Core Laboratories N.V. (CLB) Q4 2014 Earnings Report, Transcript and Summary

Good morning. And welcome to the Core Laboratories’ Fourth Quarter 2014 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to David Demshur, Chairman, President and CEO. Please go ahead.

Thank you, Andrew. Good morning in North America, good afternoon in Europe and good evening in Asia Pacific. We’d like to welcome all of our shareholders, analysts and most importantly, our employees to Core Laboratories’ fourth quarter 2014 earnings conference call. This morning, I am joined by Dick Bergmark, Core’s Executive Vice President and CFO; Core’s COO, Monty Davis, who will present a detailed operational review and Chris Hill, Core’s IR Analyst. The call will be divided into five segments. Chris will start by making remarks regarding forward-looking statements. We’ll then come back and review market conditions and give an analysis of Core Laboratories’ actions taken in 2008-2009 downturn compared to Core Lab actions expected to be taken in the 2014 to 2015 downturn, then some comments on some technological targets for the year 2015. Dick will follow with a detailed financial overview and additional comments regarding building shareholder value, Core’s first quarter 2015 outlook and a general industry outlook as it pertains to Core’s continued growth prospects. Then Monty will go over Core’s three operating segments, detailing our progress and discussing the continued successful introduction of new Core Lab technologies that relate to completing, stimulating and producing wells and then highlighting some of Core’s operations and major projects worldwide. Then we’ll open the phones for a Q&A session. I’ll turn it over to Chris for remarks regarding forward-looking statements. Chris?

Before we start this conference call this morning, I’ll mention that some our statements that we make during the call may include projections, estimates and other forward-looking information. This would include any discussion of the Company’s business outlook. These types of forward-looking statements are subject to a number of risks and uncertainties relating to the oil and gas industry, business conditions, international markets, international political climate and other factors, including those discussed in our 34 Act filings that may affect our outcome. Should one or more of these risks or uncertainties materialize, or should any of these assumptions prove incorrect, actual results may vary from material respects from those projected in the forward-looking statements. 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 more a detailed discussion of some of our foregoing risks and uncertainties, see item 1A, Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as well as other reports and registration statements filed by us with the SEC. Our comments include non-GAAP financial measures. Reconciliation to the most directly comparable GAAP financial measures is included in the press release announcing our fourth quarter results. Those non-GAAP financial measures can also be found on our Web site. With that said, I’ll pass the discussion back to Dave.

