CORE LABORATORIES INC. The following discussion highlights the current operating environment and summarizes the financial position ofCore Laboratories N.V. and its subsidiaries as ofMarch 31, 2023 , and should be read in conjunction with (i) the unaudited interim consolidated financial statements and notes thereto included elsewhere in this Quarterly Report and (ii) the audited consolidated financial statements and accompanying notes to our 2022 Annual Report.
General
Core Laboratories N.V. is aNetherlands limited liability company. It was established in 1936 and is one of the world's leading providers of proprietary and patented reservoir description and production enhancement services and products to the oil and gas industry. These services and products can enable our clients to evaluate and improve reservoir performance and increase oil and gas recovery from new and existing fields.Core Laboratories N.V. has over 70 offices in more than 50 countries and employs approximately 3,600 people worldwide.
References to "
We operate our business in two segments: Reservoir Description and Production Enhancement. These complementary operating segments provide different services and products and utilize different technologies for evaluating and improving reservoir performance and increasing oil and gas recovery from new and existing fields.
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Reservoir Description: Encompasses the characterization of petroleum reservoir rock and reservoir fluids samples to increase production and improve recovery of crude oil and natural gas from our clients' reservoirs. We provide laboratory-based analytical and field services to characterize properties of crude oil and crude oil-derived products to the oil and gas industry. We also provide proprietary and joint industry studies based on these types of analyses and manufacture associated laboratory equipment. In addition, we provide reservoir description capabilities that support various activities associated with energy transition projects, including services that support carbon capture, utilization and storage, hydrogen storage, geothermal projects, and the evaluation and appraisal of mining activities around lithium and other elements necessary for energy storage.
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Production Enhancement: Includes services and manufactured products associated with reservoir well completions, perforations, stimulation, production and well abandonment. We provide integrated diagnostic services to evaluate and monitor the effectiveness of well completions and to develop solutions aimed at increasing the effectiveness of enhanced oil recovery projects. OnJanuary 17, 2023 , the Company filed a proxy statement/prospectus announcing its intention to reorganize the Company's corporate structure, which will include redomestication (the "Redomestication") of the parent company fromthe Netherlands tothe United States asCore Laboratories Inc. , aDelaware corporation. The Company and itsBoard of Supervisory Directors believes that the Redomestication will enhance shareholder value over the long-term through simplifying the corporate structure, improving operational efficiencies and reducing administrative costs. The Redomestication requires a shareholder vote for approval, which was conducted through an extraordinary general meeting of the Company's shareholders onMarch 29, 2023 , and received an affirmative vote. The transaction is expected to become effective approximately 30 days following the date of the extraordinary general meeting, onMay 1, 2023 .
See Note 1 - Description of Business of the Notes to the Interim Consolidated Financial Statements for further details.
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act.
Certain statements contained in this Management's Discussion and Analysis of
Financial
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Condition and Results of Operations section, including those under the headings "Outlook" and "Liquidity and Capital Resources", and in other parts of this Quarterly Report, are forward-looking. In addition, from time to time, we may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. Forward-looking statements can be identified by the use of forward-looking terminology such as "may", "will", "believe", "expect", "anticipate", "estimate", "continue", or other similar words, including statements as to the intent, belief, or current expectations of our directors, officers, and management with respect to our future operations, performance, or positions or which contain other forward-looking information. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, no assurances can be given that the future results indicated, whether expressed or implied, will be achieved. While we believe that these statements are and will be accurate, our actual results and experience may differ materially from the anticipated results or other expectations expressed in our statements due to a variety of risks and uncertainties. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. For a more detailed discussion of some of the foregoing risks and uncertainties, see Part II, "Item 1A - Risk Factors" of this Quarterly Report and "Item 1A - Risk Factors" in our 2022 Annual Report and other reports filed by us with theSEC . Outlook Currently, global oil inventories are low relative to historical levels and supply from OPEC+ and other oil producing nations are not expected to be sufficient to meet forecasted oil demand growth for the next few years. InOctober 2022 , OPEC+ determined to reduce production beginning inNovember 2022 throughDecember 2023 by 2 million bbls per day, due to the uncertainty surrounding the global economic and oil market outlooks. OnApril 2, 2023 , OPEC+ announced further reductions in production of around 1.16 million bbls per day in addition to theOctober 2022 reductions as a precautionary measure aimed at supporting the stability of the oil market. The current global demand for crude oil and natural gas