Core Labs 2Q17 Earnings Call Notes

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David Demshur – CEO

Increasing interest in enhanced recovery from shale reservoirs

“The first major trend is the increasing client interest in enhanced oil recovery from unconventional reservoirs. Early work performed by Core has indicated possible recoveries increasing from an average of about 9% in share reservoirs to 13% to 15% by utilizing engineered gas absorption techniques, gas recycling and the laws of physics and thermodynamics”

Using micro proppants

“The second major trend is the interest in using finer proppants or micro proppants in the initial procedures in a hydraulic fracture program. Core via our industry wide profit consortia with a 30 plus year history and consisting of over 40 companies is boosting its evaluation of 100, 200 and 400 non-API mesh sand. These macro proppants are thoughts to open secondary and tertiary fracture patterns significantly increasing the stimulated reservoir volume. Therefore, increasing initial flow rates as well as the estimated ultimate recovery from the wellbore.”

Lateral length may have reached their maximum

“The third major trend is that lateral length may have reached their maximum owing to frictional forces of pumping the frac fluid and its profit. However, Core is currently testing friction reduction additives to once again allow for longer laterals. Pad drilling and completion programs rule today and are causing the recent disconnect in wells drilled and wells completed in the last two quarters. Wells drilled and completions will start to mirror each other in the second half of 2017.”

10k feet appears to be the maximum

“right now the average lateral length is about 10,000 feet. That expanded from number of years ago from an average of 7,000 -8,000 feet. The problem is the frictional forces in pumping the proppant and fluid at or about 10,000 feet. You don’t get enough effective pressure to actually do a good job in fracturing the reservoir. ”

Can’t continue to outspend free cash flow. Markets will be tighter this time around

“I think we stay in a $45 to $50 environment. You are going to have a number of the private operators probably laid down some rigs. So we wouldn’t be surprised if we saw a contraction in the rig count by maybe 50 to 100 rigs by the end of the year. That’s kind of what our guidance is based on where we toned down what the expectation for revenue was for Q3. And it’s based on a flat to possibly down rig count. They can’t continue to outspend their free cash flow because in our view the equity markets and the debt markets will be much tighter this time around than maybe year or year and half ago”

Dick Bergmark

If crude persists below $50 rig count may contract in the second half

“If crude persists below $50 per barrel, the U.S. land-based rig count may actually contract in the second half as we do not believe operators can continue to outspend free cash flow with debt and equity markets likely closed to them for additional capital. This observation is not withstanding the continual decline in the global crude oil inventories and the impact this will have once the decline falls below the five-year average inventory level.”

Increasing number of DUCs because of a shortage of equipment

“Further, in the U.S., We are experiencing the impact of the prevailing market and transitory industry issues of U.S. labor and completion equipment shortages, which is expected to continue through year-end. The increasing number of DUCs, as reported by the EIA throughout 2017, is evidence that completions have not been able to keep up with the pace of drilling. The shortage of equipment is an issue for operators getting crews to complete wells which are why DUCs went up. Many EMP analysts wrote about this as the issue became more problematic as quarter went on. The pressure pumpers spoke about this in their own vernacular on the recent calls. The reason they are bringing equipment of out of cold stock is because they are short spread. They wouldn’t be spinning money to bring them out of storages if they were not short equipment”