Well, thanks Chris. We’d like to look at market conditions and analyze some of the 2015 markets that Core Lab will be challenged by. Core believes that today’s crude oil markets are imbalanced by a 1 million to 1.5 million barrels per day. Using a net annual production decline per grade of 2.5% on 89 million barrels of worldwide production daily, coupled with capital investment rates falling year-over-year by approximately 30%. Crude oil markets should balance late in 2015. Some general methodology in how we arrived at that looking at U.S. supply and supply gains. First of all, looking at 2015, we used and removed some 800 to 1,000 rigs from the peak of the market in the fall of last year. In general, for unconventional production adds, we used a 70% decline curve rate in year-one, a 40% decline curve rate in year-two and a 20% decline curve rate in year-three. We applied those unconventional production additions in 2012, ’13 and ’14, and determined that the crude oil production that needs to be replaced owing to these decline curves exceeded over 2 million barrels heading into 2015. Moreover, at current prices when one looks at the NPV of a well compared to the company’s or the operators’ cost of capitals, additional wells will not be completed with current pricing, as over 60% of the well costs are tied to completion and stimulation cost. Wells might be drilled but they might be extended for their completion times. Just look at a recent report from Continental as an example. They have some of the best acreage in the Bakken and they’re going to go from 50 to 31 rigs and they’re going to weigh completion and stimulation events on every well drilled. So this presents the backdrop from what we see as a significant supply destruction coming from North America and it maybe as little as 300,000 barrels in additional production from the U.S. this year. We have seen this scenario play out in previous downturns, none sooner than in 2008 to 2009. As was the case in 2009, crude oil imbalances were caused mainly by slacking demand and not from overwhelming supply growth. These parameters hold similar to the 2014 to 2015 downturn albeit supplies have been boosted by recent North American high decline rate production additions. As was the case in 2009, Core sees a V shaped recovery starting to occur in late 2015, and that echoes comments from Harold Hamm most recently. During the 2008 to 2009 downturn Core share price went from an approximate high of $83 to a low of $30. The Company continued to pay its dividend, aggressively repurchased outstanding exchangeable notes that were trading significantly below par and repurchased shares albeit at lower rates due to do the prevailing financial crisis. Shares then rebounded from that $30 level to $221 in 2014. So far during the 2014 to 2015 downturn, we have seen Core’s price go from that high of 221 to approximately trading in free market conditions this morning at around 87 to 90, and that may trade lower down in the $85. During today’s downturn so far Core has increased its dividend 10% year-over-year and will aggressively repurchase shares using our free cash flow and new borrowings under our revolving credit facility which we have recently expanded for such opportunities. As we see little difference from the 2008 to 2009 downturn to today’s current downturn and the transitory nature of the imbalances in today’s crude oil markets dividend increases and aggressive share repurchases will reward shareholders as these efforts did in 2009 to 2014. History does repeat itself and long-term Core Lab investors will once again be rewarded. Now a quick review of Q4. In the fourth quarter of 2014 Core’s operations produced our most profitable quarter in Company history, with record EPS, net income, free cash flow, operating margins and revenue. Our operations especially our reservoir fluids businesses have not seen structural decline we are so often have been recently asked about. Also if you look at reservoir description operating margins they would confirm the expansion of our high margin reservoir fluids business. All of this is good news at all dues as our industry have seen titanic shifts owing to sharply lower commodity prices pertaining significantly lower activity levels in 2015. In reviewing Core’s first quarter of 2015 guidance as we have always stressed, investors and analysts should compare year-over-year results and projections for Core Lab, as opposed to sequential quarterly comparisons as Core’s business does realize seasonal variations especially from Q1 to Q4. Comparisons of our guidance to our Q4 results are in error. Core will also continue to invest money to innovate technologies to boost daily production and maximize estimated ultimate recovery rates from wells worldwide. As new drilling in unconventional tight-oil plays fall in response to these lower prices Core is diligently innovating enhanced oil recovery techniques that will be utilized by our most technologically sophisticated clients. We are currently looking to boost recovery rates in the Bakken, and the Eagle Ford from high single-digit recovery rates into the low-teens as these incremental barrels are the most economical in the reservoir. These new EOR technologies will continue to generate high margin revenues a years out as the reservoir fluids markets will become more sophisticated and that market could only be served by Core Lab alone. Moreover, Core expects to increase market penetration of our newly introduced FlowProfiler and KODIAK related technologies as Core’s production enhancement segment produced record operating results in Q4. Again providing value-added services needed in the low commodity market will be targeted by Core Lab. As stated in our Q3 earnings all of our operations are committed to posting future results that are equal or to greater than the Core Lab standard that we have put up over the past decade. Our operations successfully navigated the 2008-2009 industry downturns, by reducing operating cost to maintain operating margins superior to all other oil field service companies. And we are diligently working on the standard today. I’ll now turn it over to Dick for some detailed financial reviews.

