Core Laboratories N.V.
Q1 2013 Earnings Call Transcript

Published: 18 Apr 2013

[Operator:]

Good morning. My name is Keyla, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Core Lab Q1 2013 Earnings Release 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'm going to turn the call over to David Demshur.

[David Demshur:]

Thanks, Keyla. 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 Laboratory's first quarter 2013 earnings conference call. This morning, I'm 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 brief investor update, and highlight the three financial tenets by which Core's executive management executes the Company's gross strategies. We believe these three tenets have produced industry-leading shareholder returns, and returns on invested capital. We will also discuss Core's long-held philosophy of returning excess capital back to our shareholders. Dick, will then follow with a detailed financial overview, and additional comments regarding building shareholder value, and Core's second quarter and full year 2013 outlook, and a general industry outlook as it pertains to Core's continued growth prospects in 2013. This outlook confirms our confidence in the trends of an increasing activity in international and especially deepwater activities tied to crude oil and large LNG developments, and unconventional tight oil reservoirs in North America. Core also sees exceptional opportunities in the deepwater Gulf of Mexico developments, including the potentially prolific, but technologically challenging lower tertiary fields. Then we'll turn to Monty and he will go over Core's three operating segments, detailing our progress and discussing the continued successful introduction of new Core Lab technologies, and then highlighting some of Core's operations and major projects worldwide. And then we'll open the phones for question-and-answer. I'll turn it over to Dick now for remarks regarding forward-looking comments. Dick?

[Dick Bergmark:]

Thanks, David. Before we start the conference this morning, I'll mention that some of the statements that we may 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 risk 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 of our assumptions prove inaccurate or 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 discussions on 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, 2012, as well as the other reports and registration statements filed by us with the SEC and the AFM. Our comments include non-GAAP financial measures. Reconciliation to the most directly comparable GAAP financial measures is included in the press release announcing our first quarter results. These non-GAAP measures can also be found on our website. Now, with that said, I'll pass the discussion back to David.

[David Demshur:]

Okay, well, thank you, Dick. I'd like to give a brief investor update. Core's operations produced the Company's most profitable quarter ever, as the Company continued to benefit from our continued focus on international and deepwater activities, and unconventional oil plays in response to relatively high oil prices and dwindling global spare oil producing capacity. The focus on crude oil related projects continued to build, as Core's revenue mix now is slightly more than 80% oil, and slightly less than 20% natural gas. Moreover, most of the natural gas related projects emanate from the international theater, and are LNG related with major projects in the Eastern Mediterranean, East Africa, and Western Australia. Reviewing the Company's first quarter results reveal that Core's gross strategy of progressively working in more established and new field developments, while continue to offer new technologies and services, will lead to revenue growth of 2 to 400 basis points higher than the increase in worldwide activity levels. Year-over-year quarterly revenue and operating profit growth for the first quarter of 2013, is testament to the validity and the robustness of the Company's gross strategies, and underpinned by our operational excellence. We believe these trends to outperform market activity levels to hold throughout 2013. Therefore, our gross strategy, and execution by our operating units continue to serve our clients, our employees, and our shareholders well. Core continue to focus on high-return international crude-oil-related developments, especially those in deepwater environments, unconventional oil resource plays, and the continued internal development of new technologies and services, that has led to multiple years of sustained growth and increased profitability. We are not complacent on technological innovation, as our recent breakthrough on high pressure, miscible gas flood technology, which will lead to billions of barrel of additional recovery from deepwater fields worldwide, would be testament too. Another such evident of this trend would be seen in our Reservoir Description segment, which saw its year-over-year operating margins increase for its 10th consecutive quarter. While speaking about reservoir description, analyst should note and recognize that for the last 10 or 11 years, quarter one revenue, description revenues, go down sequentially from the prior fourth quarter levels, owing to seasonal variations. This is why we always stress the year-over-year comparison to gauge the project of our three business units. The reason for the sequential decline happens to be the lack of work that it emanates from the North Sea and northern parts of Europe during the first quarter of the year. Turning to Core Lab performance. Core has always followed, and will continue to follow three key investment tenets that have lead 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 flow through fiscal discipline. Core follows a strict disciple for allocating capital for investment in growing our business. Unless certain return on investment capital standards are met or exceeded, capital expenditure is disallowed. This strict capital discipline produced a record first quarter level of free cash flow of approximately $60 million. In fact, Core converted almost one of every four revenue dollars into free cash for the quarter that's $0.23 per revenue dollar, the highest in the oilfield service industry. Core will continue to demonstrate strict financial discipline throughout 2013, and expects to generate free cash flow around $230 million to $240 million. The second financial tenet is to maximize return on invested capital. Core's Board has initiated a compensation program for Core's executive and senior management teams based on Core producing an ROIC in the top decile for the oil field service industry. Core's Board believes that stock performance overtime is directly related to return on invested capital. Based on the most recent calculations available from Bloomberg, Core's return on invested capital was the highest of any company in the oil field services top group listed by Bloomberg, and also Core's weighted average cost of capital was the lowest for that group as well. Our third financial tenet is to return excess capital to our shareholders. During the first quarter of 2013, Core returned over $62 million to our shareholders in forms of quarterly dividends and the repurchase of shares. Since October of 2002, Core's shareholder capital return program has returned over $1.42 billion or over $30 per diluted share to our owners. We will continue to follow these three key investment tenets throughout 2013, 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 Bergmark:]

