permian Basin of West Texas. This drove incremental margins for production enhancement.

And finally, reservoir management posted another strong quarter reflecting additional oil company support for its joint industry projects in oil shale reservoirs and international areas of interest like deepwater East and West Africa. Our growth strategies and the execution by our operating units continued to serve our clients, our employees and our shareholders well.

Core's continued focus on higher return international crude oil related developments, especially those in deepwater environments and unconventional oil resource plays and the continued internal development of new technologies and services, has led to multiple years of sustained growth and increased profitability.

Core has always followed and will continue to follow three key investment tenets that have led to industry-leading returns. These three important tenets which usually receive only scant attention in our oilfield services sector are number one, maximizing free cash through fiscal discipline. Core follows a strict discipline for allocating capital for investment in growing our business, unless certain return on invested capital standards are met or exceeded the capital expenditure is disallowed.

Potential acquisition opportunities must pass the same high standards. This discipline produced a free cash flow for the first quarter of 2012 of $46 million. In fact Core converted about one of the every five revenue dollars into free cash during the quarter. Core will continue to demonstrate this strict financial discipline in 2012 and beyond.

Second financial tenet is to maximize our return on invested capital. Core's board has initiated an incentive compensation program for Core's executive and senior management teams. This is based on Core producing a return on invested capital in the top decile for the oilfield services sector. Core's Board believes that stock price performance over time is directly related to its return on invested capital.

Based on the most recent calculations available from Bloomberg Financial, Core's return on invested capital was approximately 38 percentage points higher than the oilfield services peer group listed by Bloomberg Financial and more than 30 percentage points above the Core's weighted average cost of capital.

Core is fortunate and values its long-term relationship with our top shareholders as the company's top 10 shareholders own approximately 50% of our outstanding shares with an approximate $57 ownership basis. Some of this ownership dates back to 1998. Our top 20 holders own approximately two thirds of the company's outstanding shares with an approximate investment basis of around $63 a share. And to these shareholders we have returned excess capital which is our third financial tenet.

During the first quarter 2012 Core returned over $26 million to our shareholders in the forms of quarterly dividends and the repurchase of share. Core also reduced debt in the quarter as well. Since October 2002, Core has returned over $1.2 million or almost $24 per diluted share to our owners. We will continue to follow these three key investment tenets into 2012, which should enable Core to continue to produce industry leading returns for all of our shareholders.

So now, I'll turn it back over to Dick for a detailed financial review, Dick?

Dick Bergmark

Thanks David. And I'd like to start by mentioning that we are excluding two items from our operational earnings that occurred in the quarter that were gains. Meaning there were items that increased our reported gap earnings.

We are excluding those from operational earnings for discussion purposes because they were either a one off item like an insurance recovery or an item that was specifically excluded from our prior guidance like the financial impact caused by changes in foreign exchange rates.

We have discussed in prior quarters the fire in our suppliers' steel mill that resulted in an interruption through our production enhancement manufacturing business last year. As a result we filed a claim under our business interruption insurance policy for $5 million.

In the first quarter we received notification from the insurer, they agreed to pay $3.4 million of the claim and we'll continue reviewing the remainder of our claim. We have received the initial payment amount, expect the review of the remaining amount to be completed in the second quarter.

We are excluding this $3.4 million pre-tax gain from our operation results as it is not indicative of the ongoing results of the company. It equals approximately $0.05 on EPS. We're also removing from our operation results of $0.02 per share after tax gain as a result of the effects of changes in foreign exchange rates, given that our prior guidance also excluded the impact of foreign exchange.

Okay. Now let's look at the income statement. Revenues were $234.2 million in the first quarter and were almost midpoint of our guidance of $230 million to $240 million. Revenues in the last year's first quarter were $206.7 million.

So year-over-year revenues are up 13.3%. Interestingly over the last decade our revenues on a compounded average annual basis are also up 13%. And we did experience a couple of business cycles over that time period, while the [OSX] was up just 11%, which is a good way to show our secular growth in a cyclical industry.

Of these revenue and services for the quarter $162.7 million, up 15% when compared to $141.5 million last year or an increase to $21.2 million. Product sales for the quarter were $71.5 million up 9.6% compared to last year's first quarter.