Thanks David. Looking at the income statement, revenues were 278.6 million in the fourth quarter versus 276.3 million in the fourth quarter of last year, representing a 1% increase year-over-year. Revenues for the full year of 1.1 billion, a record as David said also up from the year ago totals. Of these revenues services for the quarter 200.3 million, down slightly when compared to 201 million last year, but for the full year services were up 2% on a year-over-year basis. Product sales for the quarter were up 4%. For the full year, they’re up 1%. Moving on to cost of services for the quarter 56.6% which was better, an improvement than the 57.2% of service revenues in the fourth quarter of 2013. And cost of services also improved for the entire year to 57.6% from 58.1% in 2013. Cost of sales in the fourth quarter they were 70.5% of sales revenues which again was an improvement better than the 70.8% of sales revenues in the fourth quarter of 2013. G&A for the quarter was 11.7 million down from last year’s fourth quarter. For the full year, G&A was 45.7 million, representing 4.2% of revenues for the year. That’s down when compared to 4.8% of revenues in the prior year. Depreciation and amortization for the quarter 6.9 million and that’s up from that incurred in last year’s fourth quarter. For the full year, depreciation and amortization expense was 26.7 million slightly higher than the 25.5 million in the prior year as a result of our capital expenditures aimed at technology, services and products. Other expense this quarter primarily includes foreign exchange losses of 2.1 million due to the strength of the dollar. The guidance we gave on our last call for the quarter specifically excluded the impact of any FX gains or losses so accordingly our discussion today excludes this foreign exchange loss. And a year ago the loss was 1.3 million in the same quarter. Excluding those losses to conform our guidance EBIT for the quarter was 92.5 million which was up 4% or almost 5% year-over-year. Fourth quarter EBIT represents margins of 33.2% a quarterly high for any quarter for the Company. Full year 2014 EBIT ex-items was approximately 350.8 million up 14.6 million or 4% compared to that earned in 2013 and our margins did expand once again by 100 basis points to 32.3%. Interest expense was 2.9 million in the quarter and that’s up from 2.5 million in last year’s fourth quarter as the revolver balance increased by 89 million to accelerate our share buybacks. Income tax expense in the quarter was 21.3 million and an effective rate of 23.8%. We believe full year effective tax rate of 23% will also be the same in 2015. Net income ex-items for the quarter was 67.8 million up 4.4% compared to 64.9 million in last year’s fourth quarter and for the full year ex-items it was up 6.5%. For the quarter earnings per diluted shares ex-items noted earlier was a $1.54 compared to our prior guidance given on our last call of a $1.53 to a $1.56 per share and that’s compared to the unreduced main streak of a $1.54 per share. In spite of the recent yet dramatic reduction in commodities and industry activity levels, our EPS is up 7.7% from $1.43 in last year’s fourth quarter. EPS for the full year was $5.85 up 10% when compared to EPS of $5.32 in 2013. Our GAAP EPS for the year was $5.77 up 9.3% compared to our GAAP EPS in the prior year of $5.28. If we look at the balance sheet cash very similar to last year’s receivables improved our DSOs from 64 days for the full year and that’s an improvement from 67 days in 2015. Inventory is down year-over-year to 42.4 million from 46.8 million reflected of a slightly slowing market. Other current assets were 37.9 million that compares to 30.6 at last year and primarily due to an increase in income tax receivable of 5.7 million. PP&E is 149 million that’s up from the prior year-end balance again that’s due to our client driven CapEx program. Intangibles, goodwill and other long-term assets were 224.8 million and that’s up from the prior year again primarily to an increase in the cash surrender value of life insurance. On the liability side of the balance sheet accounts payable is down slightly. Other current liabilities of 84.8 million virtually unchanged from the prior balance long-term debt though at year-end was 356 million that’s up 89 million when compared to our long-term debt at the prior year-end and that as David mentioned is because of our opportunistic share repurchases. Remember our debt is comprised of our senior notes at 150 million as well as 206 million under our bank revolving credit facility. Other long-term liabilities ended the year at 92.8 million and that’s up from 88.8 million and that’s primarily due to an increase of 4.7 million in deferred comp. Shareholders’ equity ended the year at 94 million down from the prior year-end of 169.4 and that’s primarily due to share repurchases and dividends paid, offset by additions from earnings. CapEx in the quarter was 9 million, for the full year 36.6 million and that’s up from 35.4 million in the prior year as we addressed opportunities created by our clients in 2014. Our CapEx program in 2015 will focus on projects that are client-directed, as those projects should create our highest returns on invested capital. The total expected level for our capital investments for 2015 has not yet been determined. Now if we look at cash flow, the fourth quarter cash flow from operating activities was 97.8 million. After paying our 9 million in CapEx our free cash flow was 88.8 million, the highest quarterly amount for any quarter. In the quarter we used our cash to pay approximately 21.9 million in cash dividends and repurchased 408,328 shares. For the full year of 2014 cash flow from operating activities was 303.4 million of free cash flow after paying for the CapEx program was 257 million, again a record for the Company. Now let’s talk about guidance. As David said we offer a high technology, services and products that optimize our client’s revenues derived from their current production, as well as from ultimate recovery from their fields. In an industry downturn such as today’s environment we may experience some degree of insulation due to our proprietary technology, as well as a historical slide by a more technologically sophisticated clients to value-added services providers like Core Lab. Our unique reservoir fluids technologies are expected to see continued growth as these services are critical in optimizing unconventional and deepwater developments. Our FlowProfiler services are expected to again realize greater market penetration as is also the case for our KODIAK Enhanced Perforating Systems. Nonetheless, due to significantly and sharply lower commodity prices which we anticipate that North American land rig count will continue to fall sharply into the second of 2015 although deepwater activity in the Gulf of Mexico should continue at or near fourth quarter 2014 levels. International activity levels will decrease slightly with the Middle East region continuing at a relatively higher level of activity. Therefore our product enhancement segment will be most affected by the sharp North America downturn as it was in 2009. Our reservoir description and reservoir management operations are expected to be affected to a lesser degree. Accordingly, we began rightsizing our operational cost base in the fourth quarter of 2014 and continue that in 2015. Development cost for new technologies and services will remain intact, while we plan to marginally turn client directed capital expenditures in 2015, owing to our belief that crude oil markets will balance later in 2015. Therefore we project first quarter 2015 revenues to be down approximately 12%, and EPS to be down approximately 20% from year ago levels. Similar declines realize when compare to the 2008-2009 industry downturn. We believe our performance in the first quarter will be superior to industry activity levels that we project will be down more than 12% year-over-year. As North America activity levels will be down significantly greater than 12% year-over-year, decremental margin for our production enhancement operations will weigh on our overall first quarter results. We project first quarter 2015 revenue of approximately 230 million, and EPS of approximately a $1.05 to a $1.10 which does factor in recent ruble, euro and Canadian dollar weakness versus the U.S. dollar. Just a quick fact to remember, we are a year-over-year managed company not a sequential quarter Company. We are not drilling with contracts. Rather we move with industry spend which is seasonal as the oil companies wrap-up their annual capital budget for the beginning of each year and then go about spinning that CapEx during the year, which generally means that their spinning ramps up as the year progresses. Q1 is always, most of the time lower in activity than the preceding fourth quarter for that reason. We look at how Q1 compares to the prior Q1. So this guidance was derived by reducing our prior Q1’s revenue by 12% and which is just the same as occurred in 2008-2009. The rapid contraction of the North America rig count coupled with the suspension of the completion and stimulation of recently drilled wells will likely cause year-over-year first quarter decremental margins of approximately 80%, which does match our recent incremental margins. Decremental margins going forward should improve as we take further action to right size our operational cost structure in future quarters. Having said free cash flow in the first quarter of 2015 is projected at approximately $50 million. All operational guidance excludes any foreign currency translations in any share that maybe repurchased other than those already disclosed and assumes an effective tax rate of 23%. We are unable at this time to provide full year 2015 annual guidance with a high degree of confidence. Now I would like to hand the discussion over to Monty who will provide an operational update.

