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Core Laboratories N.V. Overcomes a String of Hurricanes to Post Expectation-Beating Results

Up until last quarter, the greatest headwind facing Core Laboratories (NYSE: CLB) was the steep decline in oil prices, which negatively affected oil-field activities. While the fierceness of that headwind has started to abate, a more literal one emerged in the third quarter in the form of hurricanes, which disrupted business activity in the oil patch. That said, the impact wasn't as bad as Core initially feared, enabling the company to deliver above-guidance results.

Core Labs results: The raw numbers

Metric

Q3 2017

Q2 2017

Quarter-Over-Quarter Change

Revenue

$166.2 million

$163.9 million

1.4%

Net income

$21.1 million

$22.7 million

-7.2%

EPS

$0.48

$0.51

-5.9%

Data source: Core Labs.

Image source: Getty Images.

What happened with Core Labs this quarter?

Hurricane Harvey hurt results.

  • Revenue crept up 1.4% from last quarter and was above the $161 million the company initially anticipated in the wake of Hurricane Harvey. Further, the result was within the original guidance range issued last quarter of $165 million to $170 million. That said, revenue would have been even higher if it wasn't for Harvey, which caused flooding, power outages, and wind damage to the Houston area, causing service disruptions between Core and its clients.
  • Harvey had the greatest impact on Core's margins, which fell from 18% last quarter to 17% in the third quarter, causing net income and earnings to decline. However, earnings per share did come in ahead of the $0.44 per share the company initially anticipated immediately after Harvey, though it was below its original $0.54 to $0.56 per share guidance range.
  • Core generated $25 million in free cash flow during the quarter and returned all of it to investors via the quarterly dividend. Going forward, the company plans to continue sending all its excess cash to shareholders through the dividend and share repurchases.

What management had to say

Core Labs' management team commented on its results in the earnings release:

Third quarter 2017 results were affected by Hurricanes Harvey, Irma, and Maria, and even though damage to Company facilities was minor, Core Lab and its clients did suffer interruptions of business activity due to local area flooding, power outages and wind damage. Despite these events, Core's third quarter 2017 results exceeded the updated guidance issued by the Company on 5 September 2017.

Hurricane Harvey hit the energy industry hard, forcing several oil companies to temporarily shut down production. These shut-ins had a direct impact on Core's operations, with the company estimating that it lost $4 million of revenue due to the storm during the quarter. Without that disruption, the company believes margins would have increased sequentially.

Looking forward

There has been a notable shift in the past few months among several of the larger oil companies away from just growing production and toward increasing shareholder returns. For example, oil giant Anadarko Petroleum (NYSE: APC) unveiled a $2.5 billion buyback because that has the potential to deliver an incremental 10% increase in earnings and production per share. Meanwhile, shale giant Encana (NYSE: ECA) plans to grow cash flow at a 25% compound annual rate through 2022, which positions it to generate $1.5 billion of cumulative free cash flow at current oil prices. One of the ways companies like Anadarko and Encana will achieve their goals of producing higher returns and cash flow is by using more technology to maximize recovery. Because of that, Core believes that return-focused producers will pay for more technology in the future, which it sees as a positive for its bottom line.

In addition to that, most other drillers in North America remain focused on expanding their well completion activities, while international customer activity levels will be flat to slightly higher next quarter. As a result of these factors, Core estimates that revenue will rise to $171.5 million in the fourth quarter, while earnings per share will jump to $0.58 thanks to better margins. Furthermore, the company noted that several energy companies made Final Investment Decisions on new projects during the quarter, which should yield incremental work for Core in early 2018.

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Matthew DiLallo owns shares of Core Laboratories. The Motley Fool recommends Core Laboratories. The Motley Fool has a disclosure policy.