remains at a high level and according to the latestInternational Energy Agency's report, global demand is expected to increase throughout 2023. As a result, it is anticipated that crude-oil commodity prices for the near-term will remain at current levels or increase if projections for demand remain accurate. In 2022, capital spending towards the exploration of crude oil and natural gas reached their highest level in over a decade, and our clients' activities associated with the appraisal, development and production of crude oil and natural gas are also expected to increase for the remainder of 2023. However, we believe some oil and gas operators will continue to manage their capital spending within free cash flow and maintain their focus on improving and maintaining a stronger balance sheet, which also is expected to moderate future growth in activities associated with the production of oil and gas. The geopolitical conflict betweenRussia andUkraine that erupted inFebruary 2022 , caused disruptions to traditional maritime supply chains associated with the movement of crude oil, primarily reducing the level of crude oil sourced fromRussia and being imported into various European ports. The disruptions to traditional maritime supply chains of crude oil and derived products, such as diesel fuel, and associated sanctions imposed on maritime exports of these products out ofRussia , also caused significant volatility in both the prices and trading patterns of these products during 2022 and into 2023. The average crude-oil prices for the first quarter of 2023 were significantly lower compared to the average prices for 2022, however, crude-oil prices still remain elevated when compared to 2021, prior to theRussia -Ukraine conflict. The maritime supply chains associated with the movement of crude oil continue to realign and establish new logistical and trading patterns, asEurope finds new suppliers of crude oil to import into the region, and maritime exports fromRussia find new destinations. Thus,Core Lab expects supply lines to continue to realign, and the Company's volume of associated laboratory services to increase commensurate with the trading and movement of crude-oil intoEurope and across the globe. The situation continues to evolve andthe United States , theEuropean Union , theUnited Kingdom and other countries may implement additional sanctions, export controls or other measures againstRussia ,Belarus and other countries, regions, officials, individuals or industries in the respective territories. We have no way to predict the progress or outcome of the 20 Return to
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conflict in
Our major clients continue to focus on capital management, return on invested capital, free cash flow, and returning capital to their shareholders, as opposed to a focus on production growth. The companies adopting value versus volume metrics tend to be the more technologically sophisticated operators and form the foundation ofCore Lab's worldwide client base. As oil and gas commodity prices have stabilized or are expected to increase in the near to mid-term, the Company expects our clients' activities associated with increasing oil and gas reserves and production levels will continue to increase in the coming years. Additionally, some of our major clients have begun investing in projects to reduce the levels of CO2 in the atmosphere, including carbon capture and sequestration projects. The Company's activities on these projects increased significantly in 2022 and is expected to continue expanding in 2023 and beyond. As part of our long-term growth strategy, we continue to expand our market presence by opening or expanding facilities in strategic areas and optimizing our global network to be aligned with client demand and market conditions. More recently, we have expanded our laboratory capabilities inQatar ,Saudi Arabia andBrazil , but have consolidated facilities inthe United States andCanada . We believe our market presence in strategic areas provides us a unique opportunity to serve our clients who have global operations, whether they are international oil companies, national oil companies, or independent oil companies. Results of Operations Our results of operations as a percentage of applicable revenue are as follows (in thousands): Three Months Ended March 31, Change 2023 2022 $ % REVENUE: Services$ 91,076 71%$ 84,723 73%$ 6,353 7% Product sales 37,280 29% 30,577 27% 6,703 22% Total revenue 128,356 100% 115,300 100% 13,056 11% OPERATING EXPENSES: Cost of services, exclusive of depreciation expense shown below* 70,934 78% 68,857 81% 2,077 3% Cost of product sales, exclusive of depreciation expense shown below* 30,594 82% 28,095 92% 2,499 9% Total cost of services and product sales 101,528 79% 96,952 84% 4,576 5% General and administrative expense, exclusive of depreciation expense shown below 16,331 13% 12,545 11% 3,786 30% Depreciation and amortization 4,044 3% 4,557 4% (513 ) (11)% Other (income) expense, net (28 ) -% 1,637 1% (1,665 ) NM OPERATING INCOME (LOSS) 6,481 5% (391 ) -% 6,872 NM Interest expense 3,429 3% 2,644 2% 785 30% Income (loss) before income taxes 3,052 2% (3,035 ) (3)% 6,087 NM Income tax expense (benefit) 610 -% (1,196 ) (1)% 1,806 NM Net income (loss) 2,442 2% (1,839 ) (2)% 4,281 NM Net income (loss) attributable to non-controlling interest 69 -% 49 -% 20 NM Net income (loss) attributable to Core Laboratories N.V.$ 2,373 2%$ (1,888 ) (2)%$ 4,261 NM Other Data: Current ratio (1) 2.38:1 2.03:1 Debt to EBITDA ratio (2) 2.52:1 3.08:1 Debt to Adjusted EBITDA 2.18:1 2.23:1 ratio (3) "NM" means not meaningful *Percentage based on applicable revenue rather than total revenue 21 Return to
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(1)
Current ratio is calculated as follows: current assets divided by current
liabilities.
(2)
Debt to EBITDA ratio is calculated as follows: debt less cash divided by the sum
of consolidated net income plus interest, taxes, depreciation, amortization and
certain non-cash adjustments.