Thanks Dick. The fourth quarter of 2014 was our best quarter ever. Setting records for revenue, operating income excluding FX and operating margins. The credit for these achievements goes to our 5,000 employees around the globe and we thank them. Reservoir description revenue of 131.7 million was up slightly sequentially and operating earnings of 37.3% were increased 2.8% over Q3 2014. Operating margins of 28.3% improved 60 basis points from the prior quarter and reaching our highest in four quarters. Leading these margins higher has been the structural expansion of the high-end of the reservoir fluids market that only Core can serve. Recently our reservoir fluids services group completed a number of U.S. enhanced oil recovery projects to investigate the viability of miscible-gas injection into their reservoirs. These reservoirs had been on water injection for several decades to the point that their oil production was barely sufficient to sustain production cost. The EOR studies included targeting of the minimum miscibility pressure at which the injection gas would displace oil from the formation most effectively. Miscible-gas injection is extremely efficient at the pricing much of the remaining oil so it makes sense to investigate the feasibility of available gas to flood these older reservoirs. In some cases carbon dioxide is available. But as the natural gas is abundant it makes sense to test both to review the economics of one over the other. Core Lab’s worldwide expertise in determining the optimum gas composition and injection pressure is unsurpassed. The EOR studies performed in our state of the art laboratories investigate compositional changes that occur as a result of gas mixing with oil, how much the oil swells and how the mixed fluid viscosity is reduced. All of these factors along with the core flood experiments factoring in a variety of rock qualities allow our clients to calculate the amount of additional oil that maybe recovered by this rejuvenating process. In the majority of these cases these viability studies confirm to the client that gas injection makes economic sense. In addition to providing the fundamental information required to determine gas injection viability, Core’s reservoir fluids services group also investigates those factors that might mitigate the effectiveness of gas injection. One of these factors includes the destabilizing the heavy components of the oil that may lead to deposition of organic solids and asphaltenes in the reservoir production tubing. Our comprehensive EOR testing programs review whether asphaltene deposition is likely to cause injectivity issues thereby leading to a reduction in the dispersion of gas through the reservoir, which may in turn lead to reduced displacement and lower oil production. The testing of treatment chemicals to mitigate any organic deposition that may occur during the gas injection process is also part of our study and a key piece of information fine engineers need to optimize their reservoir management plans. Performing EOR viability studies to investigate gas injection projected economics is one way that Core Lab assists our clients to recover their latent potential in their current oil field assets. Gas injection EOR projects can be an alternative to risky and expensive exploration projects producing a known oil from a known source with production facilities already in place. Core’s technology is used to tap the undiscovered potential of these old oil reservoirs and help our clients optimize their return on investment. Core Lab believes EOR is the future of the reservoir fluid business and has expanded facilities and put in place state-of-the-art equipment to position our self as the provider of these services in the years go come. Core developed digital rock characterization services continued its rapid growth in Q4 digital rock characterization DRC which is primarily an imaging-based core analysis program was started in February 2014 and developed using our extensive expertise in geology and rock property analysis. This expertise gives us unique modeling capabilities and brings real value to our digital rock characterization services. Across the globe it is well documented that image analysis of core rocks can provide petrophysical information. This information can range from purely qualitative and visual to numerical, modeling, calibration-based quantitative data. The project and concept require low to very high resolution imaging equipment. State-of-the-art imaging combined with extensive core analysis-based calibrations using Core Lab’s global core analysis experience provide fast, detailed and reliable data which in turn helps operators describe reservoirs in a much more detail than ever before. The first level of imaging is attained by high frequency CAT scanners. The extensive modeling based on Core Lab’s lab measurement knowledge, DRC provides a virtual geological core description. Integration of this description with spectra gamma scan provides detail meteorological information, mostly within a week of coring. Core Lab performs these services in Houston, Denver, Bogota and Abu Dhabi currently and plans to extend these capabilities further in 2015. The second level of an imaging provides micro core level x-ray information and utilizes a micro CT scan. Various petrophysical properties, proxy, permeability, capillary pressure, electrical properties, et cetera are capitalizing using high resolution 3D rock models and advanced rock-based software. First level of an imaging combined with Core analysis-based calibrations provides a quick look into reservoirs accurate sub-sampling and models based on higher resolution levels lead to a very detailed reservoir description and can resolve some industry-wide up-scaling problems. The Core Lab DRC approach represents a significant improvement over competitors’ deliverabilities due to the extent to which we ground tooth our interpretation and modeling using first, geological input in the form of actual laboratory derived mineral composition and secondly actual