Core Laboratories N.V. (CLB) Q3 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the Core Laboratories' Third Quarter 2015 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 and good afternoon in Europe, and good evening in Asia Pacific. We would like to welcome all of our shareholders, analysts and most importantly our employees, to Core Laboratories third quarter 2015 earnings conference call. This morning, I'm joined by Dick Bergmark, Core's Executive Vice President and CFO, Core's COO, Monty Davis, who will present the detailed operational review; and Chris Hill, Core's Chief Accounting Officer. The call will be divided into five segments. Chris will start by making remarks regarding forward-looking statements. Then we'll come back and give a review of the current macro environment updating worldwide crude oil supply thoughts and then quickly touch on Core's three financial tenets by which the company employs to build long-term shareholder value. Chris will then follow with a detailed financial overview and additional comments regarding building shareholder value, followed by Dick Bergmark commenting on Core's fourth quarter 2015 outlook and a general industry outlook, as it pertains to Core's prospects in 2016. And then call will be turned over to Monty who will look at 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 horizontal wells, deepwater wells, and then, highlighting some of Core's operations and major projects worldwide. And then we'll open the call for Q&A. I will turn it back over to Chris for remarks regarding forward-looking statements. Chris?

Thanks, David. Before we start the conference this morning, I'll mention that some of the statements that we make during this 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 climates and other factors, including those discussed in our 34 Act filings that may affect our outcomes. Should one or more these risks or uncertainties materialize or should any of our assumptions prove incorrect, actual results may vary, in 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 a more detailed discussion of some of the foregoing risks and uncertainties, see item 1A, risk factors, in our annual report form 10-K for the fiscal year December 31, 2014, as well as other reports and registration statements, filed by us with the SEC and the APM. Our comments include non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measure is included in the press release announcing our third quarter results. Those non-GAAP measures can also be found on our website. With that said, I will pass the discussion back to David.

Thanks, Chris. First a current macro view from Core Laboratories, we believe that the worldwide crude oil supply and demand markets are well on their way to balance by year-end or in early 2016. On the crude oil supply side, U.S. crude production peaked in April of 2015 and over 9.6 million barrels of oil per day. Last quarter, Core projected U.S. production to fall over 500,000 barrels per day by year-end 2015 owing to high decline curve rates associated with the over 5 million barrels of oil being produced from tight oil and unconventional reservoirs. These projections proved to be too conservative as U.S. production has already fallen by 500,000 barrels a day based on current information. And Core now believes, that U.S. production will fall over 700,000 barrels per day by year-end 2015. This generates an estimated net crude oil decline curve rate for U.S. production of approximately 7.8% more than twice Core's newly estimated net worldwide crude oil decline curve rate of 3.1% up 60 basis points over earlier estimated worldwide crude oil decline curve rates of 2.5%. The 60 basis points increase is tied directly to the elevated early year net decline curve rates of 70%, 40%, and 20% for the first three years of production respectively from tight oil and unconventional reservoirs. Therefore applying the estimated 3.1% net crude oil production decline curve rate to current worldwide crude production of approximately 85 million barrels per day, means the planet will need to produce over 2.6 million barrels of new oil by this time next year or production will yet again fall internationally. To maintain current levels of production a year from now, the planet will need to produce 2.6 million new barrels, that's just not going to happen. To make up for some of this deficit, producers can produce crude from the world's dwindling spare capacity which currently nears zero. Internationally, last quarter, Core believed that the ultra high levels of Middle East production were not sustainable, and production cuts were announced within weeks of our last quarterly EPS release. Core believes the Middle East production levels will continue to fall in Q4 led by declines in Iraq notwithstanding unknown and unpredictable crude oil supplies from Iran. Other than the opaque market of Iran, Core sees no large viable additions to crude oil supply in 2016 to offset the estimated 3.1% net worldwide crude oil production decline curve rate. Therefore international production will continue to fall below today's unsustainable levels. On the demand side, the latest IEA estimates are for demand to increase 1.8 million barrels of oil per day in 2015 followed by another 1.2 million barrels increased demand in 2016 tromping all of the mixed economic news from Asia Pacific especially China recently in the news. Paradoxically so far in 2015, China demand for crude oil continues to occur at record levels. Therefore Core continues to see a V-shaped recovery getting underway in 2016. The industry is still on the left hand side of this V going into Q4 perhaps with activity upticks in early 2016. Now a quick word on Core's three financial tenets by which the company employs to build long-term shareholder value. This quarter marks Core's 20th anniversary is a publicly traded company. The three financial tenets has guided Core from our September 1995 IPO price of about $2.86 a share to where the shares trade today, and we will continue to adhere to these tenets as they have proven very successful for our long-term investors. In the third quarter, Core generated free cash flow that exceeded net income for the fourth consecutive quarter and converted over $0.24 of every revenue dollar into free cash for the first nine months of 2015. Also in the quarter, Core once again produced the industry leading return on invested capital. And finally in the quarter, Core returned over a $1.22 per common share back to our shareholders and a total of $3.62 for the first nine months of 2015. I'll now turn it back over to Chris for a detailed financial review. Chris?

