Good morning, and welcome to the Fourth Quarter Core Laboratories 2018 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] Please note, the event is being recorded. I would now like to turn the conference over to Mr. David Demshur, CEO and Chairman of Core Laboratories. Please go ahead, sir.

Thank you, Judith. 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 2018 earnings conference call. This morning I am joined by Chris Hill, Core's CFO, who will give a detailed financial review; followed by Gwen Schreffler, Core's Head of IR, who will make some comments on what Core projects for the first quarter of 2019; and then Larry Bruno, Core's President, who will present a detailed operational review. The call will be divided into five segments. Gwen will start by making remarks regarding forward-looking statements. We'll then review of the current macro environment, updating industry trends related to optimal well spacings, well positioning, parent-child well relationships and then new cutting-edge technology offerings from Core Laboratories. We will then review Core's three financial tenets, which the company employs to build long-term shareholder value. Chris, will then follow with a detailed financial overview and additional comments on regarding building shareholder value, followed by Gwen, discussing Core's first quarter 2019 outlook and a general industry outlook as it pertains to Core's prospects. Then Larry will go over Core's two operating segments, detailing our progress and discussing the continued successful introduction of new Core Lab technologies, and then highlighting some of Core's operations and major projects worldwide. And then we'll open the phones for a Q&A session. I'll turn it back over to Gwen, for remarks regarding forward-looking statements. Gwen?

Thank you, Dave. 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 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 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 most recent Annual Report on Form 10-K as well as other reports and registration statements filed by us with the SEC and the AFM. 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 measures can also be found on our website. With that said, I'll pass the discussion back to Dave.

Well, thanks, Gwen. First, let's look at some macro and industry investment trends, then we'll have some comments on horizontal parent-child well relationships. This has been a topic of immense interest from all of our clients involved in tight-oil reservoir developments, and we have a number of projects in-house to try to define what is the proper upsizing, rightsizing and well positioning, and then some information on some new cutting-edge technological offerings from Core. Core is encouraged that operating companies are buying into operating within free cash flow and emphasizing returns on invested capital as demanded by today's investors. This trend benefits Core's – Core, whose clients tend to be technologically sophisticated and are heavy users of technology over commodity-driven solutions offered by drillers, pressure pumpers and/or wireline providers. During the fourth quarter, Core hosted several conference calls and industry sessions for various industry groups and analysts to discuss optimal well spacing, rightsizing, upsizing, well positioning and parent-child well relationship. Core Lab is uniquely positioned to provide technology-driven datasets to determine optimal well spacing and well positioning to eliminate the deleterious effects of horizontal well interference. To ultimately determine well spacings and cite better well locations associated with pad drilling, Core's most technologically advanced clients are cutting vertical and horizontal cores through the entire target pay-zone and also taking multiple reservoir fluid samples throughout that pay-zone. Detailed analysis of these cores and fluid sample provide information to the operator on micro-lithology, rock competence, rock mechanics, crude oil types and qualities, all datasets necessary to determine optimal well spacings and well positioning. As horizontal wells are drilled and completed and stimulated, Core's SPECTRASTIM, SPECTRASCAN and FLOWPROFILER EDS completion diagnostics technology can verify that wells are not interfering with neighboring wells on the pad, eliminating loss production and maximizing producible reserve. This…

Thanks, David. The guidance we gave on our last call and past calls typically excluded the impact of any FX gains or losses and assumed an effective tax rate of 15%. So accordingly, our discussion today excludes any foreign exchange gain or loss for current and prior periods. Additionally, we have excluded a $10 million non-cash charge recognized in the fourth quarter of 2018 for stock compensation expense. Although these performance share awards continue to be subject to future vesting schedules and company financial performance metrics, recognition of this expense is required by the FASB ASC 718 for employers when they attain their eligible retirement age. Now looking at the income statement. Revenues were $173.2 million in the fourth quarter, up 2% from the same quarter in 2017 and within our guidance we gave during last quarter's earnings call. For the full year, revenues were a little over $700 million, so up over 8% from prior year. Of this revenue, service revenue, which is more international, was $120.8 million for the quarter, down 4% year-over-year as international activity remained relatively flat and completions activity slowed in the U.S. onshore market during the fourth quarter of 2018. Product sales, which are more tied to North American activity, were $52.4 million for the quarter, up 17% year-over-year and were up 28% for the full year. Moving onto cost of services for the quarter are 71% of service revenue, remaining consistent with the last couple of quarters. For the full year, cost of services averaged 71% of our service operating – as our service operating margins continue to be some of the strongest amongst oilfield service companies. Cost of sales in the fourth quarter was 77% of revenue, up from last quarter due primarily to the absorption of our fixed cost on lower…

