Iberia Capital, Morgan Stanley Think Core Labs Can Win From This

• Shares of Core Laboratories N.V. CLB have risen 10.63 percent over the last three months, hitting a high of $120.08 on October 14.
• Iberia’s Robert MacKenzie has maintained an Outperform rating and price target of $140 on the company, while Morgan Stanley’s Ole Slorer has maintained an Overweight rating and price target of $148.
• While the company report in-line Q3 results, Core Laboratories is expected to be well positioned to benefit from an upswing in oil prices.

Poised to Benefit

Analyst Robert MacKenzie believes that this is a good time to build a position in the stock, since earnings are expected to “bottom in 1Q16 and that the stock has already put in its lows... While the stock is certainly not cheap, we would not expect it to be cheap at this stage of the cycle,” MacKenzie added.

According to the Iberia report, a recovery is expected to begin in 2016, although a sharper recovery is expected in 2017, which justifies margins beings close to the high end of their historical range.

Core Laboratories reported its Q3 EPS in-line with the consensus, estimates and guidance, while Reservoir Description and Reservoir Management margins were ahead of the estimates. On the other hand, Production Enhancement that was more levered to North America missed the expectations.

The company has, however, revised its Q4 EPS guidance down, meaningfully below the consensus. “This, though, comes in the wake of a 3Q result that showed a sequential increase in profitability, unlike Core’s peers that have reported so far,” the report stated.

MacKenzie expects Core Laboratories to witness a turnaround in 2Q16, when the E&P industry begins to work through its inventory of drilled but incomplete wells.

“While we are not as bullish as Core management in calling for a V-shaped recovery, we do agree that the recovery should start in 2Q16 in North America, but probably not until 2017 outside of NAM,” MacKenzie explained.

V-Shaped Recovery

Analyst Ole Slorer also mentioned that the company “sees a V-shaped recovery once a trough is reached, as it expects to attract the incremental dollar from its tech-savvy clients once the oil price swings higher.”

The company expects accelerated decline in U.S. production, ending 2015 more than 700 kbpd down from the April peak. Core Laboratories expects additional declines in Europe, Mexico, South America, Russia and Africa.

Slorer believes that the company’s near-term earnings would decline to trough levels in Q1, despite robust operating performance, driven by a 9 percent quarter-on-quarter decline in sales in 4Q15.

“We model Q1 revenues to decline in the mid to high single digits, as activity is slow to resume, while Reservoir Description experiences typical seasonal weakness,” Slorer said, although the company expects Q1 margins to rise due to its high-grade mix and reduced costs.