Thanks David. Looking at the income statement revenues were $197.3 million, down only 3% sequentially. We continue to be pleased with our execution in results considering the market conditions. Of these revenues, services for the quarter $151.1 million, down only 4.3% sequentially compared to $156.9 million last quarter, and a strong performance given the reduced industry activity levels seen across the globe and a continued weakening in some foreign currencies. Product sales which are tied to more North America activity $47.1 million for the quarter, virtually unchanged from $47 million in the second quarter in an environment where horizontal rig count in the U.S. fell over 7% sequentially. Moving onto cost of services for the quarter, they are 62.7% of revenue improved slightly when compared to 62.8% in the prior quarter, so despite lower sequential revenues our service operating margins expanded again this quarter which confirms the benefits from our cost reduction action are being realized and pricing did not play a part of big part in our results. Our cost of product sales is 74.1% of revenues, also improved nicely from 76.9% in the prior quarter, again these improved profitability results were achieved with comparable revenues in lower industry activity levels. This improvement was a direct result of our cost and structure reduction efforts which are now being realized. G&A for the quarter is $12.2 million compared to $12.6 million in the previous quarter. Depreciation and amortization for the quarter at $6.9 million is unchanged from last quarter. Other expenses this quarter primarily includes foreign exchange losses of $2.6 million. The guidance we gave on our last call for this quarter specifically excluded the impact of any FX gains or losses. So, accordingly our discussion today in pro forma EBIT and EPS excludes this foreign exchange loss. Excluding those FX losses to conform to our guidance pro forma EBIT for the quarter is $49.4 million compared to $48.9 million in second quarter. Ex-item our operations generated best in class incremental EBIT margins this quarter, resulting in an EBIT margin of 25.1%, a sequential improvement of 110 basis points. This is consistent with our previous guidance despite the contraction of industry activity. GAAP EBIT for the third quarter is $46.8 million. Income tax expense in the quarter is $10.3 million based on an effective tax rate of 22.5%. Net income for the quarter ex-item is $35.4 million, while GAAP Net income is $33.4 million. Earnings per share for the quarter is $0.83 on the same basis that our guidance was given and is up sequentially from $0.82 earned last quarter. Our GAAP EPS for the third quarter is $0.78 per share. As we move onto the balance sheet, and in the interest of time, I'm only going to highlight the items we feel are of interest to the audience or have materially changed from previously reported balances. Cash is $18.5 million, down from $23.4 million at prior year end. Receivables stand at $152.4 million down $3 million sequentially and down from a $197.2 million in prior year end. Our DSOs in the quarter are 66 days and not materially changed from prior quarters. Inventory at $44.5 million is also down $3 million sequentially or almost 7% as we continue to work off prior year end commitments which were based on expected activity levels existing before November 27 last year. We expect inventory to continue trending down as the year progresses. Our current assets stand at $26.9 million down sequentially and down from $37.9 million at prior year end primarily due to a reduction in current deferred tax asset and timing of tax payments. Intangibles, good will, and other long-term assets had no material changes in the quarter. And to the liability side of the balance sheet, our long-term debt stands at $428 million compared to $421.5 million last quarter and is comprised of $150 million in senior unsecured notes and $278 million drawn on our $400 million bank revolving credit facility. The increase in borrowings came as a result of our increased share buyback program. As of today drawings under the credit facility are $287 million and we have $88 million available. Shareholders equity ended the quarter at a deficit of $5.9 million, down from the year-end balance of $94 million, primarily due to share repurchases and dividends in excess of net income since the end of last year. As we've previously discussed, clearly book equity does not represent the solvency of a company, and we note that several S&P 500 companies who generate significant levels of free cash also have negative book equity because they return that free cash flow to their owners just as we have done. We do not have any debt or contract compliance requirements to report positive net worth. Capital expenditures for the quarter are $6 million, consistent with prior quarters this year, but down from 2014 levels. We expect CapEx program in 2015 to continue tracking client demand for our services and products. Consequently we expect full year CapEx to be approximately $25 million in 2015, so expectedly be down over 30% or about $12 million from 2014 levels. Looking at cash flow, cash flow from operating activities in the quarter is $43.5 million, and after paying our $6 million in CapEx our free cash flow is $37.5 million for the quarter which again is in excess of net income. For the first nine months of the year, we converted 25% of our revenues into free cash which generated $151.5 million in free cash flow, an improvement from 22% converted in the same period last year and represents over 150% of net income. Our focus on managing a business during this challenging environment continues to be on maximizing free cash flow and return on invested capital. During the quarter, we used our free cash flow, cash balances, and borrowings to pay $23.4 million in quarterly dividend and repurchase approximately 268,600 shares for $28.7 million. To the close of business yesterday, in the fourth quarter, we have repurchased a further 56,000 shares at an average price of $115.37 per share for an aggregate cost of $6.5 million. Our diluted share count now stands at 42.6 million shares. I will now turn it over to Dick for an update on our guidance and outlook.

