Wednesday, March 25, 2009

Core Labs, a Prime Pick in the Energy Patch

Core Labs, a Prime Pick in the Energy Patch

Judging by its name alone, one would think that Core Laboratories (CLB) is a drug company or some other type of health-care outfit. It's not, although it does provide a form of "well care." The Netherlands-based company actually serves the energy industry, and it counts almost all of the global oil and gas producers among its customers. Core Labs' services boost their productivity by helping them improve the output of their oil wells and enhance their management of oil and gas reservoirs.

That pivotal role has enabled Core Labs to cope with the recent drop in spending by Big Oil. In terms of share price, the company is doing better than its customers, whose stocks have been on the ropes since crude oil prices retreated from their peak of $147 a barrel last summer.

In fact, Core's stock has run counter to those of such oil biggies as Exxon Mobil (XOM) and Chevron (CVX), which have been weak. Shares of Core have surged, climbing to 76 on Mar. 24, significantly up from their 52-week low of 48.41 reached on Dec. 12, 2008.

But don't think that Core Labs' stock is peaking. Far from it. It's still way below its 52-week high of 145.47, hit on Jun. 9, 2008.The stock is cheap at its current price, says Ryan E. Crane, chief investment officer of investment bank Stephens. Core Labs' shares recently traded at 12.6 times Crane's 2010 earnings estimate of $6 a share, far lower, the analyst notes, than the stock's five-year price-earnings average multiple of 17, and a 2004 p-e of 27.

An International Footprint

"The stock could double in a year or two," figures Crane, noting that Core has no big rivals in the industry. Its major competitors are the research units operating within the major oil and gas producers.

Crane says Core Labs is very well managed, with the company's earnings consistently rising. Core specializes in measuring the quantity and value of crude oil and natural gas in a company's reservoir, which accounts for about 47% of its operating income. Another part of its business (42% of operating income) aims at improving reservoir well completions and increasing production. The third part of Core's operations (11%) is reservoir management, specifically to solve reservoir-wide problems and to maximize daily production and total recovery.

"While Core's business isn't immune to adverse changes in the global rig count, the company is less affected than most, given its technological edge and international footprint," says analyst Karen David-Green of Oppenheimer (OPY). She rates the stock outperform with a 12- to- 18-month price target of 80 a share. She figures Core will earn $5.25 a share in 2009 and $6 in 2010. Those forecasts are below Core's 2008 per-share earnings of $6.18, mainly because of lowered forecasts for North American and international oil and gas production. According to a consensus forecast compiled by Zacks Investment Research, Wall Street analysts see Core earning $5.49 a share in 2009 and $6.22 in 2010. Among the 11 analysts who track the company, nine recommend buying the stock and two rate it a hold.

Mideast Strength

David-Green notes that 70% of Core's revenues come from oil reservoirs located outside the U.S. The company sees West Africa, the Middle East, Asia Pacific, and South Caspian regions as areas where it could generate flat to slightly increased revenues in 2009. Because it reduced operations in Russia, Venezuela, Mexico, and Nigeria over the past few years, David-Green adds, the company is more insulated from recent production declines in those regions.

Analyst James C. West of Barclays Capital (BCS) says that despite the challenging outlook for the industry as a whole, Core remains well-positioned to do better, in part because of its strong international franchise and good technology. West expects the Middle East to be a particular area of strength for Core in 2009. So he figures the company, which beat consensus earnings forecasts in the first quarter, deserves to trade at a higher price. Given what he considers "a solid outlook for Core Labs and the company's superior positioning relative to the oil-service group," he rates the stock overweight, with a 12-month price target of 87 a share. (Barclays has done banking for Core Labs.)

Should crude oil prices turn around, as many analysts expect (they have recently fallen to about $50 a barrel), and start spurting higher again, the company's shares will certainly surge along with the currently sluggish Big Oil stocks. But while investors wait for that resurgence, Core Labs looks like a safe-haven energy play.

Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

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