We are maintaining a Neutral rating on Core Laboratories (CLB)given its leadership position in reservoir optimization, along with its global footprint and deep portfolio of proprietary products and services, partially offset by the gas and oil price volatility and geo-political risks.
Core Labs exhibits an array of proprietary products and services that position it to operate successfully in the current environment of low commodity prices. Moreover, the expected improvement in international markets, including the Middle East, Asia Pacific, East Africa and West Africa will be highly beneficial for the company.
We also believe that the Production Enhancement segment should continue to reap rewards from the drilling and service momentum in North American oil and liquids rich shales.
Moreover, Core Labs’ low capital expenditure needs (of around 3–4%) and service-oriented nature differentiates it from peers, who are capital intensive and devote around 10–15% of revenue to capital spending. Capital expenditures for 2010 totaled just over $27.5 million (less than 3.5% of the company’s total annual revenue) generating approximately $178 million in free cash flows, up about 8% from the 2009 level.
However, Core Labs’ has its operations spread across the globe. Consequently, it remains vulnerable to risks such as embargoes and/or expropriation of assets, exchange rate risks, terrorism and political/civil sentiment in critical countries like Iran, Iraq, Nigeria and Venezuela.
The company is continuously engaged indeveloping and acquiring essential products and technologies that drive its operational performance and growth. If its technologies and/or products become obsolete or cannot be brought to market in a timely and competitive manner, they may face severe operational and financial dilemmas.
We remain apprehensive regarding the usage, storage and disposal of chemicals inherent in Core Labs’ analytical technologies that may make them susceptible to strict laws and regulations in compliance with environmental safety. Restrictions and laws enforced by the government may require the purchase of costly equipment, or it could involve steep fines and suspension of operations for non-compliance. The trend of tougher environmental regulations will continue into the future.
Taking into account the aforesaid factors, we expect the company to perform in line with its peers Baker Hughes Incorporated (BHI) and Halliburton Company (HAL).
BAKER-HUGHES (BHI): Free Stock Analysis Report
CORE LABS NV (CLB): Free Stock Analysis Report
HALLIBURTON CO (HAL): Free Stock Analysis Report
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