Thanks David. Looking at the income statement, revenues were $260.9 million in the first quarter versus $234.2 million in the first quarter of last year, so revenues were up 11.4% year-over-year. As David mentioned, this represents a record revenues for any first quarter. Of these revenues, services for the quarter were $182.5 million, up about 12% when compared to $162.7 million last year, or an increase of $19.8 million. Product sales for the quarter were $78.4 million, up almost 10% when compared to $71.5 million in last year's first quarter. Moving on to cost of services for the quarter they were 60.4% of revenue, which is similar to last year's first quarter, and our cost of product sales were 68% of revenues, which represent an improvement from the 71% reported in the last year's first quarter. G&A for the quarter was $12.8 million similar to last quarter; the expense is about 4.9% of revenues up slightly from last year. We expect G&A to be around $44 million in 2013. Depreciation and amortization for the quarter was $6 million unchanged from last year's first quarter, and we expect depreciation in 2013 to total approximately $24 million. Other income this quarter is only $590,000 when compared to $4.9 million a year ago in the same quarter due to a one-off non-operational business interruption gain, which we excluded from earnings at the time of that gain. EBIT for the quarter was $79 million, which was up $9.5 million or almost 14% when compared to the first quarter of 2012, if you exclude the business interruption gain we spoke about. GAAP EBIT for the quarter is up $5.1 million or 6.9% year-over-year. Our first quarter EBIT margins were 30.3%, an increase by 60 basis points over the 29.7% margins earned in last year's first quarter ex-item. And this was in spite of the lower than expected activity levels in the North America, and internationally, and as EBIT represents a record for any first quarter. Interest expense was $2.3 million in the quarter compared to $2.2 million last year in the first. Income tax expense in the quarter was $20 million based upon an effective tax rate up 26.1% slightly higher than the expected 25%. We do continue to expect our full year 2013 annual effective tax rate to be approximately 25%. Net income for the quarter was $56.5 million, compared to $50.6 million ex-item, an increase of almost 12% over last year's first quarter. GAAP net income for the first quarter increased 5% from $54 million on a year-over-year basis. Earnings per share for the quarter was $1.22. Our EPS is up over $0.16 or over 15% ex-item, with our GAAP EPS up by $0.09 or 8%. This represents record EPS for any first quarter. If we go to the balance sheet, cash was $22.9 million compared to the prior year-end balance of $19.2 million. Cash balances, and our free cash flow during the quarter were used primarily to repurchase stock, and to pay our dividends. Receivables stood at $200.1 million, up from $184.8 million at year-end primarily as a result of our increased revenues. Our DSOs in the quarter were 66 days, up just slightly from 65 days experienced in all of 2012. Inventory was $50.8 million, up slightly from the year-end balance, but important to note that our inventory turns improved in the quarter compared to last year. Other current assets were $39 million, down from the year-end balance of $43.6 million for the most part as a result of the decrease in income tax pre-payments of $5.3 million. There were no material changes in PP&E, intangibles, goodwill, and other long-term assets. And now to the liability side of the balance sheet, our accounts payable were $54.1 million, down just slightly from the year-end balance. Other current liabilities of $96.7 million are up $11.3 million from last quarter primarily due to an increase in income tax payable. Our long-term debt stood at $241 million, up from the year-end, and is comprised of $150 million in senior unsecured notes due in 2021 and 2023 with a blended fixed interest rate of 4.06%, and the remaining is $91 million drawn on our bank revolving credit facility. As of today, drawings under our credit facilities are $99 million. Other long-term liabilities ended at $75.8 million, an increase of $1.7 million primarily from an increase in the deferred comp. Shareholders' equity ended at the quarter at $187.9 million unchanged from year-end, and that's primarily due to additions from earnings being offset by share repurchases and dividends. Using annualized net income for the first quarter, our return on equity was over 120% making it one of the highest returns earned in the industry. Capital expenditures for the quarter were $8.4 million, up from $7.3 million in the first quarter of 2012. We expect our CapEx program in 2013 to be approximately $33 million as a result of an expected continued improvement in 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 of the reasons why we have been able to generate high returns on invested capital. Looking at cash flow, cash flow from operating activities in the quarter was $68.3 million and after paying for our $8.4 million in CapEx, our free cash flow was $59.8 million. In the first quarter, we turned almost 23% of our revenues into free cash, one of the highest conversion rates in our industry. During the quarter, we used our free cash flow and cash balances to pay $14.8 million in quarterly dividends, and to repurchase 364,541 shares for $47.7 million. Through close of business yesterday, in the second quarter, we repurchased a further 127,600 shares at an aggregate cost of $16.8 million. The outstanding indebtedness under revolver now stands at $99 million compared to $84 million in at year-end 2012. Our diluted share count now stands at 46.3 million shares. Okay. Now, let's walk through our guidance. Our outlook for 2013 remains positive after reporting our best first quarter in our history. We continue to report from robust Brent crude pricing and the expected delivery of additional deepwater drilling rigs and drillships. We believe that we will continue to work increasingly in more established fields, as well as new developments in field projects. In addition, as we have consistently done in the past decade, we will, we plan to enter into new fields where we currently do not have operations and to offer new technologies and additional services in 2013. These new technologies and services will be focused on increasing daily production and ultimate hydrocarbon recovery rates from deepwater fields and liquids related unconventional reservoir developments worldwide. Specific technological developments currently underway are designed to increase the hydrocarbon recovery rates in undersaturated reservoirs similar to the lower tertiary reservoirs in the deepwater Gulf of Mexico and several pre-salt fields in the Santos Basin offshore Brazil. Consequently, we believe that our business model, whose goal is to achieve a revenue growth rate of 200 to 400 basis points, above the increase of worldwide activity directed towards producing fields does remain intact, with incremental margins positively impacting operating margins. We expect 2013 free cash flow to range between $230 million to $240 million, assuming our client directed capital expenditure program to be equal to or slightly greater than that of 2012. We increased our quarterly dividend in the first quarter of 2013, while we expanded our Shareholder Capital Return program to-date through the year. Going forward, we continue to anticipate 2013 North America activity levels to stabilize at first quarter 2013 levels, and international activity levels to increase approximately 7%, yielding a worldwide activity increase of approximately 5%. We expect our revenue to grow at a rate faster than our anticipated change in worldwide industry activity by approximately 200 to 400 basis points. However, as was the case during the first quarter, if worldwide activity levels exceed our anticipated level of activity, our revenue growth could be higher. Therefore for the second quarter of 2013, we expect revenue of approximately $264 million to $269 million after taking into account seasonal effects, and we expect EPS to be in the $1.29 to $1.36 range. For the full year, we expect revenue to range between $1,060,000,000 and $1,075,000,000, with operating margin averaging approximately 31% and incremental margins ranging from 35% to 45% for the full year. This operational guidance excludes any foreign currency translations and a 25% effective tax rate is assumed for the year. This would increase the midpoint EPS range to between $5.06 to $5.26 and the midpoint to $5.16. The midpoint of revenue guidance suggests revenue growth of approximately 9%, but up to 10%. EPS guidance suggests earnings growth will be higher than previously guided and is now expected to be approximately 14% in a range up to 16% over full year 2012 levels. Okay. Now, let's turn the call over to Monty for his operational review.

