Monday, May 31, 2010

Core Laboratories: An Oil Patch Opportunity

Problems in the oil patch generally result in new opportunities. The Gulf oil spill will, no doubt, have a short-term impact on off-shore drilling in the Gulf and elsewhere. However, long-term, there are no viable alternatives to continued off-shore drill. Another area worth investigating is oil and gas production from shale deposits.

One key factor in both oil and gas production is an accurate reservoir description. Core Laboratories, NV, is probably the leading provider of reservoir description, production enhancement and reservoir management services.

According to Eric Nuttall, an energy analyst at Sprout Asset Management, new fracking technology makes recovering natural gas from shale economically feasible. Nuttall has stated "The Barnett Shale was really the first to take off commercially. That led then to the Marcellus Shale, Fayetteville Shale, and then most recently the Haynesville Shale, which is being touted as probably the most economic shale play."

The Company describes itself as "Core Laboratories is a leading provider of proprietary and patented reservoir description, production enhancement and reservoir management services for the global petroleum industry.

These services enable the Company's clients to optimize reservoir performance and maximize hydrocarbon recovery from their producing fields.

The Company has over 70 offices in more than 50 countries and is located in every major oil-producing province in the world. The Company provides its services to the world's major, national and independent oil companies."

"Core Laboratories reports results under three operating segments: Reservoir Description, Production Enhancement, and Reservoir Management.


Reservoir Description


Reservoir Description operations posted first quarter 2010 revenue of $104,093,000 and operating income of $25,084,000 yielding operating margins of 24%, equal to those posted in the year-earlier quarter. During the quarter, large-scale core analyses and reservoir fluids phase-behavior studies continued for deep-water fields offshore West Africa and eastern Brazil and also for the Middle East and Asia-Pacific regions.


From offshore West Africa, core analyses projects were conducted for the Cuanza basin of Angola and the Tano and Liberian basins of Guinea and Liberia, respectively. The measured petro physical data sets were being used to determine reservoir quality and to plan further exploitation and development of both producing and recently discovered fields. Reservoir fluids data sets from reservoirs offshore Brazil were being used to help determine initial hydrocarbon recovery rates and the economic value of the crude oil

being produced from pre-salt and post-salt reservoirs.


The Company continues to conduct high-margin reservoir studies of reservoir rocks and fluids in the northern and southern regions of Iraq. In the north, Core is mostly working for independent companies developing fields around the super-giant Kirkuk oilfield.

Projects include both core analyses and reservoir fluids phase-behavior studies aimed at exploitation of recent discoveries. In the south, Core is working for large multinationals that will be redeveloping the major and giant fields awarded in recent licensing rounds. The key to success for the multinationals in these southern field projects will be to increase ultimate hydrocarbon recovery rates from relatively low levels by 3 to 5 percentage points over time. Continuing projects in Kuwait, Qatar, Saudi Arabia, and

Oman are chiefly aimed at expanding production capacities. Asia-Pacific projects included combinations of reservoir rock and fluids studies from various fields in Malaysia, Indonesia, China, India, and Australia.


Production Enhancement


Production Enhancement operations posted first quarter 2010 revenue that increased 9% over year-earlier quarterly totals to $68,844,000 and operating income that was up 14% year-over-year to $20,943,000. Operating margins reached 30%, while year-over-year quarterly incremental margins exceeded 45%.


Production Enhancement realized unprecedented demand for its ZeroWash® and SpectraChem® Plus+ fracture diagnostics technologies used to optimize multistage fracture-stimulation programs. Operating companies are combining proprietary core analyses data sets, including rock mechanics, and fracture diagnostics technologies provided by Core Lab to fracture and stimulate unconventional natural gas and oil shale reservoirs. Rock mechanics data from cored intervals yield information on how strata will react to differing hydraulic stress fields that can be applied to the reservoir during complex frac programs. Fracture-stimulation programs based on measured petrophysical and geological data sets are proving to be much more effective than programs based on low-tech geometric designs. Once a formation has been fracture stimulated,Core's SpectraScan® technology is being employed to determine which specific perforations did, or did not, have enough proppant injected to hold the producing formation open and permit hydrocarbon flow into the wellbore.


In addition, the Company's patented and proprietary HEROTM High Efficiency Reservoir Optimization line of perforating charges and gun systems has increased market share in North American natural gas and oil shale reservoirs. These low-debris, deep penetrating charges and gun systems deliver higher initial hydrocarbon flows to the wellbore, but more importantly, they enable higher ultimate hydrocarbon recovery rates from natural gas and crude oil reservoirs. Increased demand for HERO technology in

Middle East and Asia-Pacific perforating markets added to strong first quarter results.


Reservoir Management


Reservoir Management operations produced its second most profitable quarter in Company history. First quarter 2010 revenue increased to $15,400,000, up 16% from 2009 first quarter totals, and operating income increased 62% to $5,620,000. Operating margin exceeded 36%.


In addition to expanding joint-industry projects evaluating the Eagle Ford, Haynesville, and Marcellus shales and the Granite Wash tight gas sands, the Company was requested by a number of oil companies to initiate joint-industry projects in the Montney shale in northeastern British Columbia and northwestern Alberta, Canada. Prospective Montney shale and mudstone sections will be analyzed for geological, petrophysical, geochemical, and geomechanical properties. The resultant data sets will be used to optimize completion and stimulation programs in the Montney, ranging from selection of the most effective perforating charges to optimizing geological and petrophysical modeling of multistage fracture-stimulation designs. Current industry participants include EnCana, Devon, ConocoPhillips, Shell, Husky, Talisman, and Suncor, among others. Core also was requested to initiate a joint-industry project in the fractured and oil-prone Niobrara formation, which is located in the northern sections of the Denver-Julesburg basin of Colorado and the Powder River basin in Wyoming. Several established fields in the region already produce from the Niobrara, and the joint-industry project will help determine the lateral extent of the play."