Thank you, Chris. During the fourth quarter 2018, the worldwide crude-oil market added supply, likely in anticipation of the Iran sanctions. Consequently, during November and December, the per-barrel price of crude oil fell by more than 40% from the year’s peak in October 2018. However, global crude-oil inventories exited 2018 at approximately 38 days of consumption, consistent with a multi-year trend of declining crude-oil inventories related to demand. The International Energy Agency's most recent estimated worldwide demand projections remain strong at 1.4 million additional barrels of oil per day anticipated to be needed in 2019. After five years of muted investment in international, offshore and deepwater projects, oil companies announced more than 30 upstream FIDs in 2018, an increase of more than 20% from 2017. The renewed investment at a global level is critical in order to meet future supply needs. Recognition of the need for investment is evidenced by the FIDs announced over the last two years and Wood McKenzie's estimation of another 30 upstream projects for 2019. However, we anticipate a slowing in further project announcements until confidence in the balance of the global crude-oil market is restored. Core believes there will be a positive correction in the temporary oversupply of crude oil by the end of the first quarter 2019, which should encourage additional FID approvals for projects announced. As customary, we expect typical sequential seasonal industry patterns will cause Core’s first quarter 2019 to be down, and international field development spending will be funded largely from operating budgets. International recovery on a more broad-based scope is expected to improve as 2019 unfolds. The Company believes that the 2019 international growth is expected to reach mid to high single-digit levels. Our Reservoir Description segment continues to discuss international projects with clients, which are in alignment with FIDs…

Thanks, Gwen. I'd like to open by thanking our global team of employees for providing our clients with integrity, new technologies and innovative solutions to help them optimize their reservoirs. Our employers are Core Lab’s greatest asset. Looking first at Reservoir Description, during the fourth quarter, Core conducted analysis on shale core from our perspective unconventional play in Mexico that is in the early stages of being vetted by the operator. In order to fully evaluate these geologic formations, Core Lab brought to bare a wide range of proven proprietary laboratory technologies that were developed for unconventional reservoirs in the United States and Canada. These technologies include specialized geo mechanical testing, which are used to determine if the rocks are suitable candidates for fracture stimulation. Reservoir fluid saturation measurements which determine the relative amounts of crude oil and natural gas and water in the rocks, along with porosity, permeability, and neurology were and are still being determined. The results of this work will be used to assess the reservoir potential of this perspective, unconventional play as well as to determine the optimal completion strategies. This analytical program is ongoing. Also in Mexico, Core’s laboratory facility in Ciudad del Carmen has recently been expanded to handle the analytical challenges posed by conventional reservoir targets in the deepwater environment offshore Mexico. Some of these projects will encounter weekly to unconsolidated sandstone formations. Core’s patented – Core’s stabilization technology can be used to protect the cores from damage, both during handling at the wellsite and while in transit to the laboratory. Once the core reaches the lab, Core has a wide array of proprietary technologies for assessing soft formations. Upcoming deepwater offshore Mexico core projects of this type have already been committed to Core Lab. During the fourth quarter, a major oil company…

We’ll now being the question-and-answer session. [Operator Instructions] The first question comes from Byron Pope with Tudor, Pickering, Holt. Please go ahead.

Good morning.

Good morning, Byron.

Yes. I wasn't multitasking very well. And so I – as it relates to the Q1 guidance, I think, Gwen, I just wanted to confirm. With regard to Production Enhancement, was the guidance there that we could see the top line up there, sequentially slightly? And then part of the reason I posed the question is just trying to calibrate the exit rate for completions activity versus how activities trending on the completion type across the Production Enhancement portfolio as we start this year.

Yes, Byron. We see low single-digit increase for Production Enhancement as we go through Q1 and with completion activity, we think that that's going to be somewhat flat to modestly up at this stage in terms of how is trending as we exited 2019. So maybe we see that modestly up for Q1 is what we have put in our guidance

Okay. And then…

Yes. So revenue up, margins up, operating profit up.

Okay.

Sequentially for…

Okay, great. And then, Dave or Larry, for either of you. Just as I think about Reservoir Description in an environment where we all see increased international activity and hopefully, an increase in offshore activity well. Could you just remind us how you’re position there in terms of offshore, onshore exposure; and then just in terms of the fluids work versus Core reservoir rock analysis?

Yes, Byron. I think the first thing is to recognize a long and often repeated pattern of seasonal slowdown from Q4 to Q1 and that's factoring into our perspectives here. We do see the trend moving in the right direction in terms of our clients' commitments to large offshore and major international projects as Gwen and Dave both mentioned. We saw FIDs increasing from 2017 to 2018. We think 2019 looks kind of like 2018 in terms of future FID approvals. So I think that long-term trend looks good for us. In terms of the blend of rock and fluid analysis, still running about 60% fluids, 40% rocks.

Okay. Thanks. I appreciate it.

And Byron, additionally, if you look at the stacking effect of FIDs from 2016, 2017 and 2018, we are now starting to form a similar pattern that we saw with the stacking effect in 2011, 2012, 2013, 2014 and 2015 there that led to all-time revenue and margin highs for Reservoir Description. So if we can get a couple more years of stacking, we can return to those revenue and operating margin levels.