Moving onto cost of services for the quarter 60.3% of revenue and improvement when compared to 65.5% in last year's first quarter and 63.6% for all of 2011. In the first quarter our cost of product sales increased to 71.5% of revenues compared to 69.3% for all of last year. As a result of inventory cost being impacted by the cost of the replacement steel as a result of the fire at our supplier.

G&A for the quarter $10.2 million which is 4.3% of revenue, it was down sequentially from $10.7 million, but up slightly from $9.5 million in last year's first quarter. We expect G&A to be around $42 million in 2012. Depreciation and amortization for the quarter of $5.9 million unchanged from the last year. We expect depreciation in 2012 to total approximately $24 million.

Other income this quarter is $4.9 million. This amount is comprised of among other things, the FX gain of $1 million and a $3.5 million gain on the insurance recovery mentioned earlier.

EBIT for the quarter excluding the gains from the two items were $69.5 million, which was up $13.5 million or 24.2% year-over-year. Our first quarter EIBT represents EBIT margins of 30% well above the 27% margins earned a year ago.

Interest expense was $2.2 million for the quarter compared to $2.4 million in last year's first quarter. Income tax expense in the quarter was $17.8 million and that was based on effective tax rate of 24.8%, we expect our full year 2012 annual effective tax rate to be approximately 25%.

Net income for the quarter excluding the two items was $50.7 million compared to $37.8 million in last year's first quarter. So net income in the first quarter increased almost 34% on a year-over-year basis, GAAP net income for the first quarter was $54 million compared to $46.3 million last year.

Earnings per share for the quarter adjusted to exclude the gain relating to the two items was $1.06 which rose to the top end of our prior guidance of a $1.01 to a $1.06 per share and compares to the $1.06 reported at Bloomberg's Main Street estimate.

Putting this under perspective the Main Street for Core Lab went up as the quarter progressed unlike most OSX members who's estimates went down as the quarter progressed. Our adjusted EPS is up year-over-year by $0.29 or 37.7%. GAAP EPS stood at $1.13 for the quarter.

Now if we look at the balance sheet, cash was $23.5 million compared to the prior yearend balance of $29.3 million. Cash balances on our free cash flow were used primarily to repurchase stock, pay our dividends and to reduce borrowings on our revolver.

Receivables stood at $171.7 million virtually the same as yearend. Our DSOs improved in the quarter to 66 days, an improvement from the 68 days in all of 2011 and 70 days for all of 2010.

Inventory increased from $53.2 million at yearend to $58.2 million in the first quarter as we received raw materials purchased from multiple vendors in connection with a supplier disruption and to finished goods. Inventory turns were 3.8 in the first quarter compared to 4.2 for the full year 2011. Although, we do expect turns to continue to improve throughout 2012.

Other current assets were $31 million up slightly from the yearend balance of $27.5 million as a result for the most part from increases in various prepaid account. There were no material changes in PP&E, intangibles, goodwill or other long-term assets. On the liability side of the balance sheet accounts payable were $48.2 million down from the yearend balance of $57.6 million and that's primarily due to the timing of the interim payments.

Other current liabilities of $82 million are up $4.5 million from the prior yearend balance of $77.5 million due to a variety of reasons including in part to an increase in unearned revenue of $6.6 million for certain consortium studies.

Our long-term debt stood at $198.1 million compared to $150 million and comprised of $150 million in senior unsecured notes during 2021 and 2023 with a blended fixed interest rate of 4.06% while the remaining $48.1 million was drawn on our bank revolving credit facility.

Other long-term liabilities ended at $66.7 million an increase of 3.7 over the yearend balance. Shareholder's equity ended the quarter at $214.3 million up from the prior yearend balance of $181.7 million primarily due to additions from earnings offset by share repurchases and dividends, using annualized net income for the first quarter our return on equity was approximately 101% and certainly this is one of the highest returns earned in the industry.

Capital expenditures for the quarter were $7.3 million up from $4.4 million in the prior year as we continued to address opportunities created by the strong growth being experienced in our business. We expect our CapEx program in 2012 to be approximately $33 million as a result of an expected continued improvement in the industry activity particularly internationally and in the deepwater environment.

Our CapEx growth is client directed for the most part, meaning that we will increase our capacity for locations or for increases in technology, on the basis of discussions with clients about their specific needs, which is one reason why we have been able to generate our high returns on invested capital. So when our CapEx increases in positive business cycles it usually reflects upcoming demand for our products and services.