[Monty Davis:]

Thank you, Dick. Thanks to our 5,000 employees around the globe. Q1 2013 was again a record quarter. Revenue of $261 million and operating earnings of $79 million were both records and margins exceeded 30% for the quarter. These records were achieved by our employees providing an industry leading services and products to enable our clients to produce more hydrocarbons daily and over the life of their reservoirs. Thank you to all our employees around the world. Reservoir Description revenue of $125 million is a record for Q1 revenue, and grew 8% over Q1 2012 revenue, which is almost three times the growth rate in the international rig count. As Dave mentioned in his operating remarks, Q1 was slightly lower than Q4 revenue, due to the seasonal patterns and the sell through in 10 of the last 11 years. Q1 operating margins of $34.9 million are a record and grew 9% over Q1 2012. Operating margins increased year-over-year for the 10th consecutive quarter to 28%. Core Lab's Advanced Technology centers are advancing, are currently analyzing Core from over 40 different high profile deepwater wells. These include wells from the Gulf of Mexico, Europe, Africa, South America, and the Mediterranean. The analysis includes routine rock properties, reservoir geology, and a suite of advanced rock property depth. Information from these rocks is critical to the development plans and production techniques for these fields. Even more important are the reservoir fluids analysis being performed on deepwater wells to help all companies optimize their engineering decisions in an environment of ever higher temperatures and pressures. Core Lab's Reservoir Fluid Services Group has been very active in evaluating lower tertiary prospects for a number of clients on multiple wells. The fully optimized recoveries oil companies need to plan beyond primary recovery early in the lifecycle of their reservoirs. Core Lab's Reservoir Fluid Services Group not only provides oil companies with the information that allows them to calculate the life and economics of their reservoirs from primary recovery, but is also able to assist them in determining the effectiveness of pressure maintenance and gas injection, including the stability in prolonging the life of the reservoirs and optimizing their total recovery of original oil in place. Foreseeing that a growing deepwater market will require more capacity, and high pressure capabilities, to meet the urgent need for timely high quality data, Core Lab has put in place the largest more sophisticated reservoir fluid services capability in the world to service this market and ensure that it remains the premier provider of these services. Production Enhancement revenues of $107 million set a new quarterly record for revenues growing 11% over Q1 2012. Operating earnings of $134 million were also a new record and grew 15% over Q1 2012. Operating margins of 32% were 120 basis points higher than Q1 2012. In a major West Texas oil play involving the drilling of 4 to 5,000 foot laterals followed by pumping 10 to 15 frac stages using the plug-and-perf completion technique and a combination of slick water and gel frac fluids, the operator came to call out for help in optimizing their frac design to maximize the all important SRV, Stimulated Reservoir Volume. This particular reservoir has low matrix permeability's and the only chance of making economically viable wells is to fracture stimulate as much of the targeted reservoir as possible. By injecting ZERO WASH proppant tracers with the proppant pumped in each frac stage, and deploying our SpectraScan logging tool to log the well after all frac stages are pumped so as to identify the location and extent of treatment placement across the six groups or clusters of perforation in each of the 10 to 15 frac intervals. It soon became apparent in a significant number of the perforation clusters were not being effectively stimulated with trace proppant. For every un-stimulated perforation cluster, there was a potential for as much as 125 feet of reservoir that was being left un-stimulated and thus non-productive. Working with the operator's completions engineers, Core Lab began systematically proposing individual completion procedural changes designed to decrease the number of unstimualted perforation clusters, thus increasing the stimulated reservoir volume. Early on, the SpectraScan logs identified approximately 15% un-stimulated perforation clusters across the length of the horizontal wells. After modifying the frac rate to increase the rate per perf and in the process taking advantage of limited entry the version of the treatment across the perforation clusters, the percentage of un-stimulated perforations drop to 10%. Another round of changes involving the redistribution of perforations across each frac in about both further lower percentage of un-stimulated perforation clusters to a targeted 5% level. In the process of making these completion design changes and using our ZERO WASH proppant tracers and our SpectraScan logging tool to help identify the extent of treatment coverage across these 4 to 5000 foot horizontal laterals. The amount of potentially un-stimulated reservoir declined from as much as 750 feet per lateral, down to as little as 250 feet per lateral. This represented a potential 10% to 15% cove and an increase in lateral coverage for each horizontal level. As a result of these improvements in treatment coverage across the laterals and the resulting increase in stimulated reservoir volumes, the operator opted to continue to utilize our ZERO WASH proppant tracers and our SpectraScan logging tool to help ensure optimal reservoir coverage and minimal un-stimulated reservoir volume. Core's HTD-Blast continues to see enthusiastic and high in acceptance with our best quarter to-date in Q1, 2013. 