Core Laboratories N.V. (CLB) Q3 2020 Earnings Report, Transcript and Summary

Good morning and welcome to the Core Laboratories Third Quarter 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. Please note, this event is being recorded. I would now like to turn the conference over to Larry Bruno. Please go ahead.

Thanks, Jason. Good morning in the Americas, 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' third quarter 2020 earnings call. This morning, I'm joined by Chris Hill, Core's Chief Financial Officer; and Gwen Schreffler, Core's Senior Vice President and Head of Investor Relations. The call will be divided into six segments. Gwen will start by making remarks regarding forward-looking statements. Then we'll have some opening comments and review Core's strategies and the three financial tenets that the company employs to build long-term shareholder value. Chris will then follow with a detailed financial overview and additional comments regarding shareholder value. Following Chris, Gwen will provide some comments on the company's outlook and guidance. I'll then review Core's two operating segments, detailing our progress and discussing the continued successful introduction and deployment of Core Lab's technologies as well as highlighting some of Core's operations and major projects worldwide. Then we'll open the phones for a Q&A session. I'll now turn the call over to Gwen for remarks on forward-looking statements.

Before we start the conference call 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 related to the oil and gas industry, business conditions, international market, 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 third quarter results. Those non-GAAP measures can also be found on our website. With that said, I'll pass the discussion back to Larry.

Thanks, Gwen. First, I'd like to say that our thoughts remain with all of those directly affected by COVID-19, particularly among our employees, our industry colleagues and their families, as well as the medical professionals and others serving on the front-lines. In addition, we want to express sympathies to our industry colleagues and their families that were impacted by the five recent hurricanes along the Gulf Coast. Those of us that have lived along the Gulf Coast for a long time understand that preparing for, living through and cleaning up after events like these requires both patience and fortitude. Headwinds across the entire oil and gas industry due to a combination of reduced crude oil demand and oilfield operational disruptions tied to COVID-19, persisted during the third quarter, but there were signs of subtle improvement in operational activity in some regions. Operational disruptions shifted geographically as various countries and regions saw either waxing or waning virus activity. Very importantly, Core Lab’s dedicated staff continued to safely and efficiently provide all of the vital services and products required to meet the needs of our global client base. And we are very well positioned to continue to do so. Now to review Core Lab’s strategies and the financial tenants that Core is used to build shareholder value over our 25-plus year history as a publicly-traded company. The interest of our shareholders, clients and employees will always be well served by Core Lab’s resilient culture, which relies on innovation, leveraging technology to solve problems and dedicated customer service. While we navigate through the current challenges, Core will remain focused on its three longstanding long-term financial tenants. Those being to maximize free cash flow, maximize return on invested capital and return excess free cash to our shareholders. Core generated $18.5 million of free cash in the second quarter of 2020, marking the 76th consecutive quarter of generating positive free cash. Core’s asset-light business model continues to focus on maximizing returns on invested capital which excluding one-time adjustments for asset impairments remains among the best in the industry. As described in recent company communications, Core will continue to use free cash to reduce debt and further strengthen its balance sheet. In the second quarter, Core reduced net debt by more than $16 million. Earlier in the year, the company very quickly undertook major steps to align its cost structure with client activity levels while maintaining flexibility to meet short-term client needs, compared to 2019 structural costs have been reduced by $61 million on an annualized basis. And I'm happy to report that all of those announced cost reductions have now been implemented. We will continue to look for additional measures to improve both on efficiency and financial performance. While this is a challenging task in this uniquely volatile market, Core’s management team remains sharply focused on rightsizing its cost structure while still maintaining the workplace safety of our employees. Moreover, we will continue to meet all of our client project needs and very importantly, remain positioned for the recovery in client activity. Central to our long-term growth strategy is to continue the introduction of new technologies. Core Lab’s internal pipeline for new technological offerings remains very strong and the unique collaborative relationship that Core maintains with its technologically sophisticated client base has always allowed Core scientists to provide innovative solutions to address industry needs. New collaborative efforts to develop problem solving technologies are currently and always underway. Before we move on, I want to thank Core’s management team and employees for their continued decisive actions to address the unprecedented challenges in our industry. We also want to thank them for their dedication, loyalty and adaptability in meeting all of our clients' needs and for the personal sacrifices that many have endured as we both navigate the moment and prepare for a more active market. I'll now turn it over to Chris for the detailed financial review.