Looking at cash flow? Cash from operating activities in the quarter was $53.8 million and after paying for $7.3 million in CapEx, our free cash flow was $46.5 million. As David mentioned on the first quarter we turned almost 20% of our revenues into free cash flow which is one of the highest cash conversion rates in our industry.

During the quarter we used our free cash flow and cash balances to pay $13.3 million in quarterly dividends, repurchased $12.8 million worth of our shares and repaid $25 million on our bank revolver.

Now let's talk about our industry outlook. The dual listing process of the Euronext Amsterdam stock exchange requires that we file a prospectus with the Dutch financial regulatory body known as the AFM.

They have similar duties and responsibilities as the SEC has over U.S. listed companies. Although, we are not issuing any new shares in connection with the listing. We are required nonetheless to file a prospectus for AFMs' approval. And we have filed that prospectus with the AFM, but we have not yet concluded the process. Although, we do expect to by mid May.

Given that the listing is not yet approved only with certain stringent requirements would we be allow to issue specific guidance prior to the listing becoming effective. Consequently, we are not providing strict numerical guidance this quarter, but we are able to provide qualitative guidance.

Once our shares begin trading on the Amsterdam Exchange, which we think will occur in the midnight mid May timeframe, we will be able to return to providing our usual quarterly and annual guidance. While not consistent with prior practice this is what we can do for the moment. So for the second quarter and remainder of 2012, we expect increasing international growth, especially in deepwater projects supported by the scheduled arrivals of additional deepwater rigs.

Deepwater pre-salt activities in several international basins, such as the Kwanza basin, offshore Angola, should increase significantly throughout 2012. These prior observations have been supported by the recent announcement of pre-salt discoveries by Maersk Oil and Cobalt in the Kwanza basin. Other international areas include the Middle East specifically Iraq, and Asia Pacific, should see activity levels remain brisk with a support of higher international commodity prices.

In addition, we believe that we should benefit from increasing activities in the deepwater Gulf of Mexico, which is projected to approach the highs of early 2008 by late 2012. We should also benefit from increasing activities in unconventional oil-shale reservoirs, not only in North America, but also in South America and North Africa.

We assume that worldwide activity levels will increase by 10%, and possibly more, with sustained higher commodity prices. For comparison purpose with Q1 results versus the Main Street for the first quarter.

We believe that the Main Street estimate for Q2 just as it was for Q1 would be at the top of our range. We would look forward, we do look forward to providing our customary guidance next quarter.

Okay. With that, I'd like now to pass the discussion to Monty for detailed operational review.

Monty Davis

Thanks, Dick. The first quarter of 2012 was our best first quarter ever with revenue of $234 million and operating earnings excluding the FX gains and one-time gain from business interruption insurance increased to $69.5 million with operating margins of 30%, revenue growth year-over-year was 13%, and operating margins improved 300 basis points over Q1, 2011. We commend our nearly 5000 employees around the globe for another excellent performance.

Reservoir description revenue grew 8% over Q1 2011, and operating earnings grew 22% over Q1 2011 with operating margins improving by 400 basis points to 28%. We continue to receive a huge volume of work from Africa, in reservoir fluid analysis, well-site services, routine core analysis and more advanced rock properties analysis.

This activity truly spans the continent with projects from Tanzania, Mozambique, Uganda, Sierra Leone, Ghana, Ivory Coast, (inaudible) and Egypt. We expect this area to continue to be very active through the year. Scientific laboratory analysis of the reservoir fluids and formation of rock from these reservoirs is critical to our clients to understand and optimally produce these reservoirs.

Production enhancement revenue grew 18% over Q1 2011 and operating margins improved 300 basis points over Q1 2011 to 31%. The manpower stimulation diagnostic technologies is very strong. SpectraFlood technology is helping operators in the Middle East Africa, North America, Europe, and South America that understand the performance of their flood projects. This information is critical for optimizing flood sweeps of complex reservoirs from a maximum recovery.

Core's proprietary Fracture Diagnostics are helping all companies optimize fracture stimulations in the Midland Basin, Eagle Ford, Bakken, Niobrara, Utica and other shale reservoirs across North America. The manpower perforating completion systems was at an all time high first quarter year. The HTD-Blast perforating gun systems and premium High Efficiency Reservoir Optimization, HERO perforating systems continued to be in high demand in horizontal well completions.