physical measurements of capillarity and permeability. Our digital rock models therefore have a real, quantifiable physical basis and are not purely theoretical. Production enhancement revenue of 124.1 million was the highest in Company history or quarter and grew 7.7% over Q4 2013 and 1.6% sequentially. Operating income was 45.7 million and grew 10% over those of Q4 2013. Operating margins of 36.8% were up 80 basis points over Q4 2013. Demand for our diagnostic services remained high through the fourth quarter, as clients continue to test various strategies to stimulate the highest percentage of the reservoir lock in the most cost effective way. Our FlowProfiler service continues to grow and gain market penetration. We expect this to continue as the FlowProfiler brings great value to our clients. Currently we’re seeing a common theme for clients are moving from the well building mode to putting more attention to optimization and best practices. Return on investment is the driver and our global technology team, our regional engineering advisors and diagnostic services are an important solution to help our clients quickly determine the optimal way to explore the reservoirs. Our fracing experts and regional engineering advisors are mining our extensive database of refrac diagnostics data over the last several years and are helping our clients determine how best to target refracs as a way to gain production without drilling. The early wells in a field are not optimized, leaving large percentages of un-stimulated rock. These are prime candidates for refracs and our diagnostics are even more than critical on these environments because diversion techniques and strategies need to be optimized. Offshore activity continues to be strong and our PACKSCAN and other complementary services continue to be critical to these operators. On our recent projects our diagnostics indentified that a gravel pack operation completely failed. All surface data identified the job is a success, however troubles pulling out of the hole caused fluid losses that washed the gravel pack away. This knowledge from our PACKSCAN enabled the operator to pull the completion and re-gravel pack successfully saving 100s of millions of dollars in potential loss production due to gravel pack failure. Proven technologies such as HERO, SuperHERO charges and the HTD-Blast drove record quarter revenues as clients continue to look towards Core Lab for more effective procreating techniques to optimize frac results. The use of Core Lab’s proprietary HERO HR charges specifically designed and engineered to achieve maximum penetration in hard compressive strength formations have been adopted by numerous clients both domestically and internationally. Recently Core Lab has been responding to multiple client requests to utilize KODIAK technologies both in North America and international arenas. KODIAK propellant stimulation technology enables the operators to reverse material wells, zones in decline as well as stimulate extremely long horizontal zone simultaneously. This is an example of operators taking advantage of Core Lab production enhancement technologies to capture value by increasing production at a much lower investment level. This will be even more important in the current market. Then reservoir management revenues of 22.7 million were up sequentially 1% yielding an operating income of 9.6 million an increase of 25% over Q3 2014. Operating margins of 42% were the highest ever up 820 basis points over the prior quarter. Reservoir management had a strong fourth quarter due to a combination of projects, sales and the initiation of new projects, both in North America and internationally. In the U.S., reservoir management experienced high demand for our projects in the Permian and Appalachian Basins. Our project in the Delaware Basin that focuses on reservoir characterization and fracture stimulation well performance increased membership to 29 companies, targeting the Avalon, Bone Spring, and Wolfcamp reservoirs. The Midland Basin project increased membership to 51 companies. This project is directed at improving an operator’s well performance through the integration of geology, petrophysics, geomechanics, fracture stimulation design, and post-frac production analysis, well performances has continued to improve by this integration process for optimization. Reservoir Management also experienced a resurgence of interest in our Marcellus, Upper Devonian, and Utica Point Pleasant projects in the Appalachian Basin. We added more members to the Marcellus project, bringing the total to 55. However, most of our client interest has been directed at the expanding Utica Point Pleasant gas play in Pennsylvania and West Virginia. We now have 20 member companies in this project, and expect this number to grow based on the high gas rates we reported from exploration wells. Also in North America, Reservoir Management initiated three new projects during the quarter. These consist of the Montney Phase 2 and Wilrich Sandstone projects in Canada and a project targeting the Upper Cretaceous oil-bearing formations in the Powder River Basin of the U.S. Internationally, Reservoir Management completed an interim report on its Mozambique Reservoir and a Seal study participant ahead of the current license round closing. The project will be completed during Q1 2015. Also in the quarter, we initiated two new Atlantic Margin Studies, an extension to our Brazil Equatorial Basin’s dataset and Atlantic Ireland. Atlantic Ireland held a new suite of deepwater projects in the Northern Atlantic. Q4 quarter saw continued high demand for our South Atlantic portfolio, both in Africa and Brazil. As Dick mentioned and it was mentioned in our press release, our decremental margins that we expect as we right size the business are in the 60% range. We are rightsizing our operations around the globe as is applicable to prepare for the future 2015. We will now open the call for questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Ole Slorer of Morgan Stanley. Please go ahead.

