CORE LAB REPORTS FIRST QUARTER 2024 RESULTS

Core’s CEO, Larry Bruno stated, “Core Lab delivered modest revenue growth and overcame the typical sequential seasonal decline in client activity that we often experience between the fourth and first quarters.  Strong demand for both our Reservoir Description laboratory services and Production Enhancement’s completion diagnostic services drove the quarter. Core’s investments to expand laboratory capabilities in the Middle East and other international markets prior to and during the global pandemic are now delivering results, as long-delayed client analytical projects progress into the early stages of execution.  We expect that these prior investments in international growth opportunities will generate superior, long-term returns. Production Enhancement’s sequential financial performance was driven by higher demand for both U.S. and international completion diagnostics, as Core’s clients seek to evaluate new completion designs for optimizing hydrocarbon production.  Despite quarter-over-quarter softness in U.S. completion activity, U.S. product sales also improved sequentially.  Core Lab used excess free cash to reduce debt by $3,000,000 in the first quarter of 2024, and will continue to remain focused on executing strategic business initiatives while reducing our leverage ratio.”

Reservoir Description

Reservoir Description operations are closely correlated with trends in international and offshore activity levels, with approximately 80% of revenue sourced from projects originating outside the U.S.  Revenue in the first quarter of 2024 was $84,200,000, flat sequentially and an increase of 5% from last year.  Operating income on a GAAP basis was $6,900,000, while operating income, ex-items, was $11,400,000, yielding operating margins of 14%.  The segment’s financial performance in the first quarter of 2024 reflects a year-over-year increase in demand for reservoir rock and fluid analysis in both international and U.S. markets.  This growth helped offset both the typical seasonal decline in client activity that occurs between the fourth and first quarters, as well as on-going disruptions to hydrocarbon transportation and trading patterns caused by the Middle East and Russia-Ukraine conflicts.  While operating margins remained strong at 14%, sequential margins were somewhat impacted by the mix of services delivered to Core’s clients compared to the fourth quarter of 2023.

During the first quarter of 2024, Core Laboratories continued to experience increased industry adoption of its proprietary web-enabled data management system, RAPID™.  A significant milestone was achieved with the successful installation of RAPID™ by a prominent Middle Eastern National Oil Company (“NOC”).  The installation, as part of a platform demonstration, rigorously tested the system’s functionality and is providing the NOC with centralized, consistent, and easily accessible subsurface data in a secure format.  RAPID™ empowers clients to efficiently organize, retrieve, archive and analyze vast amounts of geological, petrophysical, reservoir engineering and reservoir fluid data.  The database facilitates sophisticated queries through a user-friendly interface, enhancing various predictive and Artificial Intelligence (“AI”) innovations.  Utilizing RAPID™ as the primary platform for subsurface data management within this NOC allows for a more robust digital environment for future AI projects.  Core Lab continues its leadership position in the digitization of the oil field, bridging data analytical tools with digitally delivered and archived data.

Also during the first quarter of 2024, Core Lab was engaged to evaluate conventional cores from the North Slope region of Alaska.  This project brought together Core’s proprietary and patented technologies to help the client optimize their reservoir.  By using a combination of drilling mud tracers from Core’s Production Enhancement segment, along with proprietary laboratory technologies from Reservoir Description, Core’s InvasionProfiler™ technology package allowed the operator to quantify the invasion of drilling mud filtrate.  The client will use this data to refine their reservoir model with tracer-corrected fluid saturation data.  A laboratory program is also under way on the recovered reservoir fluids from this project to determine the chemical and physical properties of the hydrocarbons.  This comprehensive rock and fluid analytical program provides the hard data points required to define pay zones, build and de-risk reservoir models, and predict reservoir performance.

Production Enhancement

Production Enhancement operations, which are focused on complex completions in unconventional oil and gas reservoirs in the U.S., as well as conventional projects across the globe, posted first quarter 2024 revenue of $45,400,000, up over 4% sequentially.  The sequential financial performance reflects both higher demand for completion diagnostic services as well as improved penetration of completion products in the U.S., despite a quarter-over-quarter decline in completion activity.  Operating income on a GAAP basis was $1,600,000, while operating income, ex-items, was $3,400,000, yielding operating margins of 8%, an improvement of 200 basis points sequentially, with incremental margins exceeding 55%.

In the first quarter of 2024, Core Lab’s Production Enhancement engineers introduced new capabilities for its proprietary downhole Metal Anomaly Tool technology.  The Metal Anomaly Tool (“MAT”) is used when preferential alignment of perforating guns are required to ensure that casing clamps, data cables and control lines are not cut during the perforating process.  The MAT technology measures magnetic fields induced during fluid flow around protrusions that surround the casing, such as those caused by clamps and lines.  However, certain reservoir applications require the use of high-chromium-content well casing to mitigate corrosion, such as where CO2 or H2S are present in high concentrations. High-chromium-content casing has historically created limitations for the MAT technology, as the metallurgy attenuates the magnetic field peripheral to the casing.  Core’s engineers developed a proprietary solution that allows the MAT technology to identify clamps, cables and lines behind high-chromium-content casing, reducing operational risks in real time. 