The HTD-Blast has proven very effective for completing the difficult tow-in of horizontal wells with optimum efficiency. Our SuperHERO Plus+ charges used a patented ultra-low degree perforating technology for best in the industry performance.

Reservoir management revenue grew 25% over Q1 2011 and produced operating margins of 37%. Our consortium projects combined analysis from reservoir description and production enhancement to provide consortium members with the better understanding of their reservoirs. Core Lab's project tight all reservoirs of the Midland Basin now has 22 member companies.

This project is directed at reservoir characterization and production enhancement of the Sprayberry, Wolfcamp and other intervals down to the Mississippi Line section. All of these intervals are potentially productive across the Basin.

Recent results of horizontal wells in the Wolfcamp Shales have been very encouraging with the initial production rate about 200 to 1,000 barrel oil equivalent per day. The project is helping operators determine which intervals are the most prospective and to optimize their stimulations or maximum oil production. The play now rivals the Eagle Ford in terms of drilling activity.

The discovery of first oil in Kenya and additional gas discoveries in Tanzania have maintained the high level interest in our East African studies. The Ugandan government has approved a joint consortia study of the Albertine Graben by Core Lab. We anticipate initiating this study in Q2 2012.

In West Africa, the Core Lab Namibia, South Africa North Orange basin consortia study has been initiated. Recent deepwater acreage awards in both countries have been awarded in the last six months leading to increased activity in this part of the South Atlantic.

In the Asia Pacific area, our emphasis has been on expanding our shale reservoir data sets with ongoing projects in Indonesia and a recently announced shale reservoirs of Australia study. Currently four basins are being evaluated in Australia to support the increased activity in Shales. We also initiated our Mississippi Line project with 12 companies in Q1. Oil production is from horizontal wells to this complicated reservoir. The area of focus is Oklahoma, Kansas and Texas.

Erika will now open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first audio question comes from the line of James West.

James West – Barclays Capital

Good morning, guys.

David Demshur

Good morning, James.

James West – Barclays Capital

David, Schlumberger recently made an announcement that they were opening a new core analysis center in Houston, and it seems like they make it a push towards your business. I know the Weatherford previously had kind of bought up all the competition you had out there. Are you seeing at this point increased competition or is this just because the markets growing so rapidly and customers are demanding this that it's kind of pulling the bigger guys into your business?

David Demshur

Yeah. Looking at and we did see that in announcement of their facility, it was about a 30,000 square foot facility. We have seen there is a logical extension of their purchase of TerraTek, which was I think about a decade ago and the emphasis from Schlumberger standpoint. And remember their focus they are an often say exploration-oriented company, where we are a development and production oriented company.

So a little different focus on the facility, 30,000 square foot lab here in Houston compared to what we are adding right now over 40,000 square feet to total 300,000 square feet here in Houston alone. So yeah, we understand that they are in the business. As of yet we have not seen any increase in competition because we think it's a little bit of a different market focus.

James West – Barclays Capital

Okay. Fair enough. And then just one other question for me, the production enhancement margins for 1Q were below what we were expecting, is this a one-time blip or should we think that margins should be in this kind of lower 38% range going forward?

Richard Bergmark

James, you know we tend to look at margins on a year-over-year basis so and when – because of the typical seasonal patterns that do occur. So, we did see a nice increase in margins year-over-year.

James West – Barclays Capital

Right, sir.

Richard Bergmark

Yeah. Sequentially, they were down, but so were revenues and that was expected. And so if we have our fixed cost structure in place with lower revenues, naturally on a sequentially basis as you go from Q4 to Q1, you will experience lower margins, but that's why we tend to look year-over-year to make sure that we continue to execute on that fixed cost structure. And clearly year-over-year shows that we did because margins were up year-over-year.

James West – Barclays Capital

Sure. So we think about it as we think about the rest of this year as revenue comes back there that 200 to 300 basis point increases year-over-year are achievable?

Richard Bergmark

Yeah.

James West – Barclays Capital

Okay. Great. Thanks, Dick. Thanks, David.

Operator

Your next audio question comes from the line of Rob MacKenzie.

Rob MacKenzie – FBR Capital Markets

Good morning, guys.

David Demshur

Good morning, Rob.

Rob MacKenzie – FBR Capital Markets

Question David I guess for you, a little bit of a crystal ball type question. There is certainly become a lot of chatter among some E&Ps in our space about the real ultimate potential of the Permian Basin here and some real big reserve numbers are being thrown about. Can you guys share your thoughts on how much oil might be recoverable from the Permian over time and what that means for Core's business?