Thank you, Chris. Let's walk through our industry outlook and its possible impact on Core Lab. We believe the balancing of worldwide crude oil markets is well underway as evidenced by the continued sharp decline in U.S. production during the third quarter 2015. Additionally, the International Energy Agency estimates that worldwide demand will increase this year by as much as 1.8 million barrels of oil per, and as David said a further 1.2 million in 2016 in response to these lower commodity prices. Tighter crude markets will prevail which in turn will lead to increased demand for our unique technology related services and products. It appears that U.S. crude oil production peaked in April 2015, and we now believe that production could fall from that peak by over 700,000 barrels per day which is more than our prior estimates of 5000 barrels per day by year end 2015. Adding support to this view, in Bakken production has now peaked while Eagle Ford production began to decline earlier this year. Currently, our estimated net decline curve rate for all U.S. production is 7.8% due to the concentration of U.S. production coming from high decline rate unconventional reservoirs more than doubling our newly increased estimated net worldwide crude oil production decline curve rate of 3.1%. In addition to second half 2015 production declines in North America including Mexico, international production declines are also likely in Europe, Russia, South America, and Africa. In 2016, looking forward at current activity levels in North America, year-over-year production declines of over 900,000 barrels of oil per day are expected in Canada and U.S. while international production levels are expected to continue to decline modestly. We believe that recent downward production revisions in Mexico and offshore eastern South America confirm these views which should precipitate higher commodity prices and then a recovery in our business in 2016. So let's talk about our Q3 results and Q4 guidance from the perspective of verses this notion of a consensus. You may remember that we filed an 8-K last month updating our view on Q3 and Q4 guidance for Core Lab as a result of the now well-known new leg down in industry activity. We stated in that 8-K that for Q3 we didn't see a change in EPS although revenue would in all likelihood be lighter. Further we discussed how Q4 results would be materially lower than Q3 as a result of the continuing decline in industry activity. In fact, this commentary was no different than most general industry discussion at that time. That being said, we also commented that we felt we should outperform the group in Q4 just as we have so far in this Q3 reporting season when measured by our more resilient revenue, higher EBIT margins, superior best in class incrementals and the highest free cash flow conversion as a percent of revenue. While many in the Analyst Community did update their Q4 guidance as a result of our preannouncement surprisingly several do not. Consequently the street consensus for Q4 revenue and EPS is quite stale. So just a cautionary note for those who are trying to make comparisons of our new guidance to this consensus, to make that comparison more of an apples-to-apples exercise, one should use the street estimates that were posted after our preannouncement and not use the one still posted up before the preannouncement. Those earlier estimate should have been withdrawn or amendment. Using the current estimates, our new Q4 guidance is reasonably in line with the current relevant consensus. In spite of our view of a recovery in 2016, for the fourth quarter 2015, we project further industry activity declines in North America tight oil plays. Currently, U.S. rig counts are down 8% from average third quarter 2015 levels. [Oil] company 2015 operating budgets are at very low levels and nearing exhaustion which we believe will force the North America rig counts to further contract later in the fourth quarter. Moreover extended operating suspensions are likely during the North America holiday season. International rig counts are projected to be flat to down in the fourth quarter as well. With that as a backdrop, we project fourth quarter 2015 revenue to fall sequentially approximately 9% to $180 million with operating income falling to approximately $40 million producing sequential quarterly decremental margins in the 50% range. Fourth quarter 2015 EPS is projected to be in the range of $0.63 to $0.67 with free cash flow once again exceeding net income for the fifth consecutive quarter. All operational guidance excludes any foreign currency translations, shares repurchased other than those already disclosed any further restructuring or similar expenses and assumes an effective tax rate of 22.5%. Now let's turn it over to Monty for an operational review.