27% of our horizontal wells completed in Q1 used HTD-Blast or HTD-Blast XL perforated toe end of the well. We are helping an operator recomplete wells using our HTD-Blast XL to perforate previously un-stimulated zones that were not fracked due to the spacing plan. The operator has decided to restimulate these wells in the intervals that were previously bypassed by fracking the wells after the wells are perforated with our HTD-Blast XL. The HTD-Blast XL allowed the operator to perforate these wells efficiently and without requiring a rig on-site to run in the perforating system. The operator is seeing more than double production and improved reservoir exploitation. Reservoir management revenues of $28 million were a new record and grew 32% over Q1, 2012. Operating earnings of $10 million, grew 25% over the previous year, and yielded operating margins of 35%. In Q1, Core Lab instrumented two large SAGD projects in Northern Alberta Oilsands. The patented CT more core tubing systems utilized likely the highest pressure rated pressure sensor in the world, highest temperate rated pressure senor in the world was installed in numerous wells. Our customers have seen the value in pressure and temperature data being collected on a real time basis to assist them in maximizing production and optimizing stem steam to oil ratio. Core Lab also initiated a new joint industry project for the emerging pre-salt shale play in South Texas. Several operators are evaluating this liquids play below the up dip Eagle Ford oil window with conventional course from pilot wells and production test results from horizontal. Initial production results are encouraging with IPs of 4 million to 6 million feet of gas per day and 450 to 750 barrels equivalent of oil per day from relatively short horizontals. The project will focus on reservoir characterization, fracture stimulation, optimization, and optimal production practices to maximize liquids recovery factors. Core Lab completed our pre-salt West Africa carbonate reservoir joint industry project. This developing new play is attracting both major and independent companies to the region looking to emulate success on the Brazilian margin. This new rock base study will enable company to better understand these complex reservoirs and controls, upon both reservoir quality and productivity. Core Lab has also been awarded a very large proprietary project to evaluate new play in areas in the Permian Basin for a major operator there. The project consists of evaluating a number of new wells to be drilled over the next year. We will now open the call for questions.

[David Demshur:]

Keyla, we can go ahead and open the lines for questions.

[Operator:]

(Operator instructions) The first question comes from the line of Jeff Spittel of Global Hunter Securities.

[Jeff Spittel:]

Sir, if I recall correctly from the last call you guys were one of the few management teams processing that we see kind of a flattish North American activity run rate, sounds like you're sticking to that prognostication. I guess, the more important question as it pertains to Core is, with the market penetration that you're starting to see in the uplift in this philosophy of more stage intensity, how much does that flat activity run rate really matter in terms of your growth profile this year?

[David Demshur:]

Yeah, I think for production enhancement, that's where we really see the impact of that and as we saw the year-over-year, the rig count was down significantly. We saw total well completions though up 6% year-over-year and the number of stages increased year-over-year, resulting in production enhancement, revenue growth in the double-digit range. Jeff, we think that if -- if we do see this flattish North American activity level continue on that we can get low double-digit growth with increasing margins in our Production Enhancement segment, owing to the penetration of the HTD, HTD-BLAST, and then the ultra high pressure, high temperature perforating systems that will be deployed later this year in the ultra-deep shelf and ultra deepwater lower tertiary play. So I would look for low double digit, continued low double-digit gains for production enhancement.

[Jeff Spittel:]

Good, very helpful. And I guess staying on the subject of production enhancement; you highlighted the Gulf of Mexico, the lower tertiary and the ultra-deep being a positive contributor in the first quarter. Can you give us a general order of magnitude of how much of the segment does the Gulf of Mexico comprise and obviously it sounds like that's growing fairly quickly?

[David Demshur:]

Well, it was 3% of the total company revenue that has probably gone up to around 5%. So again, it's nothing that's going to be revolutionary or needle mover. For us again, it's adding the incremental revenue that drives the incremental margin that drives our underlying margin. And if we just look back over production enhancement in the last six quarters, you'll see how that plays nicely.