David Demshur

Yeah. As Monty detailed, just looking at our tight sand reservoir study of the Midland Basin and Permian Basin collectively, we think that there is good potential there. Our new annual report entitled, 'New Oil from Old Places' goes in great detail talking about the potential for the additional production that come from the Midland Basin. You think about it three years ago production touched about 700,000 barrels a day that is now nearing a million barrels a day from all this increased activity.

And if you just look at our facility in Midland, we have a 40,000 square foot facility, much was not at use a decade ago and we continue to expand that operation now. So Rob, yeah, we we've put a lot of poker chips into the Permian Basin not only in reservoir management but also for reservoir description and production enhancement. We think it's going to be a big winner over the next couple of years.

Rob MacKenzie – FBR Capital Markets

Okay. Thanks. That basin peaked at roughly 2 million a day in the early 70s?

David Demshur

Yeah. I think it was about 2.1, correct.

Rob MacKenzie – FBR Capital Markets

And when does it exceed that, in your mind?

David Demshur

We need to drill a lot more wells before we can make that kind of projection. That crystal ball is too cloudy for us.

Rob MacKenzie – FBR Capital Markets

Okay. Thanks. And then coming back to your guidance, I guess I understand your inability to give numbers, but it sounds like from your qualitative comments that you guys are more bullish now than you were a quarter ago for this year, does that sound like a fair characterization?

Richard Bergmark

Yeah. Rob, this is Dick. I think that's correct because we are starting to see the activity levels of the clients internationally focused on oil. We are starting to see that improvement, that's why we mentioned on our prepared comments that we are comfortable with the upper end of what we are seeing from the analysts, particularly the Main Street level.

Rob MacKenzie – FBR Capital Markets

So the change is really an international one versus any moving parts of North America?

Richard Bergmark

Yeah. We would see North America on the continent being rather I would say static. The pickup we see Rob would be deepwater Gulf of Mexico, which we think by the end of this year will return to pre-moratorium levels. So we do see some uptick there, but mostly the focus internationally is where we see where we expect that will carry the day for us and earnings going forward.

David Demshur

So Rob, when you think about Q1, $1.06, I think the Street mean is $1.15 and so that's just an observation of what Main Street is published at, and so that does suggest that we would have some upside opportunity.

Rob MacKenzie – FBR Capital Markets

Okay. And then in terms of what you are seeing from your international customers that adding your bullishness, is that mostly reservoir description, is that more traction in production enhancement, can you give us feel for where it's coming from?

David Demshur

Yeah. As Monty detailed, certainly reservoir description, it's interesting to note that a lot of it has to do with the fluid side of the business. So a lot of pressure volume, temperature testing PBT and oil studies, a lot of those related to looking at enhanced oil recovery projects, miserable flood projects.

So I know we talk a lot about core analysis, but let's remember now that we generate half of our revenue from reservoir fluids. And without a solid reservoir fluids business to go hand-in-hand with core analysis, I think you kind of missed the day by not fully describing the reservoir system because we can hold the rock static and we know the fluids are dynamic, and they change every day that we do have production.

So the emphasis internationally is tilted towards reservoir description, but within reservoir description, the reservoir fluid side of that business and remember production enhancement revenues are above two-thirds North America, one-third international that continues to increase internationally, as we are looking at activities to stimulate horizontal wells that are being drilled into some of the shale reservoirs worldwide.

So the uptick is going to be international, fluids for reservoir description and then production enhancement on the fracture diagnostic side and also on the HTD-BLAST side for production enhancement on the perforation side.

Rob MacKenzie – FBR Capital Markets

Great. Thank you very much for the answer. I'll turn it back.

Operator

Your next audio question comes from the line of Veny Aleksandrov.

Veny Aleksandrov – Pritchard Capital Partners

Good morning, guys. Hi.

David Demshur

Good morning, Veny.

Veny Aleksandrov – Pritchard Capital Partners

My first question is from the Reservoir Management segment, great quarter and extremely strong margins. Was there anything quarter specific or can you give us a rate on the margins?