I think it’s difficult to have a view on anything at the moment without having some view on how global oil demands -- supply versus demand is incrementally moving. You mentioned 1 million to 1.5 million barrels of excess capacity at the moment production -- are you talking about production relative to consumption or production capacities there has been another firm commenting a little bit about the difference of the two. Well, what’s your view on this issue and also how we are moving? You gave some color on North America. Maybe you could also elaborate so at what point do you actually see North America production sequentially rolling over when rates are down year-over-year? And also where else in the world do you see issues with production emerging as a result of the current CapEx cuts? And on declines you mentioned DIA number. But I would imagine that the decline is also a function of the investment in the field. So if you can shed some light on your views on that.

Well, starting with the methodology that we use to look at U.S. production, pretty much frame that in the unconventionals. So if you apply those numbers, and I gave general numbers, but when we apply the specific numbers to the individual basins there is a possibility depending on the number of wells that are drilled, completed and stimulated that we could see a reversal in production gains from unconventionals in the U.S. sometimes in the fourth quarter of this year. So, that’s why we are predicting as we did back in 2008-2009 as a V-shaped recovery because as you look at rising oil prices, the cost of capital net present value of wells I think right now in the Bakken you have got 775 wells that have been drilled but have not been completed and stimulated. So there is a backlog that backlog will start to be eaten into when crude prices get to a level where it makes sense for those operators to complete and stimulate those wellbores. Worldwide areas that we think that will be the hardest hit with respect to challenges on maintaining production look no further than Russia, this will be a high decline rate environment. When we look at the amount of investment that’s gone in, the investment needed that certainly will be one area that is certainly susceptible to high levels of production declines somewhere on the order above our worldwide decline curve rate of 2.5% continuing certainly in the North Sea where we will see decline curve exacerbated due to the lack of investment. Other areas that production gains might be needed would be Central and South America and some portions of West Africa.

And just to clarify when you say year-over-year in reversal of gains, sorry fourth quarter reversal of gains do you mean year-over-year that in the fourth quarter as when you expect year-over-year declines?

That is correct.

Secondly, looking at your own business and its context and comparing it what you and I describe as cycle should be similar to the last one you went through. At that point in time you went down I think about 12% or so 12.5% year-over-year third quarter ’08 to third quarter ’09 you are guiding something similar to that now here in the first quarter, your business from a revenue mix that in the directions is reasonably similar but you are now making much more money out of a couple of high-tech products. Do you think that it makes you more than normal as operators’ cuts back on anything they can cut back on I mean the HERO charges and FlowProfiler are certainly initiative products, but are there risks of a bigger decline do you think compared to the prior cycle or should be similar. How do you think about that?

Well, because we do have a higher level of production enhancement revenues at higher margins, it could look dissimilar with 2008-2009 just because when you look at margins in production enhancement they are so much higher, and it is a higher percentage of our business. That being said with rolling out FlowProfiler and things like our KODIAK Energized Perforating System, I will turn that over to Monty on some comments on market penetration of those that might certainly meet those declines that we would see due to lesser activities.

We have spent the last two weekends with key client groups discussing exactly those products and a few others that how they can derive more value and what they are doing. How they can derive value from their reservoirs by using these services, these perforating methodologies and products to enhance what they are doing and get more out of it. Those two client groups are very well received on these, a lot of interest and expanding the use of both the FlowProfiler and in particular the KODIAK Energized Perforating Systems to enhance what they are going to be doing in this coming year. We have a couple of more of these sessions planned and on the schedule with some more key clients in the coming couple of months. And we are encouraged that our market penetration will in fact increase as the clients seek the best value in what they are doing.

The next question comes from James West of Evercore ISI. Please go ahead.

Dick a quick question for you on liquidity at this point, and I am sorry if I missed this earlier, but how much do you have available to repurchase stock at this point?

Yes, what David referred to was our revolver going up to 350 million. And so what we gave on the call about the amounts drawn at 206 million, so we have got another say 344 million.

And then in terms of timing of getting back at the market, you have obviously not reported earnings when can you start buying back stock again? Can you buyback I mean today your stocks were down it looks like pretty large, can you get back in today or do you have to wait few days?