[Operator:]

Your next question is from James West of Barclays.

[James West:]

I want to follow-up on the North America comments about a flattish market. We've seen good permit data, 1Q versus 4Q, well completions as you highlighted are improving, we're getting some help on E&P cash flows from higher gas prices, not mainly the gas activity, but certainly helps cash flows. So you're thinking about a flattish environment from the first quarter level. Is that really -- is it based on you guys being conservative, because we're still, we're early days here in North America whereas something you see in the market that suggest that we're not going to see really any growth in activity?

[David Demshur:]

Yeah, we hope, we're wrong on this James, but our view is that when we looked at a lot of the unconventional plays, you've got now WTI that has slipped below $90. For us, that's kind of a benchmark where we feel outside of the sweet spot in the Bakken, in the Eagle Ford, and then the Niobrara. It's very difficult to reach a reasonable return on investment for our clients. And so, once we have WTI elevate above $90. Okay, maybe we're little bit conservative. But with this dip down into the $80, even in West Texas, it does give us some pause that we still we'll see a flattish stable level activity from Q1 hoping that we do get a rebound in WTI.

[James West:]

Okay. That's pretty interesting given your view that $90 is kind of the threshold level would suggest that WTI is not going to stay there for very long or below $90 very long?

[David Demshur:]

Yeah, well. I don't know how long it's going to stay there, but the $90 WTI, the level that is necessary for reasonable return is not our view, it's our client's view.

[James West:]

Right. Got you, got you, okay.

[David Demshur:]

Again, that's off the sweet spot.

[James West:]

Right, got you, okay.

[David Demshur:]

If you've got clients that have acreage located on the sweet spot, yes indeed, they can get return. So when we look for incremental rig adds outside of those sweet spots, so that $90 becomes pretty important.

[James West:]

Okay, thanks. That was very helpful. One last follow-up for me. Deepwater is obviously a big driver this quarter. What percentage of sales or EBIT is deepwater now?

[David Demshur:]

With respect to our business, 30% of all oil is produced offshore, slightly more than 40% of our revenue emanates from offshore. Slightly more than 7% of all oil is produced from deepwater, slightly more than 20% of our revenue now emanates from deepwater. So it's a very important component.

[Operator:]

The next question is from Jim Crandell of Cowen.

[Jim Crandell:]

David, I want to follow-up on the deepwater issue. If we look at what's happened with the number of deepwater rigs and deepwater well completions, I mean it's grown dramatically, and I think today we've something like 85 ultra-deepwater rigs under construction. How does your revenue trend with deepwater fields that have been on for -- where you've done work for a significant amount of time versus relatively new completions and fields that are just coming on? I mean, will you get a big push from these rigs that are coming on and most of them making discoveries and will you -- would you immediately expect to do work in a lot of these reservoirs?

[David Demshur:]

Probably not immediately Jim, when we see these new deepwater assets coming on, remember the first wells and discoveries have to be drilled. Those wells are not usually cored. We do see incremental revenues though from the fluid side. And as you can tell from the theme of the release, we talked about the importance of reservoir fluids in the evolution of our technology in reservoir fluids. If we look at the ways that we enhanced oil production, you can do two things. You can alter the rock. But in deepwater we can't alter the rock that much because we're probably not going to do hydraulically fracture it that much, we may gravel pack it to change it, but really the big delta is in dealing with the reservoir fluids. So we can change the properties of those fluids. So we do get incremental revenue straight away from reservoir fluid analysis. And actually, reservoir fluids as we all know is becoming a more and more important driver for Core Lab. So once the discoveries are made somewhere around wells three to five, they think about putting the core barrel down because ultimately they are going to need those rocks to run dynamic flow tests to determine what's going to be the most effective and efficient way to recover the most oil from those reservoirs. Those tests are ongoing right now in some of the lower tertiary fields in the Gulf of Mexico. So when we look at the impact, the full impact for Core Lab on these deepwater assets that will come out let's say over the next nine months, probably will be in next year's numbers, when we look at the impact from both fluids and of course from those fields. Now, as Monty said, we are active right now on 39 or over 40 deepwater wells worldwide. So we will see that increase as we go later this year and into next year.

[Jim Crandell:]

Hello.

[David Demshur:]

Jim, did we lose you?

[Jim Crandell:]

Yeah. Yeah, you did momentarily. Good. Did you finish Dave?

[David Demshur:]

Yes, I've completed the answer to that question.

[Jim Crandell:]

Good. I appreciate it. My phone line just went dead for a second. I had a follow-up question Dave for you or Monty, is how do you see in a flattish environment let's say for U.S. rig activity over the rest of this year, or may be modestly improving, or how would you see the demand for the HTD-Blast products that you have and how would you -- how many systems would you anticipate adding given what you see for the demand?

