Core Laboratories: More Downside Potential After Tuesday's Warning

| About: Core Laboratories (CLB)
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Shares of Core Laboratories (CLB) ended Tuesday's trading day with losses of 16.3%. The provider of reservoir description, production enhancement and reservoir management services for the oil and gas industry warned for a tough third quarter.

Third Quarter Update

Core Laboratories warned on Tuesday that the company's guidance for the third quarter, issued at the second quarter earnings release, will come in below expectations.

At the time, Core's guidance assumed a flat North American rig count, and a modest improvement outside of North America. Since that point in time, the Baker Hughes rig counts has fallen some 6% in the United States, and 30% in Canada.

The lower levels of activity will impact the Production Enhancement section of the company. In a response to lower activity levels, Core has reduced variable and fixed costs in the segment to mitigate the impact on operating margins.

For the third quarter, Core Laboratories expects to generate $100 million in revenues in the Production Enhancement division. The Reservoir Description segment, more geared toward international markets, is expected to show near record revenues and a 200-300 basis point improvement in margins.

Third quarter revenues are now expected to come in between $240-$245 million, with earnings per share of $1.09-$1.13. Activity levels, revenues and earnings for the fourth quarter should be similar to those in the third quarter. The previously issued guidance assumed third quarter revenues of $250-$260 million, on which the company would earn $1.17-$1.25 per share.

The company will report its third quarter revenues after the market close on October 17.


Core Laboratories ended its second quarter with $23 million in cash and equivalents. The company operates with $207 million in short- and long-term debt, for a net debt position of $184 million. For the first six month of 2012, Core Laboratories reported revenues of $481.2 million. The company reported a net income of $106.9 million, or $2.23 per share.

Factoring in Tuesday's 16% decline, the market values the firm at $4.8 billion. Based on a full year revenue outlook of $960 million, the firm is valued at 5.0 times annual revenues. Net income could come in at $200 million, or $4.50 per share, which values the firm at 22 times annual earnings.

Core Laboratories pays a quarterly dividend of $0.28 per share, for an annual dividend yield of 1.1%.

Investment Thesis

Year to date, shares of Core Laboratories have fallen some 12%. Shares quickly advanced from $110 in January to $140 in May. Shares fell back to $105 in July as oil prices fell amidst worries about an economic slowdown. Shares recovered to $130 in recent weeks, but are now changing hands at $101, the lowest level for the year.

Longer term investors have still seen some decent gains. Shares gradually rallied from lows of $25 in 2008, to peak at $140 earlier in 2012. The company steadily grew its revenues from $781 million in 2008, to an expected $960 million in 2012. Net earnings rose from $131 million to an expected $200 million over the same period of time.

Shares of Core Laboratories hit their lowest level in a year on the back of the weaker outlook for the remainder of 2012. While the cut in guidance for the third quarter is not large, it has severe consequences for the valuation of the firm. Full year revenue and profit growth for 2012 is little inspiring, yet the firm still trades at 5 times annual revenues and 22 times annual earnings.

Other large oil and natural gas suppliers Schlumberger (SLB) and Halliburton (HAL) trade at just 2.4 and 1.2 times annual revenues. These competitors trade at 18 and 10 times annual earnings, respectively.

Given the diminished short-term prospects for Core Laboratories and the recent operating history, I see few reasons why the company should at trade premium levels compared to its major competitors. I would stay on the sidelines, as I see more potential to the downside than room for a recovery.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.