Thanks Dick. Third quarter revenues are down 3.2% sequentially from second quarter to $197.3 million. Operating earnings excluding FX increased 1.1% sequentially, and operating margins improved 110 basis points to 25.1%. We want to thank our employees around the globe for delivering important value added services and products to our client. Reservoir description revenues are down [0.8 of 1%] sequentially to $118 million. Operating earnings improved 1.5% and operating margins improved 60 basis points to 27.1% for reservoir description. Core Lab's Middle East operation continues to see high demand for EOR related services. Several projects were initiated or expanded and stopped during Q3. One of these projects involves combined rock and fluid testing at reservoir temperature and pressure conditions. During these lab experiments produced natural gas is reinjected into rock that contains an ultra-sour reservoir fluid. The objective of this testing is to help our clients understand about how the rock and fluids will behave in any pressure maintenance program. Core's unique experience with high H2S reservoir fluids work is critical to successfully and safely performing this analytical program. In another EOR project, Core is collecting samples performing PVT analysis in determining asphalt team on site pressures in response to various injected gases. This data will be used to determine if injecting CO2 main natural gas on alternative gas option will optimize reservoir performance and maximize ultimate recovery. This laboratory data is critical for selection of the best injection gas to minimize or inhibit asphalt team flocculation and prevent impairment of the reservoir. In addition to these EOR projects, Core is currently conducting field sampling [indiscernible] reservoir geology on a potential unconventional reservoir in the Middle East. Core's vast experience in evaluating shale and other unconventional reservoirs in North America and other geographical areas held us well positioned to evaluate and rank prospective unconventional reservoirs in unproven formations. Core Lab continues to see growing client's acceptance of its digital rock characterization services. In this endeavor, Core is effectively leveraging its position with industry's most expansive database of laboratory expertise on reservoir rocks. Core Lab has developed proprietary algorithms for establishing petrophysical properties from CT, micro-CT and other imaging techniques. Less sophisticated attempts to predict rock properties from pore imaging and CT data were impart or in whole based on theoretical mounts, an approach that often relies on gross simplification of complex pore system and lithological properties. At Core Lab, actual rock data forms the foundation for the predictive models. In the third quarter, core connected DRC studies on cores from the Gulf of Mexico, onshore U.S., and international basins, analyzing both conventional and unconventional reservoirs. Core continues to develop new offerings in this area through close collaboration amongst our senior scientists, mathematicians, and engineers. Core's CT-based lithotype and petrophysical property predictive tools now allow our clients to quickly gain insight into their reservoir rock properties, while companion samples work their way through traditional, rigorous laboratory programs that will ultimately be used to determine hydrocarbon reserves and model reservoir performance. Micro CT imaging is now also used in the sample selection process for sophisticated, reservoir condition flow studies. The high resolution 3D-imaging of plug samples helps our clients better understand how variations in the pore system properties will impact both laboratory test results and reservoir performance. Production enhancement revenues $65 million, fell 8% sequentially resulting in a drop in operating earnings of 15% and operating margins to 19.3%. Core Lab continues to work closely with many operators to utilize