Core Labs (CLB 114.21, -12.00) sinks about 9.5% today in reaction to lowered second quarter guidance and an underwhelming third quarter outlook. The guidance update stems from the company’s announcement of delays in international revenues out of the company’s Reservoir Description segment.
The lion’s share of the weakness today stems from Core Labs’ announcement of delays in the recovery of international field development activity which are impacting and deferring revenue opportunities for the Reservoir Description segment.
On the whole, the Reservoir Description is heavily exposed to international activity levels, with more than 85% of its revenue sourced outside the U.S. from projects where wells have been drilled and core and reservoir fluid samples have been taken for analyses. These delays exist primarily in the North Sea, Middle East and Asia-Pacific regions, but also in the Gulf of Mexico and other deepwater provinces.
In addition, the revised guidance also includes ramp-up costs associated with the deployment of new laboratory technology and new laboratory infrastructure, such as new client-driven labs in Qatar, Indonesia, and the North Slope of Alaska. Reservoir Description international client project discussions continue to increase in alignment with approximately 15 final investment decisions announced year-to-date. The total number of FID's for 2018 is expected to exceed the 20 FID's in 2017. However, activity levels and revenue opportunities from those FID's and the emerging international recovery are now not expected to have a positive financial performance impact until late Q4 2018 and throughout 2019.
The Production Enhancement segment operations, largely focused on complex completions in unconventional tight-oil reservoirs, are continuing to outperform as projected and gain market share. Production Enhancement's performance is expected to continue outpacing the industry's completion activity.
As a result of the aforementioned delays, Core continues to expect quarterly sequential improvements throughout 2018 in revenue, operating margins, profits and EPS; however, due to delays in revenue opportunities from international activity, Core now projects that second quarter 2018 results will be only slightly higher than experienced in the first quarter.
The revised guidance for second quarter revenue ranges from $174.0-175.0 million, down from the previous expectation of $177-179 million, creating an expected EPS of $0.57 to $0.59, down from the previous guidance of $0.64-0.66.
Also, the delay in timing of the expected revenue opportunities from international activity improvement will cause third quarter projected results to be similar to the company's prior second quarter guidance. Core initiates its third quarter guidance by projecting revenue of about $177.0-179.0 million, resulting in expected EPS ranging from $0.64 to $0.66.