Great. Thanks, guys. I’ll turn it back.

And also Byron, we appreciate the note this morning. We did check with the NYSE, and the symbol FCF unfortunately has been taken.

That’s too bad. All right. Thanks, guys.

Okay, Byron.

The next question comes from Ian Macpherson with Simmons. Please go ahead.

Hi, thanks. Good morning, everybody.

Good morning, Ian.

Hey. I wanted to pick up where you left off in the prepared remarks on GoGun. We don't doubt that you guys have winning technology there, but I think we also observed that your competitors are moving broadly in the direction towards integration gun systems. So there is a general market push in that direction. And I wonder if you could speak to what the pricing or the competitive dynamics are that you're seeing out there? How this new paradigm gets priced? And part B of the question is, I just want to see where margins could head with this new product paradigm for PE? Because we had this big step down in margins from Q3 into Q4, maybe you could unpack that for us a little bit in terms of just volumetric decrementals versus leading-edge price or any other issues that we should think about as we think about margins normalizing for Production Enhancement with the new product mix throughout this year.

Okay, I'll take them, actually maybe the back-end of that first to kind of frame the picture here. The decrementals from three to four were on two – reflect two trends there. One was we had a very nice international sale volume in Production Enhancement products in Q3 that was non-recurring in Q4. And the other is you saw, as was reflected in the performance of everyone exposed to completions in North America, you saw that soft market, particularly in the back-end of the quarter and that impacted our Production Enhancement. With respect to the GoGun, the preassembled GoGun, I think, yes, you're right. We do believe we've got superior technology there. We think that the trend is toward preassembled guns. It's a market that we have not been participating in until recently. And so we feel like that's additive exposure for us to get into that side of the market. And that with the architecture that we have, we think that 20% of the market that we haven't been participating in, maybe somewhere around there, we think that can – we can now access that and maybe get 30% to 40% of that markets over the next year or so.

And again, I guess, just to revisit the question with regard to margin implications for that. Is there any pricing pressure and persistence in the market today, just given the recent slowdown or the slow start of the year in completion cadence?

I think the only pricing pressure that might be out there is the commodity part of the market, which we are not big participants in. That is in the simple raw guns, the tubulars and the milling of holes in the guns. We're not seeing a great deal of pressure in anyways on the high-quality energetics. We do think there's an opportunity to bring together the energetics and the preassembled gun with a Guardian technology to maybe offer us some margin improvement in that package system overselling individual components.

Got it. Thanks, Larry. And then if I could squeeze in just one more. Can you highlight on your new Wolfcamp EOR program? Is that – how commercial is that? Really, how much of that is we're seeing in your P&L for Reservoir Description today versus opportunity in the future?

So let’s talk a little bit about how these joint industry projects work for us. And so those are never done on speculation. They're all subscribed and what we find is a threshold level that’s required to trigger the study. And so in the third quarter we announced that we had subscribed that study. We just then, as you moved into fourth quarter, started doing analysis. Only a small portion of revenue has been recognized. But I do think it's important that we're seeing broader acceptance of the idea that we brought to the market commercially that there is EOR opportunities in these unconventional. So we’ll continue to add companies to that study over time. We now have the one going into Eagle Ford, and the one going now in the Wolfcamp. And so those will be building over – one in the Wolfcamp, in particular, will be building in terms of revenue into Reservoir Description over time. These are iterative projects. We have general directions and deliverables that we have committed to with our clients. But there’s always a discovery that goes on as we proceed with the testing. And then we collaborate very much with all the consortium members and we come up with redirections, let’s try something different, let’s try a different rate, different gas combination, different residence time for the injection gases, all those variables play into how the project unfolds. So still a lot of runway in front of us on that, as we add new clients and as we add new technology and come up with new technology to apply to these very challenging reservoirs.

Good stuff. Thank you very much.

Ian, thanks.

[Operator Instructions]

Okay. Judith, we're going to go ahead and close. In summary, Core’s operations continue to position the company for activity levels in Q1 of 2019, and we know significant challenges await. However, we have never been better operationally or technologically positioned to help our clients maintain and expand their existing production base. We remain uniquely focused and are the most technologically advanced reservoir optimization company in all of the oilfield services. This positions Core well for the challenges ahead. The Company remains committed to industry-leading levels of free cash generation, returns on invested capital with all excess capital being returned to our shareholders via dividends and future opportunistic share repurchases. So in closing, our 94th quarterly earnings release, we thank all of our shareholders and analysts that follow Core, and especially all of our employees and say thanks to them for producing another quality quarter at Core Laboratory. We are proud to be associated with their continued achievement. So thanks for spending your time with us this morning, and we look forward to our next update at the end of Q1. Thank you.

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