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At the Core of Peak Oil
05/26/2011 10:00 am EST
Core Labs’ tricks for squeezing the last drop of crude from maturing fields will only get more valuable as reserves dwindle, writes Jon Markman, editor of Trader’s Advantage.
With crude oil prices high and exploration re-engaged across the world, let’s take a look at Core Laboratories (CLB)—a $4.5 billion company that provides proprietary technology to energy producers aiming to extract every last drop of hydrocarbons from their fields.
The Dutch firm represents exactly what I am talking about when referring to the beauty of the mid-caps—it’s small enough to grow fast, and large enough to be able to take on big projects.
Some 70% of its business is outside the US, and top clients include Exxon Mobil (XOM), Shell (RDS.A), Total (TOT), BP (BP), and Conoco Phillips (COP). Core likes to brag that it works in 1,000 of the largest 4,000 oil and gas fields in the world.
The company is one of the quiet powerhouses of the energy-services industry: Core has returned 25.6% annually to shareholders over the past 15 years. Only five other companies in the S&P 500 delivered better returns over this time period, according to Bloomberg.
A key reason for its success: World oil production peaked at 88 million barrels a day, which means that new efforts in the industry must be focused on improving the output of current fields—not just finding new ones. In recorded conference comments, Core managers state right from the start of their presentations that they are “peak oil guys,” which means they think that energy will become increasingly scarce from here on out.
Exxon Mobil won’t give any argument on that, as the company recently announced that it was only able to replace 95 of 100 barrels that it has pumped over the last decade.
That’s where Core’s strengths emerge. The company helps clients squeeze about 6% more oil out of their fields than they can on their own. That may not sound like a lot, but it’s worth billions to the energy giants.
Masters of the Underworld
When a new field is discovered, an explorer will come to Core Labs for reservoir description. Think of this service as an MRI of an oil field, followed by innumerable lab tests. Core’s technicians use proprietary technology to scan the field, and analyze rock porosity and fluid density.
Its staff geologists, engineers, and petrophysicists then use this information to develop a simulation of the field, giving energy companies an accurate picture of the level of reserves, at what rate they can be extracted, and where the company should place wellheads.
Typically, only 40% of an oil field can be recovered using conventional means. Core’s techniques increase this recovery rate by up to three percentage points.
Consider an oil field with an original recoverable capacity of 5 billion barrels. CLB could increase that capacity by 150 million barrels, which is worth $12.9 billion at the now-conservative price of $85 a barrel. This service will become increasingly valuable as the world’s remaining oil reserves become progressively more difficult to extract.
The most common enhancement technique is called hydraulic fracturing. It is essentially blasting sand under extremely high pressure to fracture rock so that oil can flow more easily. The end result is that an oil field looks like a car window that has been hit with a hammer.
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Proprietary explosive charges, which Core calls SuperHero, create a better wellbore, or hole for extraction, and its patented tracking gels provide instant feedback to the effectiveness of the fracture. Since only 50% of fractures result in optimum production, a complete understanding of an oil field is necessary to increase hydrocarbon production.
Core also provides reservoir management for mature fields. Real-time monitoring systems can locate debris, improve well productivity, reduce operating costs, and allow companies to understand their field on a real-time basis.
Other oil-service companies indirectly analyze reservoir rock through seismic logs, but Core Labs’ proprietary equipment directly measures rocks and fluids. This technology provides the firm with a unique, competitive advantage in analyzing and mapping fields.
Iraqi oil fields currently produce 2.5 million barrels of oil per day. Core Labs has 11 new projects in Iraq, and expects its technology can help Iraq surpass its peak pre-invasion output of 3.6 million barrels within five years.
Sharing Is Caring
Core is one of the most shareholder-friendly companies in the S&P 500. Its return on equity (ROE), a measure of how effectively a company uses shareholder capital, is massive at 52.2%. For comparison, oil-service giants Schlumberger (SLB) and Halliburton (HAL) have 16.8% and 18.3% ROEs, respectively.
Core Labs does an excellent job of returning free cash that it does not use for capital expenditures directly to shareholders. The firm repurchased 3% of its outstanding shares in 2010, and plans to increase its dividend 12% this year.
In the most recent quarter, revenue increased 10% and earnings jumped 17% year over year.
The stock is not cheap at 22 times forward earnings, but this well-run company deserves a premium.