[David Demshur:]

Yeah, as has been the case here, I think a good reflection of that Jim, would be to the activity level that we saw in Q1, which was rather flattish where we did from a rig standpoint. But we did see the number of well completions up 6% year-over-year and we saw the number of stages increase. That all fed into increased penetration for HTD-Blast and more importantly now HTD-Blast XL. The example that Monty gave on the recompletions up in the Woodford, up in Oklahoma is a classic case of the original operator treating completions in the Woodford, in the horizontal zones, there as a manufacturing operation or a factory. Now, if you're, it's a new major operating company, which has taken over this acreage is applying science and using HTD-Blast XL and Core Labs fracture diagnostics technologies is getting 3x out of these wells. So the major independent that originally had these wells was leaving a lot of production behind by treating this as a manufacturing type process without applying science. So I think we'll see increased penetration of that because we'll see more and more of these testimonials coming out. But these are not manufacturing processes and it's not a factory where they crack the code that we will continue to need additional science and technology that Core Lab can provide.

[Jim Crandell:]

Okay, interesting Dave. And one final question is the biggest upside surprise to me versus which you reported was in the reservoir management sector. It certainly seems like some very good things are going on there. To what extent are your first quarter results sustainable or perhaps even could be improved on over the balance of the year?

[David Demshur:]

Yeah, Jim we've already said that segment is lumpy, and so we had a number of sales take place on projects that had been completed where you do get a lot of events that feeds to the bottom-line expanding those incremental margins. Probably not sustainable, but we still think with their concentration on now 14 major projects in the Golden Triangle area, most recently as Monty referenced was the carbonate plate pre-salt West Africa where we're had the cobalt discovery, the Maersk discovery. We've got a BP cobalt well that's going to be getting down to test those zones here within several months. We think reservoir management will have a good year. Q1 probably not sustainable as that is a lumpy business, but it will give good contributions through the year.

[Operator:]

The next question is from Veny Aleksandrov of FIG Partners.

[Veny Aleksandrov:]

Dave, my question is on the high pressure enhanced oil recovery technology. You've had great results in the Gulf of Mexico and now you're talking about Brazil. Is this the next target market for these technology and how are you approaching?

[David Demshur:]

Yeah Veny, its interesting Petrobras remains our largest international oil company client. A lot of the work that we do for them revolves around fluids, and in a recent presentation in New York, Petrobras did say that they do realize that the productivity of the pre-salt fields would be below the average recovery factor worldwide of around 40%. So they referred somewhere in the mid 30% and they are studying miscible gas projects, which we find highly encouraging, and so that certainly is a market where that technology will be applied over the next several years. Now turning to other markets, we do see this technology going to be applicable in some of the fields off of West Africa and in some fields in Asia-Pacific. So it's not just specific for the undersaturated fields in the lower tertiary of the Gulf of Mexico, we see this technology as being applicable worldwide. Another example would be some of the fields up in Kurdistan, where we've had large in place discoveries of crude, I think gulf keystone several billions and billons of barrels of oil in place. The problem is they lack a drive mechanism. These are significantly undersaturated in natural gas and high pressure miscible gas injection technology will improve those recovery rates as well. So there's a lot of exciting areas where we can apply this technology, it's a good question, because most people concentrate on the rocks. Remember there's only so much we can do to the rocks. We can fracture the rocks and that's about all we can do. On the fluid side, we've got a whole spectrum of cocktails and technologies that we can add to get out additional recovery. It will be a, mission critical technology heading forward and Core Lab's concentration on this in increasing this technology over the last five years is unprecedented in the industry.

[Veny Aleksandrov:]

Thank you so much. That sounds great.

[David Demshur:]

Okay, Veny.

[Veny Aleksandrov:]

And my next question on the reservoir management side, again it's had a great quarter and you talked about the largest proprietary project that you signed during the first quarter. Can we expect more proprietary projects going just entering these fields from now on, so far it was more joint industry projects?

[Monty Davis:]

We do, Veny, this is Monty. We do proprietary projects all the time. It's an ongoing business for us, has been for a long time. The project we highlighted is the largest project we have proprietary project to-date. It comes on the hill of the last largest, which was just last year. So we did these proprietary projects. Sometimes they're a small field, sometimes they're a large field, sometimes they've a wide scope, sometimes they're very focused, but that's an ongoing business. We don't talk about it a whole lot because it is proprietary to that client, and of course we'll never mention the client on what we're doing. Our joint industry projects, we talk about a lot more because they are, have a lot of clients involvement and it's something we can talk about more openly. So the propitiatory market is a good market. It's being going on for a longtime and will continue to be strong.

[Operator:]

The next question comes from Blake Hutchinson of Howard Weil.

[Blake Hutchinson:]

Just, I was intrigued by the commentary in the release, kind of coming back into the release, I guess about high potential unconventional crude and natural gas opportunities internationally. I guess through consortium studies and different studies we got into point where, you saw some promise in unconventionals internationally, but not necessarily anything that was ripe for increases in activity. Has that stands kind of changed and geographically where would you highlight the opportunity for Core Lab here as the year unfolds?