completion diagnostics to optimize completion and stimulation design and eliminate unnecessary costs. The global technology team for the production enhancement group recently co-authored three technical papers presented at the SPE Annual Technical. Conference in late September. All three papers focus on how tracer technologies can be extremely beneficial in determining the most cost effective techniques to maximize production. The cost optimization paper presented numerous case studies from multiple unconventional basins illustrating specific cost saving examples. The refrac paper discussed the results from 70 wells and documented the challenges of getting optimum restimulation coverage and effective diversion. The targeted perforated paper presented the innovative approach of tracing the [indiscernible] spacer to determine potential natural fracture areas that then specifically targeting those intervals during the stimulation process. The response to the topics presented has been outstanding. With the current market conditions operators are extremely focused on optimization and Core is perfectly positioned to provide the necessary technical support for this process. Operators' interest in restimulation of existing wells continues to increase dramatically. Many operators are now looking at refracs as the best solution in meeting their production goals with the least capital dollars. Core has realized the significance of these developments, and is dedicated to providing the critical technical expertise for successful refrac programs. The production enhancement team is being utilized to extensively help to design, implement and evaluate potential wells and areas for restimulation. Core is now utilizing both the proppant and fluid diagnostics and working with many operators to help define effective refrac geometry and evaluate diversion effectiveness. This may continue to be a major source of diagnostic work over the next six to 12 months. Reservoir management revenue of $14.4 million is flat sequentially. While operating earnings of $4.8 million are increased 43%, and operating margins improved 1,000 basis points to 33.6%. Core continued to develop new and sell existing Joint Industry Projects. The Permian section in the Midland and Delaware Basins, the Utica Formation in the Appalachian Basin, and the Haynesville plays are some of the main areas of interest for our clients. These studies contain a wealth of data, coupled with sophisticated analysis of key reservoir engineering and geological factors, for these and other unconventional plays across North America. Much of the interest is driven by companies that are using the studies to expedite the evaluation process and minimize the risk associated with acquiring new assets. In addition to Joint Industry Projects, Core Lab experienced an increase in proprietary consulting work, part of this work was driven by the asset evaluations noted previous. Many of these new companies have [affirmed that lack] with technical expertise to do a full workout, again the focus has been on the Permian and Appalachian Basin of this work, although our recent project looked at the asset value of a major play offshore in West Africa. In all of these cases, Core provided a depth and knowledge that client needed to properly evaluate the assets. Core is also developing new services that utilize unique Core Lab technology coupled with the geology to enhance the effectiveness and efficiency of our clients well complete. The trend in the industry to control costs by better planning and the customization of well completion programs. Strong geological models are required to optimize completions, when such a model is integrated with data from the completion diagnostics, specialized Core analysis, down-home monitoring, preparation planning and hydraulic fracture modeling, the cost effectiveness and efficiency of these completion jobs can be vastly increased. Andrew, we'll now open the call for questions.