We follow the various NYSE and Euronext rules. And when we have all inside information public those restrictions don’t apply at this point.

Let’s just say when we see that James when we are back in we will be certainly aggressive buyers at these levels.

The next question comes from James Chase Mulvehill of SunTrust. Please go ahead.

Just wanted to touch on the reservoir description, I think most guys I talk to kind of have struggled with how to model this segment, so if you can kind of just help us understand, how much of this segment is driven by exploration spending and kind of OpEx or production related spending? And then talk to how much of this segment is driven by NOC excluding Pemex and Petrobras? And then how much is assumed by kind of IOCs?

Okay, think about a reservoir description in its total being a very international, very crude oil-related business, so the 85% of their revenues are generated from reservoirs, fluids and rocks outside of the U.S. So that would be one parameter. It is a very development and production oriented business, so it doesn’t have a lot of exploration component. In needle we look to 2008 and 2009, I think those revenues were down just a couple of 3% and we would expect that in 2014 and 2015 as well. So think about that as a stable platform, looking at fields that are already under production, projects related to enhanced oil recovery projects both on the fluids and the rock side. And as we try to make the theme of this earnings release, the importance of reservoir fluid especially high-end within Core is this is a business that essentially Core has a wide technological lead on all others. We’ve been asked many times about this structural decline of this business, we don’t know where this is coming from, but certainly when I look at that business, it is growing double-digits year-over-year-over-year. So that part of the high-tech fluid business is certainly a dull weather in coming and holding revenues and holding margins in that business.

One quick follow-up, just so we’re not surprised as we move forward to 2Q and I know there’s a not a lot of visibility, but if we think about oh what happened in ’09 and we look at year-over-year not quarter-over-quarter the peak year-over-year revenue declines they were 17% if we looked at it quarterly and so is that a fair assumption to say that you won’t do worse than 17% year-over-year as we roll forward into 2015?

Little too early to tell on that, let’s see how the Q1 rolls out and how many rigs go down. And that’s why we didn’t give any further guidance. Perhaps on the conference calls from other oil field service companies, they will then assertion some solid information on there on what they see in Q2.

And decrementals would be much better than 60%?

Well we’re striving towards that and we’ve got to right size our cost base which we are doing today.

The next question comes from Phillip Lindsay of HSBC. Please go ahead.

Two questions if I could. First one is reservoir description related, when you look at the six or so flagship labs that you have internationally where would your main utilization concerns be outside the U.S. and further if we look back at the last downturns in 2009, slightly unusual performance I thought from the business, margins were actually up on lower revenues, can you just remind us was there something one-off in nature about that performance or was the mix particularly favorable for example or do you think you can actually repeat that this time around?

I don’t know if Phillip we can repeat it, but remember back in 2008-2009 we did have a good bit of support of worldwide deepwater developments. That’s a little lesser today, although we duly want that we think that the deepwater Gulf of Mexico will be a stalwart in adding and/or maintaining a revenue base with the possibility of maintaining or increasing margins and also we’ve made number of comments on Core’s reservoir fluid business also being some support for those revenues. Areas of weakness that we anticipate in taking actions on would certainly be Canadian operations our Advanced Technology Center in Calgary would be one. And then the other would be the Asia-Pacific arena with our flagship lab in Kuala Lumpur. Other than those two, we see steady as it goes through the year even though international spending probably will be down somewhere on the order of 10%.

Okay, surprising to hear Europe or Aberdeen absent from that…

Yes Phil as you know because you visited there, heavy in the fluids business. And so they are a prime example of the market share and the technological lead we have in those business and certainly that is our worldwide leading fluids lab so it’s no surprise to us that they’re not including in those remarks.

Second question, look to get your views on rig productivity as well as well productivity today versus 2009 or previous downturns obviously can’t show the mix is different today, so what is your view on how production rates may fall versus previous downturns?

Well, I think -- we think they’ll fall higher. As we think about all the methodology that has been used, what are we trying to do? We’re trying to speed up when we capture that NPV. So when we look at the number or the length of the lateral, the number of stages that are being used, the number of propane that’s being pumped, it is indeed the capture that MPV in a quicker period of time. So when you look at decline curve rates in these unconventionals, you’ll actually see that they have increased over the year slightly but due to capturing that NPV in a quicker part of time.

Okay. The next question will be from Rob MacKenzie of IBERIA Capital. Please go ahead.

A couple here somewhat related to what we have heard before. I guess one of the questions I get from investors a lot is what does the next debt cycle look like? And to put it into context and using of your language we have seen apparently a decline in spending on some of the established unconventionals. Which plays do you think are likely to be and the relevant with each one the primary drivers of Core’s growth in the next debt cycle?