[David Demshur:]

Yeah, good question, Blake. And, actually you kind of caught us. We thought, we had -- we're putting too much in the release, but we were going to talk about unconventionals, really tight oil internationally. We’ve just conducted a technical seminar in Russia. And, we got together another -- a number of the operating companies there, both international and Russian-based, and we talked about the Bazhenov Shale. This is a very large shale deposit over Western Siberia, where even Exelon has talked about teaming with Lukoil to drill some scientific holes down through the Bazhenov Shale. But we think that has an opportunity to significantly increase activity levels throughout Russia over the next two to five years. So that would be one area of concentration for us. The other area we're actually we're starting to see some movement now is in North Africa. We've talked about the Silurian Gotlandian Shale that underlies the main basins in Algeria stretching over into Libya, the Ghadames basin, the Illizi basin. And so we've some international oil activity led by Eni and Total that are looking at working with Sonatrach for starting to develop these tracks, little bit more politically sensitive there but we're seeing some movement in those areas. In the Middle East, more of a focus on unconventionals, but right now related to natural gas generation. They would like to up the natural gas production throughout the Middle East to replace the 3 million so barrels of crude oil that is now used to generate power and run their desalinization plants. That would really free up an additional 3 million barrels of crude for export. So our reservoir management team has been busy there, running some proprietary studies throughout the Middle East, right now focusing on natural gas production from some of the unconventionals. And then the other area we would mention although not really interesting from Core Lab, from a geopolitical standpoint, again would be the Vaca Muerta, a shale in the Neuquen Basin, in Argentina, we saw that there was a recently a well drilled there that had a number of frac stages that was performed. It does appear to have the high potential that we've talked about over the last year, but we just think the geopolitical risks there are too high, the lack of currency conversion, the lack of being able to get a concurrency out of Argentina, a hard currency, and it's going to be kind of tough to buy Core Lab's stock back with those Argentine pesos. So those would be the areas internationally that we would highlight that over the next year, you'll probably hear us talk about more.

[Blake Hutchinson:]

Great. Thanks. That's an in-depth review. And then just quickly, Monty, I wanted to make sure that not reading too much into this in terms of the differences and applications between the HTD and HTD-XL. Once you have the product out in the field, are you finding that that XL is becoming more of a recompletion, refrac tool? And, that's where the market growth is, or is that really reading too much into it and it's not necessarily as big an application from a new well standpoint?

[Monty Davis:]

I think it's applicable both. It depends on what the operator is trying to do and really comes into how many different perforation events he wants to put together into one run in the well. The HTD-Blast and the HT-Blast XL are run on coil tubing. So they run into the well on coil tubing and you can do a number of perforating events in one run into the well, it increases their efficiency. Obviously that lowers their cost a lot; it lessens duties without a rig, so recompletion, it enables a recompletion method that might not otherwise be available to them. So, we're excited about that opportunity, but it's early days in that market.

[David Demshur:]

And while it brings up one good point there Blake, on these recompletions being done one coil tubing. So again, we're seeing more completions being done without a rig being present onsite. So activity levels are going to be higher than what would be indicated by what the working rig count would be.

[Operator:]

Our next question comes from Kurt Hallead of RBC Capital Markets.

[Kurt Hallead:]

Hey, I wanted to follow-up actually on that question because that's a pretty significant leverage point and something that is very difficult to crack on a regular basis obviously, as you guys have indicated, because there is no coil tubing rig count, that we could track on a week-on-week or month-on-month or even annual type of basis certainly available. So on the same context you guys provide some information about if you look at international overall spend or global spend, you can grow your revenues 200 to 400 basis points higher than that's been. What kind of multiplier affect can we put on rig count to try to adjust or adapt to this changing dynamic as it relates to recompletions for coil tubing, how would you guess think about that?

[David Demshur:]

Don't have an answer to that yet Kurt, but we're on to something there. Clearly, in Q1, we saw some effect on production enhancement, because if you look at the delta in the rig count obviously there were other factors that were in there certainly as Monty mentioned our activity up in the Woodford needs recompletion. I think once operators look back at completions that were done in this they've cracked the code in this manufacturing factory mode, they're going to find out that they've left a lot of production behind. So early days for that, but I think the testimonial is the fact that when we look at the number of wells that will be recompleted, we think that is one heck of an opportunity especially for HTD-Blast XL where right now, we believe we can run a string of up to 25 stages on one coil tubing unit. So you look at the efficiency or the effectiveness of that, plus the increase in the yield of hydrocarbons in this case, this major oil company getting three times the production from the original completion that this independent at the time had topped up of being in the factory mode and having cracked the code. So that will be something to watch and we'll try to give you a barometer on that as the quarters increase through the year.

[Kurt Hallead:]

Now that's obvious in your commentary that's in the early phases, but how would you characterize the saturation rate right now, 10%, 5%. Can you give us some indications here in that same context; we're looking at 6% completion year-on-year. I mean you got to be thinking that's going to be accelerating as the year goes on, don't you think?

[David Demshur:]

Yeah, we would put the saturation rate on the recompletions for our HTD-Blast XL at about zero. So that's just out of the box?

[Kurt Hallead:]

Yeah. So I want to come back around to the comment you made little bit earlier in that $90 oil works only here in the sweet spot, or sub-90 only works within the sweet spot, need, and you said that over 90 bucks WTI if you're not in the sweet spot. So what's your prediction, where is oil going from here?

[David Demshur:]

Don't have a clue, my friend. I can just tell you based on our long held philosophy of being peak oil guys that we certainly on the longer-term we see both Brett and WTI going higher, actually much higher on a more of a short notice. We can't help you there.

[Kurt Hallead:]

Yeah. So in that context look, I mean oil has been down for all about a week under 90 bucks. Is that really going to change anything, might, history would tell you that?