[Operator Instructions]. At this time, we will pause momentarily to assemble our roster. The first question comes from Blake Hutchinson of Howard Weil. Please go ahead.

Good morning, guys.

Hey, Blake.

First off, just a couple quick questions around 4Q guidance, given your view for '16 that a radical kind of moved down that we've experienced here in North America and the back half of the year as we exhaust budgets, you are probably not raising as fast as you would normally to write your cost structure, and therefore a decrement maybe is hard given the fact that you're not going to make more massive cuts, given your view of the '16. Is that a good way to look at it and what creates a bit of a false economy?

Blake, some of it is being able to take the cost out quick enough in reaction to the lake down and so that's why we talked about these decrementals at 50%.

So you are not keeping the cost structure in place, it's just a timing issue?

That is correct. So we're not withholding adjusting our cost structure in anticipation of a V-shaped recovery.

Okay, that's great. And then in terms of the reservoir description business, I understand that reservoir management you usually get some budget up in the fourth quarter. Are there portions of reservoir description that usually benefit from that, that we would say that you're not going to recur this year?

No, as you pointed out Blake, primarily those year-end discretionary purchases with excess budget primarily occur in reservoir management. We don't anticipate that happening this year, up end reservoir description that is really not affect it at all by year-end budget number.

Okay, great. And then I wanted to just get back for a second and ask a more of a big picture question. I think we've been in -- so much of the story has been deepwater development related and we all understand I think that you're as prone to variations in today's exploration spending, but with what we've seen for the last year or couple years in terms of deepwater exploration spend, when does that create a smaller targeted developmental and product pipeline for you? Is that a growth concern for '16 and '17 or is it a more of a kind of longer lead multigenerational growth returns [in the void] and kind of the exploration spend today as it translates into your developmental project work?

Alright. As you know less than 15% of our business revolves around exploration spending. When we look worldwide at deepwater development and those that need to be done, we certainly have -- we'll call it backlog, but we have targeted projects for a number of years to [indiscernible]. You just look at some of the recent reports out of FTI, in some of the ocean bottom system they have sold, I think this is a pretty good indicator that we have got a long way to run. I think one of the comments out of conference call was, this is the tip of the iceberg for some of these deepwater developments. With that being said, if you look at 2015, it probably is going to be our most successful year in the deepwater Gulf of Mexico. So we look for that to continue on in the deepwater Gulf of Mexico in 2016. And some of these other deepwater plays because enough costs have been taken out that they'll go on for development as well.

Okay, so you feel good about the pipeline for the coming years there?

Yes, that is correct.

Okay, great. Thank you guys, I'll turn it back.

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

Hey good morning, guys. So I'll follow-up on Blake's line of questioning here. The Gulf of Mexico's is going be a pretty good year this year. And as we look at to 2016, how much visibility we have into the Gulf of Mexico?

Well, you got to a blend in what you think crude oil prices are going to be. We think they are going to be materially higher as we go along in 2016. So right now, our project queue that we have lined up right now looks pretty inviting. So I would say in the deepwater Gulf of Mexico, visibility going into Q1 and Q2 is pretty good. Other deepwater slots around the world, offshore eastern South America, West Africa, some parts of the North Sea and Asia Pacific, the visibility not as clear, but certainly we think we will do as well in the deepwater that we did in Q3 and Q4 this year in Q1 and Q2 of next year.

Okay. If we think of Gulf of Mexico as a percentage of your deepwater revenues, is it like a quarter half third, how should we think about that?

I would think this year probably, if we look at third and fourth quarter from deepwater, probably about half.

Okay, alright. I'll turn to the balance sheet real quick. In this environment it's still two times leverage your comfort level?

Yeah, that's right.

Okay. And if I heard you correct, you had $287 million outstanding on the revolver?

Right. So we have got about another hundred plus million under revolver, if you use our bank covenant of 2.5 times, we're still well within that, if we fully draw the revolver.

Right. Any thoughts on maybe terming out some of the revolver, I know you have got some interest rate hedges and stuff in there, but any thoughts on terming that out?

Well, we actually in some regard did that when we extended the credit facility for five years, so we have a few alternatives for five years. We take a view on floating versus fix and maybe that's where you're going and it's kind of at 50-50. So we fixed it, and half our debt and other half is floating I at this time.

Okay, alright. And then lastly on buybacks, how are you guys approaching buybacks in this environment?

Buybacks continued to be opportunistic, so no change there. Chase, clearly the dividend is first and then buybacks are after that, so we've been opportunistic and will continue to be.

Okay. That's all I have. Thanks Dick, thanks Dave.

Okay, Chase.

The next question comes from Brandon Dobell of William Blair. Please go ahead.

Thanks, good morning guys.

Good morning, Brandon.

I wanted to see, in your conversations with customers if they are aligned or maybe not aligned around how you guys are approaching or thinking about oil prices in '16, I guess trying to get at, if they are aligned maybe there is some indication of what they think they are on, their spending package may look like or if they are preparing for an environment that doesn't line up with how you guys think?

Yeah, I would say that's mixed bag, the majors because of their balance sheets are probably going to be a little bit more aggressive. The independents and smaller independents that have to live off of cash flow probably not so much, so fortunately we receive 30% of our revenue from major oil companies 15% from national oil companies, so those budgets will tend to be is effected as much as some of the independents and smaller independents.

