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Will Core Laboratories’ Strategies Improve Returns?

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Returns and key drivers

OFS (oilfield equipment and services) companies like Core Laboratories (CLB) are affected by rig counts and energy prices, and crude oil prices have declined by ~7% in the past year.

Core Laboratories’ one-year returns (~7% return net of dividends) have been better than the industry ETF, the VanEck Vectors Oil Services ETF (OIH), which has produced a -7% return in the past year. By comparison, the Energy Select Sector SPDR ETF (XLE), the broader energy industry ETF, has produced ~1% return. Notably, CLB makes up 4.4% of OIH.

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Core Laboratories has hugely outperformed the US rig count, which fell by 47% in one year. Core Laboratories has even outperformed the SPDR S&P 500 ETF (SPY), which has generated ~6% return during the same period. SPY provides investor exposure to the broader market through investments in the S&P 500 index. By comparison, larger market-cap peer Halliburton (HAL) has performed on par with CLB in the past year.

Strategies and outperformance

In its fiscal 2Q16 conference call, Core Laboratories anticipated a marginally higher revenue and operating margin as the energy market starts showing signs of recovery. CLB’s differentiated technological services, its steady operating margin based on cost reduction efforts, and its free cash flow generation have all helped the company outperform the industry. CLB’s equity also turned positive in 2Q16, after the issuance of $197 million worth of shares in May. CLB has cleaned up its balance sheet by repaying a part of its long-term debt from the proceeds of equity offerings.

Despite its positive drivers, however, Core Laboratories could be overvalued at this level. Its implied volatility has also climbed since its 2Q16 financial results were announced, and so investors would be wise to remain cautiously optimistic toward the Netherland-based OFS company going forward.

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