Core Lab (CLB) - Oct 2014

Category - Cyclical
Core Lab provides services to oil field companies. The fate of the oil field companies is tied to the price of oil and the fate of Core Lab is tied to the fate of its customers (oil field companies). The price of oil moves in cycles of demand and supply and is cyclical in nature.

Business Characteristics
A reservoir has three components, namely,
  • The qualities of the rock 
  • How the fluids (oil, natural gas, and water) will flow through the rocks over time 
  • How to prevent and mitigate damage to the reservoir. 
Core Lab provides all of the three services both on a piecemeal and an integrated solution basis.

About The company provides descriptive analysis of the geological and fluid characteristics of reservoirs to oil companies which in turn helps them increase production. The company operates in more than 50 countries and has more than 5,000 employees.

Revenue - Breakdown
  • Deep water oil production (20%) 
  • International oil production (>50%) 
Competitive advantages
  • Core Lab holds a niche position in the oil field company. 
  • Core Lab generates highest return on capital in the oil services industry. 
  • Intangible asset 
    • The firm has accumulated decades of of geological data, built considerable knowledge within its workforce and developed numerous proprietary processes and products.
  • Network effect 
    • The firm benefits by performing multi-client reservoir characterisation studies. The more customers it serves, the more robust the data set and the valuable the study is for all customers. 
  • Barrier to entry 
    • Working with multiple clients across the globe, the accumulated knowledge and capabilities provides a barrier to entry against its competition. 
    • It is the only independent services company in the world to offer these services globally. 
  • Prolonged period of lower oil prices. 
    • The firm concentrates its services on improving production and reservoir recovery, instead of exploration. 
Trends/Changing landscape
  • Greenfield oil reserves have become more difficult to find and costly to extract, leading to both independent and state-owner oil companies to spend more on maximising production at mature fields. 
  • Falling oil prices would put pressure on spending budgets of oil producers implying lower to negative revenue growth for Core Lab. 
  • Core Lab failed to meet the revenue guidance given by the management in the prior quarter. 
  • Core analysis projects in the Gulf of Mexico are experiencing delays. 
  • Slowdown in the core and fluid activity 
  • Operating margin improved to 33% by 190 basis points 
The growth in the next couple of years is likely to remain weak to negative due to falling oil prices.

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