(3)
Debt to Adjusted EBITDA ratio (as defined in our Credit Facility) is calculated
as follows: debt less cash divided by the sum of consolidated net income plus
interest, taxes, depreciation, amortization, impairments, severance and certain
non-cash adjustments.
Three Months Ended Change
March 31, 2023 December 31, 2022 $ %
REVENUE:
Services $ 91,076 71% $ 88,938 70% $ 2,138 2%
Product sales 37,280 29% 38,633 30% (1,353 ) (4)%
Total revenue 128,356 100% 127,571 100% 785 1%
OPERATING EXPENSES:
Cost of services, exclusive
of depreciation expense shown
below* 70,934 78% 69,656 78% 1,278 2%
Cost of product sales,
exclusive of depreciation
expense shown below* 30,594 82% 30,160 78% 434 1%
Total cost of services and
product sales 101,528 79% 99,816 78% 1,712 2%
General and administrative
expense, exclusive of
depreciation expense shown
below 16,331 13% 8,724 7% 7,607 87%
Depreciation and amortization 4,044 3% 4,073 3% (29 ) (1)%
Other (income) expense, net (28 ) -% (660 ) (1)% 632 (96)%
OPERATING INCOME (LOSS) 6,481 5% 15,618 12% (9,137 ) (59)%
Interest expense 3,429 3% 3,081 2% 348 11%
Income (loss) before income
taxes 3,052 2% 12,537 10% (9,485 ) (76)%
Income tax expense (benefit) 610 -% 5,847 5% (5,237 ) (90)%
Net income (loss) 2,442 2% 6,690 5% (4,248 ) (63)%
Net income (loss)
attributable to
non-controlling interest 69 -% (61 ) -% 130 NM
Net income (loss)
attributable to Core
Laboratories N.V. $ 2,373 2% $ 6,751 5% $ (4,378 ) (65)%
Other Data:
Current ratio (1) 2.38:1 2.05:1
Debt to EBITDA ratio (2) 2.52:1 2.68:1
Debt to Adjusted EBITDA 2.18:1 2.29:1
ratio (3)
"NM" means not meaningful
*Percentage based on applicable revenue rather than total revenue
(1)
Current ratio is calculated as follows: current assets divided by current
liabilities.
(2)
Debt to EBITDA ratio is calculated as follows: debt less cash divided by the sum
of consolidated net income plus interest, taxes, depreciation and amortization
and certain non-cash adjustments.
(3)
Debt to Adjusted EBITDA ratio (as defined in our Credit Facility) is calculated
as follows: debt less cash divided by the sum of consolidated net income plus
interest, taxes, depreciation, amortization, impairments, severance and certain
non-cash adjustments.
Operating Results for the Three Months Ended
Service Revenue
Service revenue is primarily tied to activities associated with the exploration, appraisal, development, and production of oil, gas and derived products outside theU.S. For the three months endedMarch 31, 2023 , service revenue was$91.1 million , an increase of 7% year-over-year and 2% sequentially. Year-over-year, the increase was due to slight growth in activity levels in 22 Return to
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international markets, which continued to be impacted by theRussia -Ukraine geopolitical conflict, coupled with a moderate increase in activity levels in the U.S. market. Sequentially, the Company would normally experience a seasonal decline in international activity, however, activity levels were relatively flat in international markets as supply chains have stabilized inEurope , activity on international projects has improved, and activity levels in theU.S. increased moderately. We continue to focus on large-scale core analyses and reservoir fluids characterization studies in the Eagle Ford, thePermian Basin and theGulf of Mexico , along withGuyana , Suriname,Malaysia and other international locations such as offshoreSouth America ,Australia ,Southern Namibia and theMiddle East , includingKuwait and theUnited Arab Emirates . Analysis of crude oil derived products also occurs in every major producing region of the world.
Product Sales Revenue
For the three months endedMarch 31, 2023 , product sales revenue of$37.3 million increased 22% year-over-year and decreased 4% sequentially. Rig count is one indicator of activity levels associated with the exploration and production of oil and gas. The average rig count forU.S. land increased over 20% year-over-year and decreased 2% sequentially. The growth inU.S. land activity levels was softened by a significant decrease in natural gas commodity prices, which began to weaken sharply inDecember 2022 . The average rig count for international markets increased 11% year-over-year and 1% sequentially. Year-over-year our product sales revenue increased by 15% in the U.S. market and 28% in the international markets, as a result of the increased drilling activity. Sequentially, our product sales revenue in the U.S. market increased approximately 3% as a result of the increased activity, outperforming the average rig count and estimated well completion activity; however, product sales revenue in the international markets decreased by approximately 8% due to a lower level of large bulk orders completed in the three months endedMarch 31, 2023 .
