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Core Labs Walks the Neutral Lane

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We are maintaining a Neutral recommendation on Core Laboratories (CLB - Free Report) – an oilfield service company that provides reservoir management and production enhancement services to the oil and gas industry on a global basis.

The company posted mixed second-quarter 2012 results with earnings per share exceeding the Zacks Consensus Estimate and revenue falling short of the same. The quarterly performance was influenced by superior performances across all the three business units, partially offset by steeper operating expenses.

For the coming quarters, Core Labs’ deep portfolio of proprietary products and services along with strong presence in the emerging shale plays and a global footprint – including markets in the Middle East, Asia Pacific, and East and West Africa – are expected to facilitate steady growth rates going forward.

Over the last few years, Core Labs has laid a lot of emphasis on international crude oil ventures, especially in deepwater regions and unconventional resource plays, which generate high returns. The company expects to see greater pre-salt activities in the Kwanza basin offshore Angola as well as in Iraq and Asia Pacific in the coming days.

Coupled with the development of advanced and superior technologies, Core Labs intends to seize attractive opportunities overseas and boost its growth momentum over the next few quarters.

Armed with strong liquidity position, Core Labs gets the opportunity to buy back shares and pay dividends (during first half of 2012, dividend and share repurchases equaled $76 million). It also allows Core Labs the scope for acquiring companies that fit their strategic profile, as well as taking on extra capacity in growing regions like the Middle East.

Notwithstanding the positive aspects, we remain concerned about the volatile macro environment, which will likely impact the company’s profitability in the coming quarters.

With operations spanning over many countries and a large portion of total revenue coming from international markets, Core Labs’ operations remain 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.  

Moreover, the use, storage and disposal of chemicals inherent in Core Labs’ analytical technologies may leave 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.

Considering, these factors we expect the company to perform in-line with the broader market. Core Labs – which collaborated with Petroleo Brasileiro S.A. or Petrobras (PBR - Free Report) for a number of reservoir analysis ventures in onshore and offshore Brazil – currently retains a Zacks #3 Rank, translating into a short-term Hold rating.

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