Okay. And the along the same lines, I think in your customer conversations, I know there has been obviously a pretty tight focus on costs for the last nine months or so but there is just like I said, broad idea that people at some point need to really focus on returns as opposed to just driving oil costs lower, do you see a shift in terms of how people are approaching the various products, the various offerings that you guys have and is there a consorted move towards just buying the best product to get the best recovery rates or is there still a bunch of customers out there that just trying to drive dollars as well as they can?

Yeah, Brandon, again a mixed bag, when you look at our technologically sophisticated clients, they still are looking at returns and are buying technology to enhance their return on their invested capital, and you do have a number of independents, that all they are looking and doing is to drive down costs. They don't tend to be as good a client for Core Lab as the technologically sophisticated clients, and you can see in the third quarter our operating margins did go up and again that was in [spot] to some cost cutting, but moreover looking at some clients still willing to invest in higher technology services and products.

Okay. And then final one for me, as you guys think about the -- let's call it the ark on furloughing or pulling back on hours for employees. How much more of that should we expect as you finish out year-end or is it really going to be letting people go as opposed to furloughing them as we move into '16?

Brandon, we're using both options there. We have some further rifts that are going to take place in the fourth quarter, and we're also going to do some furloughing as the activity levels allow that and call for it in any shrinking activity particularly if we saw hiatus inactivity as some people are projecting for December, we would use the furloughing more aggressively.

Okay, great. Thanks guys.

The next question comes from Rob MacKenzie of Iberia Capital Partners. Please go ahead.

Thanks guys. I guess my question is probably for Monty or Dave. Looking at the model here, it's interesting that sales revenue was flattish quarter-over-quarter which I've only thought was largely a big part of Owen's business. Does that indicate to me that your perforating business is holding up quite well? And if that's the case, it seems like most of the reduction in North America is coming from the frac diagnostics perforating business. Is that correct?

You're looking at production enhancements.

You're talking about sales, product sales and within product sales, we have Core Lab Instruments, we also have Downhole Measurement Instruments, so it's not 100% Owen, so just be careful on that extrapolation era.

But would you answer in every way, would you say that frac diagnostics is down probably more than Owen?

No they are about the same. The production enhancement, as the rig count is fallen the fuel wells being completed, it affects both of those units.

Yeah, Rob, when you think about it, the number of stages that are completed in stimulated would touch both of those guys equally, perforating guns on the product side and a myriad of diagnostics on the server-side.

Okay, that's helpful. Coming back to an earlier question, one of the things Schlumberger talked about is that they are having -- they are wishing that operators which shift more towards a dollar per barrel focus versus a dollar per well focus, and indicated that they are really not having much luck selling new technology so far this down cycle. It sounds like you guys were not quite having the same experience. What technologies in particular do you think are really resonating with your customers here?

I think the technologies that Monty reviewed briefly on his oratory and the right up that we had for the release of the Digital Rock Properties, the technologically driven deepwater reservoir fluids work, those margins are holding very well with respect the client still employing those technologies, Rob.

And as I mentioned earlier, Rob, there are some companies that are going for just the cheapest completion or cheapest well they can get. So that maybe what Schlumberger was referring to, not everybody is looking at technology, but our client base tends to be the companies that want science in their wells.

Thanks. And then to your point on the V-shaped recovery, Dave, how should we think about what your incremental margins might look like? I know we've had some pretty steep decremental, should we expect the incrementals to be similar, higher, lower?

Yeah, I would think they would be similar or higher due to just cost reduction and then the level of automation that we've put in worldwide which was made more efficient by the purchase of Sanchez and then some of the multi-skilling programs that we're working on globally where we can have some of our operators do several tests at one time.

Okay. And my final question comes to kind of going into the first quarter. Obviously with fourth quarter guidance being down a fair bit, would we expect to see the normal first quarter seasonality or should that be more muted on sequential basis this year?

At this point Rob, we're thinking typical seasonal patterns where Q1 is going to be lower than Q4.

Okay, thank you. I'll turn it back.

Thanks Rob.

[Operator Instructions]. The next question comes from John Daniel of Simmons. Please go ahead.