Also during the first quarter of 2024, Core’s diagnostic technologies were employed in two mature U. S. basins to assess high-profile well completions.  In the Eagle Ford, an operator needed to confirm the performance of refrac treatments in horizontal wells. The operator enlisted Core Lab to run its SpectraChem® water tracers to confirm frac fluid placement and fluid flowback from each of the twenty-one treatment stages.  After the frac job, produced water samples indicated effective treatment placement and flowback from each refrac stage with one exception. The outermost toe stage demonstrated a steep production drop compared to the remainder of the re-completed lateral.  Further analysis indicated there was an obstruction in the toe of the well.  The operator performed a remedial procedure to remove the obstruction, and production from the toe stage reached a level of contribution commensurate with the remainder of the well.  In the Permian Basin, Core’s proprietary technologies were utilized to evaluate the effectiveness of a surfactant additive in horizontal well frac treatments.  The objective was to determine if the surfactant would improve oil recovery in this very tight shale strata.  The operator wanted to determine the efficacy of the product without having to perform long-term, multi-well, post-frac comparisons.  The operator enlisted Core to run its proprietary Flow Profiler™ oil tracer diagnostics across the length of the well to compare production from treated and untreated stages.  The produced oil samples indicated higher oil contributions from the surfactant-treated stages.  This enabled the operator to quickly take advantage of this beneficial, and environmentally friendly, surfactant in upcoming wells.

Liquidity, Free Cash Flow and Dividend

Core continues to focus on maximizing free cash flow (“FCF”), a non-GAAP financial measure defined as cash from operations less capital expenditures.  For the first quarter of 2024, cash from operations was approximately $5,500,000 and capital expenditures were $3,000,000, yielding FCF of $2,500,000.  Cash from operations was impacted by an increase in working capital, as accounts receivable grew by $5,700,000 during the quarter.  The growth in accounts receivable occurred in March, reflecting strong sales in the U.S. market as we exited the quarter.

Core expects the Company to continue generating positive free cash flow in future quarters. As of March 31, 2024, Core reduced debt by $3,000,000 from prior quarter-end to $163,000,000. The Company’s leverage ratio of 1.76 was unchanged compared to prior quarter-end.  The Company will continue applying future free cash towards reducing debt until the Company reaches its target leverage ratio (calculated as total net debt divided by trailing twelve months adjusted EBITDA) of 1.5 times or lower.

On January 31, 2024, Core’s Board of Directors (“Board”) announced a quarterly cash dividend of $0.01 per share of common stock, which was paid on March 4, 2024 to shareholders of record on February 12, 2024.  

On April 24, 2024, the Board approved a cash dividend of $0.01 per share of common stock payable on May 28, 2024 to shareholders of record on May 6, 2024.   

Return On Invested Capital

The Board and the Company’s Executive Management continue to focus on strategies that maximize return on invested capital (“ROIC”) and FCF, factors that have high correlation to total shareholder return.   Core’s commitment to an asset-light business model and disciplined capital stewardship promote capital efficiency and are designed to produce more predictable and superior long-term ROIC.

The Board has established an internal metric to demonstrate ROIC performance relative to the oilfield service companies listed as Core’s Comp Group by Bloomberg, as the Company continues to believe superior ROIC will result in higher total shareholder return.  Using Bloomberg’s formula, the Company’s ROIC for the first quarter of 2024 was 11.6% and remained  relatively flat compared to prior quarter-end.

Industry and Core Lab Outlook and Guidance

As 2024 unfolds, Core will continue to execute its strategic plan of technology investments targeted to both solve client problems and capitalize on Core’s growth opportunities.  The Company will also remain focused on maximizing ROIC, generating free cash and reducing debt.  Core Lab maintains its constructive outlook on international upstream projects for 2024 and anticipates sustainable activity growth in the years ahead to support crude-oil demand and energy security concerns.  Year to date, crude-oil demand is performing as expected, with an increase in demand during the first three months of the year.  For the short and long term, increased investment in the development of onshore and offshore crude-oil fields will be required to maintain and grow hydrocarbon production.  In the near-term, crude-oil markets remain volatile due to global recession fears and the uncertainties related to on-going conflicts in Russia-Ukraine and the Middle East.   

As international activity continues to expand, committed long-term upstream projects from the Middle East, South Atlantic Margin, certain areas of Asia Pacific and West Africa support year-over-year growth for Core Lab.  As such, Core anticipates Reservoir Description’s second quarter 2024 revenue to continue growing; however, the geopolitical situations in Russia-Ukraine and the Middle East continue to create volatility with respect to trading patterns and maritime transportation of crude oil and derived products, potentially impacting demand for the lab services Core provides to these markets.  Turning to the U.S., frac spread activity peaked in the fall of 2022; however, the declines experienced in completion activity during 2023 appear to have stabilized.  Core Lab continues to project completion activity in 2024 to remain relatively flat compared to 2023.  However, market penetration of Core’s proprietary energetic system and completion diagnostic service technologies are projected to outperform activity levels.

Reservoir Description’s second quarter 2024 revenue is projected to range from $85,500,000 to $88,500,000, with operating income of $12,700,000 to $14,400,000.  Core’s Production Enhancement segment’s second quarter 2024 revenue is estimated to range from $44,500,000 to $47,500,000, with operating income of $1,600,000 to $2,600,000.                      

The Company’s second quarter 2024 revenue is projected to range from $130,000,000 to $136,000,000, with operating income of $14,500,000 to $17,300,000, yielding operating margins of approximately 12%. EPS for the second quarter of 2024 is expected to be $0.19 to $0.23.

The Company’s second quarter 2024 guidance is based on projections for underlying operations and excludes gains and losses in foreign exchange.  Second quarter 2024 guidance also assumes an effective tax rate of 20%.

Earnings Call Scheduled