[David Demshur:]

Absolutely not. Absolutely not, we need, come on we need months below that before you get any change in behavior. And the Bakken rig count has been down for five consecutive months. And so, I think something is telling you there that once you're outside that sweet spot the returns just aren't there. Interesting note, over the last five months, we've added 52,000 barrels of additional Bakken production. That's over the last five months. The seven months prior to that we were adding somewhere on the order of 20,000 barrels a month. So the moderation in the rig count probably is going to lead to lower production, gross production gain within the Bakken, keeping in mind that the decline rate first year block in production about 40%, second year about 25%. So we're going to have a large hurdle to make up outside of the sweet spot if we're going to continue to get significant production growth in the Bakken. And we've gone on record in saying that we'll take the under on 1.5 million barrels per day of Bakken production through 2014, and we're still really solid on that prediction.

[Kurt Hallead:]

I just want to be clear, you said that over the last five months in total Bakken production is 52,000 barrels, right?

[David Demshur:]

That is correct.

[Kurt Hallead:]

Okay. Great. I appreciate that.

[David Demshur:]

That will be through the end of February. That might be a little too much information, but we were just doing some work on the Bakken over the last couple of days.

[Kurt Hallead:]

No, that's really helpful, and I appreciate that additional color. Thanks.

[David Demshur:]

Okay, Kurt.

[Operator:]

The next question comes from Travis Bartlett, Simmons & Co.

[Travis Bartlett:]

Getting pretty late into the conference call here, so I thought I had reasonably one quick one for you, but you guys highlighted in the earnings release again how Core Lab has recommended tighter frac stages in increases in profit and volumes per stage. So I understand that this varies by geological formation, but just kind of broadly just wondering if you guys could frame for us, how you think it increased over time just given some of your recent studies?

[David Demshur:]

Yeah, again it's too early in the process to tell and it is related specifically to the geology of the formation. I'll have you go back and look at the cabin oil and gas release on the well they drilled in their area the most prolific drilled in Pennsylvania, where they had 35 frac stages in the well IPED at over 40 million a day to stay in rate one month later was again 35 million a day. If you look at that in comparison to some of the earlier completions that might give you a handle on what we can find in that area of the Marcellus and Pennsylvania. I also turned to some of the comments made by Pioneer and EOG in the Eagle Ford and that might be able to give you a better handle on a very generalized look at that over the next year or two I think E&P companies will be getting more specific on what those numbers would be?

[David Demshur:]

All right. We'll take one more question.

[Operator:]

The next question comes from Doug Becker of Bank of America.

[Doug Becker:]

Thanks David. Just a few --

[David Demshur:]

How are you doing Doug?

[Doug Becker:]

Good morning. Just a few housekeeping questions. How do you define activity, I know it's kind of a silly question but is, should we really be thinking about as rig count, well count, spending?

[David Demshur:]

For us, internationally, we do a bottoms-up analysis from our field operating guy, and they just look at projects that are in the queue that are going to take place. Read that a proxy internationally probably, is a rig count. In North America, we don't think the rig count is really reflective of that. It would be well completions in number of stages done. I think that would be the best handle that we could give you.

[Doug Becker:]

Okay. Now, that's very helpful. And you mentioned well completions up 6% year-over-year. Do you've that figure handy on sequential?

[David Demshur:]

You remember Doug, we're year-over-year guides and we're not sequential guides.

[Doug Becker:]

Oh, can you repeat? At completion?

[David Demshur:]

Yeah.

[Doug Becker:]

Appreciate that. Where did activity levels in the U.S. exceed or actually, I guess you said just globally. Where did activity level exceed your expectations the most in the first quarter?

[David Demshur:]

Probably, deepwater, lower tertiary Gulf of Mexico and to a lesser extent Eagle Ford, West Texas, West Africa, East Africa, and Iraq. I'd say those were the areas that were strong performers for us.

[Doug Becker:]

Pretty broad base. That's all I had.

[David Demshur:]

Yeah. And again, Russia was a serial disappointer as they always are. Our hopes are that in years down the road that this Bazhenov Shale because of the technology needed we'll uplift the technological content that we can offer into Russia. Right now, it represents around 4% of our revenues. We would like to double that over the next couple or three years and may be the Bazhenov Shale can do that. As right now, we look at that Russian market as one where it is driven by lower technology and lower technology services, really not a place for us. We maintain operations there and 4% of our revenues hoping that sooner or later the technology revolution will also reach Russia.

[Doug Becker:]

Okay. Sounds good. Thanks again.

[David Demshur:]

Okay. We're going to close in, Keyla so no additional questions. In summary, Core's operations posted another solid quarter. Hope we can do better. We've never been better positioned operationally or technologically to help our clients expand our existing production base. We remained uniquely focused and are the most technologically advanced reservoir optimization company in the oilfield services sector. This positions Core well for the challenges in 2013 and ahead. For 2013, we continue to be encouraged by recent activity trends internationally, and especially deepwater activities. Regarding activity levels in the deepwater Gulf of Mexico, especially in the lower tertiary sequences, we remain confident in activity levels associated with unconventional oil plays worldwide. The company will remain committed to industry-leading levels of free cash generation, 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 analyst, to follow Core. And as Monty Davis has already mentioned, we would like to give a special thanks to our 5,000 worldwide employees that have made these outstanding results possible. We're proud to be associated with their continuing achievements. So, thanks for spending your morning with us, and we look forward to our next update. Good bye for now.

[Operator:]

Thank you. This concludes the conference call. You may now disconnect.