Hey guys thanks for putting me in. I want to follow on, I guess on Rob's question you touched on trajectory for revenue into Q1, I'd like to get your thoughts just on the margin expectations given potential cost reduction efforts and things like that? Would you expect to maintain margins from the Q4 levels into Q1 or would you expect to see potential shift level in [lower] revenue?

No, probably drift upwards.

Okay.

We'll continue to work as Monty said on the cost structure and with the perhaps high grading of mix on the types of revenues, so perhaps we do see as David said an expansion of margin.

Just one maybe you'll take swag at Dave, but if your V-shaped recovery is correct any reason to think that you'll get back to sort of Q3 revenue levels by mid next year, is that you're working assumption or do you think it takes a little bit longer to get back to those levels?

No, I think Q2, Q3 those are possibilities.

Okay. Two other quick ones. Dick, I missed the G&A guidance for Q4, could you just repeat that, please or did you not give?

This is Chris. It should be about same as Q3.

Okay. And then just lastly on the refrac opportunity, you know the client interest is rising dramatically. Do you actually see that playing out in terms of increased activity levels next year, and just do you have any swag as to how many wells you're talking about that might actually be refrac out at the Haynesville Barnett in 2016?

We're seeing, John, that that is increasing steadily. We're looking at doing about 10 projects a month right now third quarter-ish, those are multistage projects as you probably realize when we go into frac. It done properly with the proper science is really the lowest-cost way to boost production as we're finding and many of our clients are, so we think that's going to continue to increase and there's certainly the Haynesville, the Barnett are areas that are prompted to have a delivery system for the [gas], so I think we'll see that continuing to increase.

Okay, thanks guys.

Okay, John.

And we have a follow-up from Chase Mulvehill from SunTrust. Please go ahead.

Yes, Chase.

Hey sorry, thanks for squeezing me back in. So I got a question about well productivity, you guys get to see a lot of wells, and you talked a lot of E&Ps. So how close do you think we are to maximizing well productivity for U.S. unconventional? Do you think that EOR is at peak?

No they have not peaked. What we're seeing right now is an artifact of low commodity prices because we're looking at the operators drilling up their very best acreage. And to that mind I think that on the last call, we spoke about the number of EOR projects that we have underway now in tight oil reservoirs. They again have expanded the number in Q3. So we'll look at the implementation of EOR to occur early in 2016 -- throughout '16 and into '17, so EORs will continue to increase the number of wells that will happen on will continually shrink though as the sweet spots in the very best reservoir rock end up getting drilled up.

Do you think that the completion technique has been optimized? I mean are we hitting?

No.

No?

Absolutely, not, not even close. Right now, Chase, we know that we can push a hydrocarbon, a long chain hydrocarbon about 120 feet at an average tight oil reservoir, so if that is indeed the case we should have a stage every 240 feet or feet apart, stages are still more than on average 400 feet apart, so we still have some optimization going on the drilling and completion stimulation techniques. We are still proponents of longer laterals, and if you look at companies that are drilling the longest laterals out there Pioneer Natural Resources come to the mind. They are 10,000 footers, but looking at the number of stages they are putting in their in the amount of profit that's still a blueprint for success and higher EORs.

Okay. Last one, you guys have a good feel of this as well, so what do you see in for the number of [ducks] out there in the U.S.? How does this kind compared to normalize level at current activity conditions?

Still a lot more than higher than the inventory, we'll see that get worked off we believe in Q1 and Q2 for the industry. That is a benefit to us because when the [ducks] do indeed get completed and stimulated that brings our services and products from production enhancement to their.

Okay, awesome. That's all I have. Thank you.

Okay Andrew. I think we're going to wrap so in summary Core's operations have never been better position to increase the level of enhanced oil recovery and recovery from reservoirs around the world especially those in tight oil plays and unconventional shales in North America. The company remains committed to industry-leading levels of free cash generation and returns on invested capital with excess capital being returned to our shareholders. So in closing, we like to thank all of our shareholders and the analysts that follow Core and especially our employees for joining us this morning. And as already noted by Monty Davis, the Executive Management and Board of Core Laboratories give special thanks to our 4,400 worldwide employees that have made these results possible. We are proud to be associated with their continuing achievements. So thanks for joining us this morning and we look forward to our next update at the end of the fourth quarter. Bye for now.

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