Core Labs (CLB) 2015 Annual Report

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The company had a tough year as energy prices fell substantially and customers decreased drilling activity 

“Core Laboratories had a challenging year in 2015 as crude oil and natural gas prices reached multi-year lows. Sharply higher crude oil production for the fifth consecutive year, primarily from unconventional reservoirs in the United States, and increases in production from Russia and several OPEC countries led to a worldwide imbalance, with crude oil supply outstripping increasing demand. The lower-priced energy commodity complex caused Core’s clients, the worldwide oil and natural gas companies, to significantly reduce their operating activities. The North American rig count in 2015 fell over 60%, while international activity levels fell approximately 15%.”

Core Labs says their industry is saddled with overcapacity of equipment

“Core’s Board believes that stock price performance over time is directly related to ROIC.   Note that most oil field service companies have ROICs below their Weighted Average Cost of Capital (WACC), a product of overinvestment in their company or vast overpayment for perceived growth via acquisitions. Past overinvestments and overpay- ments for acquisitions for hundreds of millions of dollars are evident today in the oilfield services industry. Several companies are faced with massive write-downs of asset values and write-offs of acquired entities, thereby destroying capital and shareholder value.”

Significantly reducing their expense base so that they are more efficient

“Core Laboratories faced a challenging year in 2015 as supply and demand imbalances in the energy complex led to lower crude oil and natural gas prices worldwide. These lower prices precipitated activity cut-backs from Core’s oil company clients. Core’s management reacted, lowering the Company’s cost basis by investing in greater global automation of services, increasing multi-skilling programs, and, unfortunately, reducing staff.  The lower industry activity levels will lead to lower future supply. The balancing of worldwide crude oil markets is already well underway, as evidenced by the continued sharp decline in U.S. land production during the second half 9,500 of 2015.

Their technology is critical to helping their customers improve oil recovery

“Today, on average, the world’s oilfields produce only about 40% of their reserves, leaving 60% of the oil in place. Core Lab’s innovative technolo- gies help to optimize production and recovery of hydrocarbons; and they can, in some cases, elevate production to 45% or more of the hydrocarbon reserves.”