Core Laboratories N.V. (CLB)

[RC2]

I'm looking forward to seeing that

Well, unfortunately the chart itself wouldn't copy. Sorry to disappoint, but perhaps it's not all that significant after all. Basically it showed CLB as a clear outlier with an R-squared of ~0.26 vs. an oil beta of ~.54. A number of other stocks in the sector cluster around an R-squared of 0.33 - 0.35 vs. oil betas ranging from 0.6 - 0.8, with a few (NOV, SLB among them) much more highly correlated.



fwiw, here's some excerpts from the report:

Maintain Buy Increasing international spending, an improving business mix from deepwater and oil related activity, and share repurchases all represent potential upside to EPS. We are increasing our 2011/2012 EPS estimates to $3.84/$4.85 from 3.64/$4.60, and our PO to $107 from $106 (implies 22x 2012 EPS). [more bullish than Pickering] While we believe the oil service industry is in an up-cycle, we note that oil prices are approaching levels that history suggests can threaten economic growth. Notably, CLB is a low oil beta stock (see Chart 1).

Conservative 2011 guidance
We think the EPS guidance is low given: (1) a conservative US rig count assumption (~1,700 on average for 2011 vs. 1,772 currently and our 1,800 forecast); (2) cautious assumption regarding turmoil in the Middle East and North Africa (activity is approaching normal levels in all countries except Libya); and (3) an assumption of no additional share repurchase (we assume ~$150mn in 2011). Notably, between 2005 and 2008, CLB beat the mid-point of annual guidance by 9-36%. CLB reiterated its 2011 revenue guidance of $890mn-$910mn and EPS guidance of $3.55-$3.60, with operating margins at ~30% and YoY incremental margins over 40%.

Ramp in int’l activity expected in 2H11
Management noted that they are surprised by lack of activity pick-up so far, but are encouraged by increasing inquiry levels. We believe a rapid increase in Middle East activity is imminent, driven by Saudi Aramco and Abu Dhabi (see The Saudi Arabia of catalysts! for details). The March international rig count stands at 1,147 currently vs. a high of 1,108 in September 2008. Critically, the rig count in service- intensive regions has surpassed the last cycle high.

Growth in Production Enhancement even w/ a flat rig count
CLB expects Production Enhancement revenue growth in the high teens, even with a flat US rig count, given the service-intensity associated with the Eagle Ford and Bakken. Approximately 2/3rd of Production Enhancement’s revenue is generated in North America, though the company is growing its international presence. We note forgone revenue by not adding another manufacturing shift is lower margin, in line with CLB’s focus on maximizing returns on capital.

CLB could buyback ~5% of it shares in 2011
CLB can buyback approximately $250mn of shares, or ~5% of shares outstanding, in 2011, while maintaining its target debt/capitalization ratio of ~30%. We are modeling ~$150mn of buybacks. Notably, CLB bought back $49.8mn worth of shares in 1Q11 and we believe the pace could accelerate once the exchangeable notes are refinanced.

CLB’s stock has low correlation with oil prices
While we believe the oil service industry is in an up-cycle, we note that oil prices are approaching levels that history suggests can threaten economic growth. Interestingly, even with over 60% of its revenue generated internationally and through oily activity [!!?? <g>], CLB stock has one of the lowest correlations with oil prices in the sector (see Chart 1). The chart [not] below shows a regression of the weekly change in share price vs. the weekly change in the near-month Brent futures contract since 2006.

Potential upside to above-guidance estimates
Reservoir Description revenue is closely tied to production spending, with growth typically running three hundred basis points in excess of underlying growth in spending. However, 1Q11 segment revenue was negatively impacted by the civil unrest in the Middle East and North Africa. Notably, Libya will continue to impact results in 2Q11. As a result, we are forecasting 16%/14% revenue growth in 2011/2012. We forecast global E&P spending will increase ~15% in 2011.
Production Enhancement revenue is closely tied to the global rig count, which we forecast to grow 14% in 2011. CLB expects revenue growth for Production Enhancement in the high teens, even with a flat US rig count. Our model assumes 19%/15% revenue growth in 2011/2012.
Reservoir Management revenues tend to be lumpy, with a smoothed growth rate in the mid-teens. With significant sequential growth of ~30% in 1Q11, we are conservatively forecasting revenue growth in 2011/2012 of 17%/20%.

Price objective basis & risk Core Laboratories (CLB) Our $107/share price objective implies a 22x multiple of our 2012 EPS estimate, which is above its historical mean of 18x. With 2012 EPS approaching the 2008 peak, we expect multiples to exceed the high of 24.7x of the 2007-1H08. Risks to our price objective are global economic weakness, slower oil and gas demand growth, reduced upstream capital spending plans and continued downward pressure on prices, changes to fiscal and royalty regimes in countries where CLB operates or might operate, and the potential for geopolitical upheaval (given its global presence).