Richard Bergmark

We've had a great quarter and a strong robust business there. Africa the news -- the studies that are taking off in Africa are very strong, but also the -- we mentioned the Tight Oil in the Midland Basin Study that's kicked off with 22 customers. So we've had a real strong response throughout our Marcellus continues to be a strong study for us as thus our Eagle Ford and we are doing very well in all the study areas.

Veny Aleksandrov – Pritchard Capital Partners

Thank you. And my second question is Argentina, I know from the press release that you -- you are monitoring the situation and you might not go ahead with the facility he decides so, but is there further negative implications on your operation shift, the situation over there keeps deteriorating?

Richard Bergmark

We don't see negative because I haven't started yet.

Veny Aleksandrov – Pritchard Capital Partners

All right.

David Demshur

So it would be certainly, we're disappointed in the most recent developments there and it would be really a lost opportunity for us. We've had discussions with several large active clients there, and certainly they have built -- they have asked us to build dedicated facilities for the development of Vaca Muerta.

As it stands right now, if events continue to go down the road where we have the government actions taking place then our appearing that they are going to take place. We would have a large pause before going in there knowing that our return on invested capital hurdles probably could not be achieved with the amount of activity we think that would be depressed there by the confiscation of assets by the government. So it won't have a negative application on our operation. It would be -- what we would see as a lost opportunity for us. So it's…

Veny Aleksandrov – Pritchard Capital Partners

Well, to ask the question differently and I didn't want to go there because of the guidance and the listings and everything but was any of those (inaudible) upsides baked in the previous guidance here?

David Demshur

No. Because we are just starting, it would be starting off rather small, Veny.

Veny Aleksandrov – Pritchard Capital Partners

Okay.

David Demshur

So really from the standpoint, it wouldn't be a nil movement for a couple years.

Veny Aleksandrov – Pritchard Capital Partners

Okay. Okay.

David Demshur

Again, it just would be a lost opportunity for us.

Veny Aleksandrov – Pritchard Capital Partners

Right. Right. Well, thank you so much.

David Demshur

Okay. Very good.

Operator

Your next audio question comes from the line of Blake Hutchinson.

Blake Hutchinson – Howard Weil Inc.

Good morning, guys.

David Demshur

Good morning, Blake.

Blake Hutchinson – Howard Weil Inc.

A lot of commentary, when you set the table for this over the last couple years but deepwater commentary really takes prominence in the current release. And I am trying to kind of gauge, as we get engaged on deepwater fields, is there sort of a multiplier effect versus initial engagement on say mature field in the Middle East that comes at being kind of -- earlier in the exploratory process and how would you couch that because it seems to me and really is there saying maybe -- maybe we get engaged on last fields year-over-year this year but the deepwater contact kind of hides a multiplier effect. Can you just explore that theme?

David Demshur

Yeah. Interesting point Blake, certainly the comparison that we always like to give is when we look at let's say a 1000-foot core from the deepwater offshore West Africa that's got the potential to generate between $2 million and $3 million of revenue for us. So you have a lot of these developments that are in the stage right now with our cutting core.

For instance, we just received 1100 meters of core from East Africa. So when you look at the amount of core that has been cut in these developments especially in the deepwater where these wells are going to cost a 110 upwards, do $150 million per well they are going to use a lot of science.

We look at a 1000-foot core that would be cut in a shale reservoir in North America or revenue potential would probably should be somewhere on the $200,000 to $300,000 level. So, you're going to multiply of about 10 fold. So that's why the concentration and you picked up on the theme at the press release certainly talking about importance of deepwater.

So when we look at developments offshore West Africa all the way from gone up -- down now to the North Orange basin that Monty mentioned that reservoir management guys have starting to work on, the potential and the timing for a lot of Core to be cut is upon us, as it is in East Africa, the same thing with the Eastern Mediterranean.

So the timing of this is very good for us especially when we have the arrival coming on the theme later this year, and then early next year over lot of these deep offshore rigs. So that gives us additional foundation for our optimism of expanding our business internationally along with margins where -- as we look at North America, maybe as being more static other than a pickup in the Deepwater Gulf of Mexico.

Blake Hutchinson – Howard Weil Inc.

And so we should view those as you -- you not only get an upfront multiplier effect but you're still sticky kind of for the life of the field, there's no…

David Demshur

That is correct.

Blake Hutchinson – Howard Weil Inc.

As long as it go into the development, okay.