Thanks Larry. In the third quarter, the company cost reduction plans both Phase 1 and Phase 2 that were previously announced were fully implemented. Although, revenue continued to decline, the cost reductions help mitigate the impact and provide a slight improvement to earnings over last quarter. As Larry stated earlier, the company continued to focus on reducing debt and improving its liquidity position and reduce net debt by $16.2 million during the third quarter. Additionally, on October 16, we announced entering an agreement to issue $60 million in senior notes through a private placement. The new notes will be funded on January 12, 2021 and have a five-year maturity on $45 million and a seven-year maturity on the other $15 million. We are pleased with both the terms under the new notes and support from our lenders as this transaction accomplishes two goals as we manage the company's corporate debt structure through current environment. First, it provides additional liquidity under the company's revolving credit facility, which will be used to address the outstanding $75 million senior notes maturing September 30, 2021. And second, issuing $60 million in new notes and retiring $75 million of senior notes next year is an additional step towards longer term strategy of reducing debt and Core Lab’s debt leverage ratio. The new notes also include financial covenants, which are aligned with the financial covenants under our existing credit facility. As a reminder, the more restrictive of these covenants is the maximum leverage ratio, which is currently limited to three times EBITDA and the company's leverage ratio was 2.49 times as of September 30. We continue to project, Core Lab will remain profitable, compliant with the financial covenants under our debt agreements and generate free cash flow, which will continue to be focused on reducing debt for the foreseeable future. Before we review the financial performance for the quarter, the guidance we gave on our last call and past calls specifically excluded the impact of any FX gains or losses and assumed an effective tax rate of 20%. So accordingly, our discussion today excludes any foreign exchange gain or loss for current and prior periods. Additionally, the financial results for the third quarter of 2020 include $1.5 million of fees and expenses associated with professional services used in evaluating various corporate debt refinancing opportunities. These additional fees and expenses were classified as interest expense and have also been excluded from the financial results discussed today. Now looking at the income statement, revenue from continuing operations was $105.4 million in the third quarter, down approximately 9% from $115.7 million in the prior quarter. The decline is the result of a 16% decrease in both international project revenue and product sales as disruptions and delays caused by COVID-19. However, sequential decline in international activities was partially offset by a more active U.S. land market from which Core Lab grew its revenue over 21% compared to the second quarter. Of this revenue, service revenue which is more international was $86.3 million for the quarter, down from $91 million or about 5% sequentially. Service revenue was most notably impacted by delays on international projects, due to COVID-19 disruptions, which started at the end of the first quarter and continued through the second quarter. Although, some activities on these larger projects have recommenced during the third quarter, the disruptions to project workflows in our laboratories have resulted in lower revenue for the third quarter. Our network of laboratories across the globe has remained open and operational throughout the third quarter. And as activities returned to project well sites and our client's facilities, our ability to advance existing projects for clients will improve. However, the COVID-19 pandemic has created additional challenges for operators and service companies to navigate resulting in additional costs and operational inefficiencies, which are expected to continue in the fourth quarter. Additionally, the afore-named weather storms, which impacted the Gulf of Mexico during the third quarter, also delayed some offshore projects and reservoir fluids analysis conducted by some of our coastal facilities in the region. Product sales, which historically were more tied to North American activity have shifted and are now comprised of more sales to international markets. Product sales for the quarter were $19.1 million, a decrease of 23% from $24.7 million last quarter. Product sales to the U.S. market were up 32% sequentially, coming off the second quarter low. This improvement in the U.S. market was offset by a sequential decrease in international product sales of both perforating systems and laboratory instrumentation. International well site locations, as well as laboratory and research facilities of our clients continue to be impacted by COVID-19 causing delays in the delivery of products and laboratory instrumentation. Moving on to cost of services, for the quarter 74% of service revenue, which is consistent with prior quarter. As the decline in service revenue was mitigated by cost reduction initiatives more fully implemented during the quarter. Cost of sales in the third quarter was 90% of revenue, improved from 96% last quarter, again, as cost reduction initiatives were completed and more fully realized this quarter. G&A ex-items for the quarter was $9.2 million, down slightly from $9.5 million last quarter. Depreciation and amortization for the quarter is $5.2 million, down from $5.4 million, reflecting lower capital expenditures in 2020. For the full year, we continue to project capital expenditures to be in that $11 million to $12 million range. EBIT ex-items for the quarter was $12.3 million, up from $10.7 million last quarter. And given the current environment continues to represent EBIT margins of 12%. Additionally, cost reduction initiatives completed during the quarter and despite decline in revenue even improved this quarter. The actions taken to align our cost structure positions the company well as the energy market continues to progress towards balancing supply and demand. Our operating income for the quarter on a GAAP basis was $11.3 million. Income tax expense ex-items and using an effective tax rate of 20% for the quarter was $1.8 million on a GAAP basis, the company recorded income tax expense of $3.7 million. The unusual events of 2020 and impairment adjustments recorded earlier in the year have also skewed the company's effective tax rate for 2020. As we project future operational results, we continue to project the company's effective tax rate will approximate 20%. For the remainder of 2020, the effective tax rate will continue to be somewhat sensitive to the geographic mix of earnings across the globe and the impact of items that are discrete to each quarter. Income from continuing operations ex-items for the quarter was $7.3 million, up 20% sequentially from $6.1 million. GAAP income from continuing operations was $3 million for the third quarter of 2020. Earnings per diluted share from continuing operations ex-items was $0.16 for the quarter. GAAP earnings per share from continuing operations for the third quarter was $0.07. Now we'll move on to the balance sheet. Receivables were $85.4 million and decreased approximately $16 million from prior quarter. Our DSOs were at 68 days for the third quarter, a noticeable improvement from the 74 days last quarter. We will continue to monitor our collections closely as we currently do not anticipate significant changes in payment practices from our client base. Inventory was $42.9 million up approximately $1.4 million from last quarter end, primarily due to delayed shipments to international markets. The company expects inventory levels to decrease in the fourth quarter as delayed shipments are completed and assuming completion activity in the U.S. land market remain stable or improves from current levels. And now on to the liability side of the balance sheet. Our long-term debt, which includes $75 million of senior notes maturing next year was $266 million at quarter end. And considering cash of $15 million net debt was reduced to $251 million or a decrease of $16.2 million. Our debt is comprised of our senior notes at $150 million, as well as $116 million outstanding under our bank revolving credit facility. As stated earlier, the company entered into an agreement to issue $60 million of new notes in January of 2021, as we extend the maturity for a portion of the debt coming due next year. Looking to cash flow in the third quarter, cash flow from operating activities was $20.7 million, and after paying for $2.2 million in CapEx, our free cash flow in Q3 was $18.5 million. In case you missed the earlier comment for 2020, the company anticipates that its CapEx will be $11 million to $12 million or down approximately 50% compared to 2019. As we project cash flow for future periods, we would expect less contribution from working capital. This also marks the 76 consecutive quarter Core Lab has generated positive free cash flow. And we are projecting to continue generating positive free cash, as we manage the organization through the challenging market ahead. We believe evaluating a company's ability to generate free cash flow and free cash flow yield is an important metric for shareholders when comparing company’s financial results, particularly for those shareholders who utilize discounted cash flow models to assess valuations. I will now turn it over to Gwen for an update on our guidance and outlook.