Core Laboratories N.V. reported first quarter 2010 earnings per diluted share (EPS) of $1.38, an increase of 10% over the year-earlier total of $1.26. First quarter 2010 net income increased 10% to $32,205,000, while year-over-year first quarter revenue increased 5% to $188,337,000. These EPS, net income, and revenue figures were the highest first quarter totals ever reported by Core. Free cash flow (FCF), defined as cash from operations minus capital expenditures, totaled an all-time quarterly record of $56,211,000, equal to $2.40 per diluted share. The Company purchased 703,902 shares for $86,467,000 during the first quarter of 2010, and quarter-ending, year-over-year cash balances increased $65,732,000 to $138,768,000.


Operating income, also a record for any first quarter, increased to $51,413,000, a 10% increase over the year-earlier total. Operating margins, defined as operating income divided by revenue, were 27%, an increase of 100 basis points over year-ago first quarter margins. Sequential first quarter 2010 incremental margins, defined as the change in operating income divided by the change in revenue, exceeded 50%.




The Company has announced a 2:1 stock split effective in July 2010. This should help the Company's liquidity and trading volume. Core Laboratories pays a dividend of $0.48 per share.


By most measures, the balance sheet is solid. CLB reports no long-term debt and Times Interest Earned of 12.1X. The payout ratio is a low 8.2% providing plenty of room for growth from a healthy and expanding free cash flow.


We consider CLB a BUY.


Disclosure: Author is long CLB.

Sunday, May 16, 2010

Navigate With Garmin

The global leader in satellite navigation, Garmin Ltd. and its subsidiaries have designed, manufactured, marketed and sold navigation, communication and information devices and applications since 1989 – most of which are enabled by GPS technology. Garmin’s products serve automotive, mobile, wireless, outdoor recreation, marine, aviation, and OEM applications.

Garmin is a difficult company to evaluate. Analysts generally consider the company a “hold.” Investor sentiment, as recorded by Motley Fools is much more positive.

The negatives appear to be obvious. Garmin participates in a highly competitive market. Some say that Personal Navigation Devices have seen their day in the sun. The press release accompanying 1Q10, extracted below, results talks about the changing market dynamic. To be sure, 1Q10 is not encouraging. The company reports a continued decline in overall revenue though not as dramatic as 2009, continued bad news for the PND segment and mixed results geographically.

On a positive note, sales in Europe and Asia continue to expand and the marine/aviation sectors and fitness sectors show strong growth.

· Total revenue of $431 million, down 1% from $437 million in first quarter 2009

Automotive/Mobile segment revenue decreased 15% to $221 million

Outdoor/Fitness segment revenue increased 28% to $103 million

Marine segment revenue increased 9% to $41 million

Aviation segment revenue increased 12% to $66 million

· Europe and Asia revenues grew, while North America revenues declined:

North America revenue was $243 million compared to $265 million, down 8%

Europe revenue was $145 million compared to $144 million, up 1%

Asia revenue was $43 million compared to $28 million, up 54%

· Gross margin increased both sequentially and year‐over‐year to 54% for first quarter 2010 from 46% in fourth quarter 2009 and 45% in first quarter 2009

· Operating margin increased year‐over‐year to 19%, compared to 13% in first quarter 2009

· Earnings per share decreased 21% to $0.19 from $0.24 in first quarter 2009; pro forma EPS increased 52% to $0.38 from $0.25 in the same quarter in 2009 (Pro forma earnings per share excludes the impact of foreign currency transaction gain or loss)

· Generated $196 million of free cash flow in first quarter 2010

Business Highlights:

· Improved margins allowing us to post pro forma earnings growth in a period of declining revenue.

· Posted strong growth in the outdoor/fitness segment as we continued to expand the product category in this market.

· Recorded year‐over‐year growth in both aviation and marine as these markets have begun to show signs of stabilization.

· Announced the Forerunner® 110 – the newest of our fitness watches which provides essential real‐time workout data at an affordable price for runners, joggers and walkers.

· Launched the GPSMAP 6000 and 7000 series chartplotters featuring Garmin G Motion™ technology with superior map panning and zooming

· Announced our proposed redomestication to Switzerland pending shareholder approval on May 20th.

· Announced our 2010 annual cash dividend in the amount of $1.50 per share representing a one‐time increase from $0.75 per share.

· Repurchased 1.4 million shares of GRMN in the first quarter.

There is no catalyst indicating the potential for a turnaround. Garmin is competing with Google in two of its segments: PND and the new Android-based telephone. Garmin is also showing interest in using its cash to make acquisitions. It just lost a bid to FLIR, to acquire Raymarine, a small, U.K. maker of marine radar systems.

Garmin’s valuation is compelling. The balance sheet is rock solid. The current indicated dividend, $1.50, yields nearly 4.5% and represents a payout ratio of 65%. The five-year growth rate for dividends is about 24.5%.

In spite of the downturn in revenues, the company is very profitable. ROE is a robust 28%. The current PE is about 9.8X. The forward PE is about 11.7X on analyst consensus earnings of $2.88. We are projecting earnings of $3.47 over the coming twelve months which suggests a forward PE 9.66X.

We think Garmin offers much potential on the upside and not an unacceptable risk to the downside. They have many obstacles to overcome. The immediate future for Garmin is not bright and therein lies the opportunity.

Disclosure: Author is long GRMN.

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