David Demshur

Because if you look at just offshore Ghana, you had some production from some of those fields now that is about a year, maybe a little bit more than a year and into it. And we're still looking at rock from those fields but now we've engaged our production enhancement folks. They're in there and they're running some of their [septicum] tracers because you have some water reinjection already going back in those fields for pressure maintenance purposes.

And of course, they want to -- watery injections going down into the water lake of those reservoirs and they want to make sure that they are not producing any of the water that they are injecting.

So it's a very logical follow-on from reservoir description to production enhancement, and then if you look further south, some of the reservoir management projects that are going on. So we tend to stay pretty sticky and because of the incrementals that those fields generate on the margin side, that's why you're seeing some margin improvement as well.

Blake Hutchinson – Howard Weil Inc.

And with that, going back to your earlier comments on the EOR projects and not to overlook those, I mean, as the business mix evolves towards that side as well, is that also a margin add?

David Demshur

Yeah. Our margins on a fluid -- on our high pressure, high temperature fluid business are probably the best that we have in the company.

Blake Hutchinson – Howard Weil Inc.

Great. And then just one quick question, I'll (inaudible) the floor, you mentioned and have been mentioning for some time here that you have a couple of large scale or some possible large shale developments, stealth place here in North America. Is that something that's already running through? Just to clarify your reservoir management business, have consortium study started on those?

David Demshur

They have not started as of yet because I think our specific -- already, as we thought that there was one and possibly two large scale oil resource plays left in North America. Those plays are still in their infancy and acreage positions are being taken as we speak by operators. So until those are released by the operators, I think we probably said enough on what we can say on possibility of one being a definite and maybe as many as two.

Blake Hutchinson – Howard Weil Inc.

Great. Thanks for your time. I'll turn it back.

David Demshur

Okay, Blake.

Operator

Your next audio question comes from the line of John Lawrence.

John Lawrence – Tudor Pickering & Co.

Hey guys, good morning.

David Demshur

Good morning, John.

John Lawrence – Tudor Pickering & Co.

Just, another quick on HTD-Blast, you talked about its use on 3,000 of 8,000 horizontal oil wells and what's realistic as far as further penetration there and then is coil tubing still bottleneck or are you starting to see market asset there?

David Demshur

Good question, John. We believe that we are addressing probably half the market right now for HTD-Blast. So we think that can easily go over 50% of oil wells being drilled, and we are seeing more coil tubing units out there. So that is becoming less of a bottleneck as utilization of those is becoming free and more units are coming on to the market.

So I think you can look for HTD-Blast, have a very good year this year. That was originally developed to deliver eight perforating guns and talking to our guys last week, we've had a system where we delivered up to 27 guns. So that technology has worked very well for us.

John Lawrence – Tudor Pickering & Co.

Further penetration I would assume.

David Demshur

That is correct.

John Lawrence – Tudor Pickering & Co.

And then a quick one for Dick. Dick, just curious how quickly you want to pay down the debt, just given how much cash you are drilling off?

Richard Bergmark

Our primary uses of capital have always been share buyback, dividends and then looking at the debt particularly when the interest rate is so low. So we think we get a very good return when we return it to our owners.

John Lawrence – Tudor Pickering & Co.

Okay. Great. Thank a lot guys.

David Demshur

Okay, John.

Operator

(Operator Instructions)

David Demshur

Yeah. Eric, we'll take one more if it's out there.

Operator

There are no audio questions at this time.

David Demshur

Okay. Very good. In summary, Core's operations posted another solid quarter. We have never better operationally or technologically positioned to help our clients expand their existing production base. We remain in equally focused and most technologically advanced reservoir optimization company in the oil field services sector. This positions Core well for the challenges ahead in 2012 and beyond.

For 2012, we continue to be encouraged by recent activity trends in international and especially deepwater activities and the growing activity in the deepwater levels of the Gulf of Mexico. We remain confident and the activity levels associated with unconventional oil plays. The company remains committed to industry leading levels of free cash generation, returns on invested capital, FX as capital being returned to our shareholder.

So in closing, we like to thank all of our shareholders and the analyst that follow Core, and as already noted by Monty Davis, the Executive Management and Board of Core Laboratories who give a special thanks to our 5,000 worldwide employees that have made these outstanding results possible. We are proud to be associated with their continued achievements. So thanks for spending your morning with us and we look forward to our next update. Good bye for now.

Operator

This concludes today's conference call. You may now disconnect.

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