Thank you, Chris. Conversations with Core's clients broadly reaffirm our expectation that international projects already underway will continue, however, the pace and breadth of recovery from COVID-19 restrictions remains uncertain, making it difficult to forecast both the level and timing of such activity. Core Lab's projects international activity in the fourth quarter of 2020 may slightly to modestly improve sequentially for both operating segments, if COVID-19 travel restrictions and supply chain disruptions continue to ease. Within reservoir description, Core expects reservoir fluid analysis, which accounts for more than 65% of the segment’s revenue to be more resilient as the work is diversified across the life of the reservoir and is less reliant on drilling and completion of new wells. Core's Production Enhancement segment has a wide range of innovative product offerings and ongoing projects unrelated to drilling and completion, including large multi-year international plug and abandonment and well remediation program. Additionally Core expects production enhancement to U.S. operation to continue to track or outperform activity levels in U.S. land completions as seen in the third quarter of 2020. As we begin the fourth quarter, the trend of gradual improvement in U.S. land activity has continued and assuming crude oil prices are $40 a barrel or higher, we expect activity to remain at current level for the remainder of the quarter. As a result, Core Lab projects revenue in the fourth quarter of 2020 associated with U.S. planned activity to modestly improve sequentially. Collectively, looking forward to the fourth quarter 2020, we are forecasting low to mid-single digit sequential improvement in both revenue and operating income. For reservoir description, we project low to mid-single digit increase barring activity disruptions related to COVID-19 with international projects. For production enhancement, we're forecasting mid-to-high single-digit sequential improvement in both revenue and operating income, as U.S. land activity has improved as we began the fourth quarter and is expected to remain at these levels for the remainder of the year. While we are optimistic with overall improvement in both U.S. and international markets, if disruptions continue associated with COVID-19, this will impact the timing of client project execution and associated workflows. Therefore, also creating challenges and maximizing operational efficiencies, which may impact or somewhat temper incremental margins. Core expects to generate positive free cash in the fourth quarter of 2020 as Core plans to reduce this cost structure has been implemented and better aligned with anticipated client activity levels. The company will continue to focus on applying excess free cash towards debt reduction. With that, I will hand it back to Larry.