Well, certainly, international deepwater will go to the forefront once again, probably followed by activity levels in the Middle East so those would be really the two that we continue to concentrate on. You’ve got to mention unconventionals you got to keep that in the certainly in the listing of areas on the upturn when we get a rebound in crude oil prices so I would think that would frame it Rob.

And calibrating your kind of as you have been giving some color in your guidance for the first quarter. I understand the high decrementals. But if were to normalize for not being able to keep up the cost and say if you were able or put another way if you were able to cut cost commensurately with the decline where do you think that EPS number would be? Once you get the costs lined up with along with activity?

An EPS number, probably with revenue down 12% decremental somewhere in the 20s so probably somewhere on the order of, I’m doing the math in my head a 1.28, something like that I think that mathematics works.

And do you expect the similar kind of quarterly progression this time versus say 2008-2009?

Typically yes, and let’s see how Q1 goes out and how many rigs do go down. We have been surprised by the number of rigs that have gone down since the peak. We think that trend continues.

And due to time constrains is there time for one more question sir?

Yes, I will take a couple of more Andrew.

All right, we have Kurt Hallead from RBC. Please go ahead.

Interesting times indeed, yes I am just kind of curious Dave, if I take to wanting questioning this way, right. This kind of reminds that if you kind of look at the lot of the rhetoric and commentary and the rig count drops and the production curve increases on crude oil, I don’t know. It could be a lot of the similarities that were made a couple of years ago about natural gas and now natural gas production curves are going to roll over and I understand there is dynamics there that with associated natural gas could mask those elements. But I am just wondering when you look at this dynamic and the question that we have been getting about duration of a lower oil price environment. You have already spelled out your scenario of a much more of a V-shape recovery. But when you go on and kind of risk assessed your outlook what do you think the risk of that outlook could be? What could cause it to be less as a V and more of a U let’s say?

Production gains from -- unexpected production gains from other parts of the world so for instance if you had unexpected production gains off of in the Atlantic margins area we currently don’t see those occurring or rapid increases in production from projects in the Middle East we don’t see those occurring. Well I guess that would be one factor that could make it a U or even tend to an L shape recovery. But we just don’t see that in the cards we’ve got the laws of physics and thermodynamics that go to work every day on the producing oilfields. Moreover, if we look at the oil versus natural gas market another contained market for natural gas here in the U.S. and a much more stable production base in that market as opposed to a worldwide crude oil market especially when we’re going to see exports of crude oil to the international marketplace probably be approved in earnest over the year or year and a half.

We have a question then from Blake Hutchinson from Howard Weil. Please go ahead.

I will just keep it to one and keep it pretty open-ended for you David just because I am tailing in here.

Thanks Blake.

Just I was hoping to get it’s fairly well delineated where we are going here in the U.S. And I think you noted earlier that your international outlook is kind of predicated on risking explorations out of the book and then putting turning it up versus the kind of ’08-’09 timeframe. But maybe you could just take us around in terms of your franchise specifically and give us some of the positives and negatives that you see from your broad international franchise in ’15 over ’14. You talked somewhat about the product line maybe geographic winners and losers or whatever you like to catch that can you maybe give us the greater feel for how you think the international market unfolds for the year-over-year period?

As I have mentioned we have looked at the international market we think spending year-over-year can be as down as much as 10% with some of the areas being the most affected would be Central and South America, parts of the West Coast of Africa, certainly North Africa, Asia Pacific and certainly Russia. We would see higher levels, relatively higher levels of activity levels for us in Middle East and in North City.

Okay, that’s helpful.

Yes, Middle East being rocks and fluids and North Sea primarily being fluids.

Just one point of clarification, Dick and we talked a lot about 60% year-over-year decrementals for the first quarter, just oversetting the first quarter right. And I thought I heard it 80% coming to your preamble so was that specifically directed at year-over-year production enhancement. I guess I would think of that as being more maybe 100% plus decremental, I am just making sure I didn’t hear an 80% in there incorrectly?

You heard me say that but I was incorrect and misspoke, it’s 60%.

I would now like to turn the conference back over to David Demshur for any closing remarks.

Okay, well I would like to thank everybody for joining us this morning. In summary, Core’s operations posted another all-time record quarter. We know significant challenges await in 2015. However, we have never been better operationally or technologically positioned to help our clients to maintain and expand their existing production base. We remain uniquely focused and are the most technologically advanced reservoir optimization company in the oil field services sector. The company remains committed to industry-leading levels of free cash generation, returns on invested capital and excess capital being returned to our shareholders. So in closing we would like to thank all of our shareholders and the analysts who follow Core and as already noted by Monty Davis the executive management and Board of Core Laboratories gives special thanks to our 5,000 worldwide employees that have made these outstanding results possible. We are proud to be associated with the continued achievements. So thanks for spending your time with us this morning. And we look forward to our next update. Good bye for now.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.