Cost of Services, excluding depreciation
Cost of services was$70.9 million for the three months endedMarch 31, 2023 , an increase of 3% year-over-year and 2% sequentially. Cost of services expressed as a percentage of service revenue decreased to 78% for the three months endedMarch 31, 2023 , compared to 81% for the same period in the prior year, and remained flat compared to the prior quarter. The year-over-year improvement in cost of services as a percentage of service revenue for the three months endedMarch 31, 2023 , was primarily associated with improved utilization of our global laboratory network on higher revenue.
Cost of Product Sales, excluding depreciation
Cost of product sales was$30.6 million for the three months endedMarch 31, 2023 , an increase of 9% year-over-year and 1% sequentially. Cost of product sales expressed as a percentage of product sales revenue was 82% for the three months endedMarch 31, 2023 , compared to 92% for the same period in the prior year, and 78% for the prior quarter. Year-over-year, the lower cost of product sales as a percentage of product sales revenue was primarily due to improved manufacturing productivity and absorption of fixed costs on a higher revenue base. Sequentially, the higher cost of product sales as a percentage of product sales revenue was primarily due to higher inflation which has increased our shipping and raw materials costs, and a slight decrease in manufacturing productivity.
General and Administrative Expense, excluding depreciation
General and administrative ("G&A") expense includes corporate management and
centralized administrative services that benefit our operations. G&A expense for
the three months ended March 31, 2023 was $16.3 million , an increase of $3.8
million year-over-year and $7.6 million sequentially. The variances across these
three quarters are primarily due to adjustments in the recognition of
stock-based compensation expense during those periods. The three months ended
March 31, 2023 includes a charge of $6.5 million to recognize accelerated stock
compensation expense recorded for retirement eligible employees compared to a
charge of $3.9 million for the same quarter in the prior year. The three months
ended December 31, 2022 includes the reversal of $1.9 million in stock
compensation expense previously recognized, to align and revalue the
compensation expense with the vesting level of performance share awards.
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Depreciation and Amortization Expense
Depreciation and amortization expense for the three months endedMarch 31, 2023 , was$4.0 million a decrease of 11% year-over-year and relatively flat sequentially. Year-over-year, the decrease in depreciation and amortization expense was primarily due to more assets that became fully depreciated compared to additional capital expenditures.
Other (Income) Expense, Net
The components of other (income) expense, net, are as follows (in thousands):
Three Months Ended
March 31,
2023 2022
(Gain) loss on sale of assets $ 96 $ (157 )
Results of non-consolidated subsidiaries (137 ) (93 )
Foreign exchange (gain) loss, net (144 ) (417 )
Rents and royalties (145 ) (171 )
Return on pension assets and other pension costs (326 ) (145 ) Loss on lease abandonment and other exit costs
641 -
Assets write-down 1,015 -
Severance and other charges - 3,332
Insurance and other settlements (604 ) (669 )
Other, net (424 ) (43 )
Total other (income) expense, net $ (28 ) $ 1,637
During the three months ended March 31, 2023 , we abandoned certain leases in the
U.S. and Canada and incurred costs of $0.6 million . We integrated and relocated
certain of our facilities in Canada and wrote down related leasehold
improvements and right of use assets of $1.0 million .
For the three months ended March 31, 2023 , the State of Louisiana expropriated
the access road to one of our facilities and paid us a settlement of $0.6
million . During the three months ended March 31, 2022 , we received insurance
settlement of $0.7 million associated with business interruptions and property
losses to certain facilities caused by the North America mid-continent winter
storm in February 2021 .
Foreign exchange (gain) loss, net by currency is summarized in the following
table (in thousands):
Three Months Ended
March 31,
2023 2022
British Pound $ (251 ) $ (36 )
Canadian Dollar 58 73
Colombian Peso 53 98
Euro 84 (98 )
Russian Ruble (251 ) (602 )
Other currencies, net 163 148
Foreign exchange (gain) loss, net
Interest Expense
Interest expense for the three months endedMarch 31, 2023 was$3.4 million compared to$2.6 million and$3.1 million for the three months endedMarch 31, 2022 andDecember 31, 2022 , respectively. The variances are primarily associated with higher interest rates on our aggregated variable rate debt in the respective quarters. 24 Return to Index
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Income Tax Expense (Benefit)
The Company recorded an income tax expense of$0.6 million and income tax benefit of$1.2 million for the three months endedMarch 31, 2023 and 2022, respectively. The effective tax rate for the three months endedMarch 31, 2023 was 20.0%. The effective tax rate for the three months endedMarch 31, 2022 was 39.4%. The tax rate for the three months endedMarch 31, 2022 , was largely impacted by the release of withholding tax related to unrepatriated earnings of our Russian subsidiary, which are not expected to be distributed in the foreseeable future.
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