Core Laboratories Earnings: Contract Delays and Subdued U.S. Activity Weigh on Results

Wide-moat Core Laboratories CLB delivered slightly weaker third-quarter results following a strong first half of 2023. Its production enhancement business was the main culprit, with segment revenue dropping 10% quarter over quarter as a result of lower-than-expected North American activity, exacerbated by a number of project delays from international clients that pushed product delivery to the fourth quarter. Despite these headwinds, Core maintained solid profitability, expanding the firmwide adjusted operating margin by more than 200 basis points to 13%. We don’t expect the operating environment will materially improve through year-end, and we’re lowering our fair value estimate slightly to $28 from $29 following results. At the time of writing, shares remain undervalued and trade at a more than 20% discount to our fair value estimate.

Core’s reservoir description business closed the quarter on more solid footing, with segment revenue increasing 8% year over year and 2% sequentially. It also led firmwide profitability with a 15% operating margin. This segment mostly serves international markets, which offer the most near-term growth opportunities given the currently subdued completion activity in North America. Core continues to establish its presence in the Middle East and commenced an expansive multiwell reservoir study in the region this quarter. The firm’s Middle Eastern clients reaffirmed intentions to expand future production capacity, which will in turn lift demand for evaluation of complex, unconventional well reservoirs. We expect this coupled with the segment’s large exposure to offshore markets will facilitate profitable growth for Core Labs through decade-end. By our estimate, Core’s top-line growth will average nearly 6% per year through 2027. We expect a favorable revenue mix will facilitate steadily improving operating margins, which we estimate will average 18% over the same period.