Thanks, Gwen. First, I'd like to thank our global team of employees for providing innovative solutions, integrity and superior service to our clients. The team's collective dedication to servicing our clients is the foundation of Core Lab’s success and it's really shiny through during the current challenges. Turning first to reservoir description. During the third quarter of 2020 Core Laboratories under the direction of the Core net – I'm sorry, the CarbonNet project engaged in laboratory analysis of 300 feet of conventional core and sidewall cores from the offshore Gippsland Basin, in the Bass Strait, offshore southeast coast of Australia. The CarbonNet project is funded by the Victorian and Commonwealth governments of Australia. This CarbonNet project is advancing the science for establishing a commercial scale carbon capture network with storage in offshore subsurface geologic formations. The network would bring together multiple carbon dioxide capture projects, transporting CO2 via a shared pipeline and injecting it into deep, underground offshore storage sites. The carbon capture and storage project is being investigated as part of a suite of solutions with the potential to mitigate greenhouse gas emissions. The cores are progressing through physical laboratory measurements, in an iterative analytical program. The data generated by Core Lab will provide insight into seal capacity, storage capacity, geomechanical properties and the pore system properties of the rocks. Core Laboratories is pleased to be playing a role in evaluating this important carbon capture and storage project, which is among the most promising CO2 storage opportunities in the region. Core Lab is the recognized global leader in laboratory testing of fluid flow through natural porous media. Whether a project is focused on extracting fluids from a hydrocarbon reservoir or on injecting fluids into subsurface geologic formations, Core’s patented and proprietary technologies provide the laboratory based hard data points required to validate the economic viability of these projects. As Core’s clients shift more capital toward carbon capture and storage projects, Core is ready to service their needs. Moving now to production enhancement, where Core Lab strengths in both energetic systems and completion diagnostics were on display. During the third quarter of 2020, Core Lab introduced its next generation best-in-class HERO PerFRAC energetic technology, which is now available in combination with the new patent pending Oriented GoGun. This new technology provides Core’s clients with a technological solution for achieving extreme limited entry perforating capability, and very importantly, precisely aligned perforations along with the operational advantages of minimize connections and shorten the completion string length. Casing erosion around perforations can occur as the frac fluid and proppant are pumped into the formation. This erosion can be inconsistent if the original preparation holes are not uniform. Larger holes, preferentially increase in size and take more frac fluid robbing stimulation from smaller perforating holes resulting in inconsistent breakdown of the formation. The consistent sized holes generated by the latest HERO PerFRAC charges mitigate this problem resulting in more uniform breakdown throughout the stimulated interval. During Q3 Core Lab partnered with major U.S. operators to design custom consistent hole size charges that could be aligned in a specific orientation in order to achieve uniform breakdown across each stage of the frac. To meet this goal, GoGuns, that could be assembled very quickly – be assembled and very quickly align with the perforation charges to do so had to be developed. Core Lab’s production enhancement development team designed a patent pending method to orient the string of GoGuns with both very high accuracy and wellsite efficiency. Current oriented perforating systems require a reusable orientation sub assembly, which adds length, cost and other complications at the wellsite. The new Oriented GoGun does not require the industry standard reusable orienting subs, making the Oriented GoGun, the most efficient system on the market by eliminating the need for reusable orientation sub assemblies, the Oriented GoGun minimizes the number of connections and saves time at the wellsite by not having to recapture and redress the orienting subs. Also during the third quarter of 2020 Core Lab’s production enhancement engineers developed and introduced a new application for its proprietary SpectraChem tracer technology. This application is used to determine whether horizontal wells are unobstructed and flowing at full capacity through the entire length of the lateral. Leveraged by operators in the Permian, Eagle Ford, and Haynesville, this technology was used to identify wellbore obstructions, often caused by inter-well communication or commonly by dissolvable plug remnants. By applying this technology, Core’s clients can identify and remediate well obstructions that would otherwise negatively impact well performance, and thus reserve calculations. That concludes our operational review. We appreciate your participation, and Jason we’ll now open the call for questions.

Thank you. [Operator Instructions] The first question comes from Blake Gendron from Wolfe Research. Please go ahead.

Good morning, Blake.

Hey, good morning guys. Thanks for getting me on here and appreciate the guidance on reservoir description there. I wanted – production enhancement, it’s kind of consensus now that the lower 48 activity outlook is fairly flat, not just through the end of this year, but next. First I'd hope that you can just help us understand maybe the trends that you're seeing between the preassembled systems versus the more desk retires or even more commoditized alternatives through this pandemic period and this downturn? And then in a flatter environment next year, we would expect pricing pressure kind of across the board for services. I'm wondering how you think about the segment strategically over the near to medium-term, maybe a tough slog, but longer-term, you see it fitting in, just any commentary around that would be helpful.

Yes sure, Blake. I think the reality is, this is a market that has to dance two notes right now. One is components, and one is preassembled guns and Core Lab is extremely well positioned to respond to both those songs, if you will. We’ll be servicing clients that want components and the flexibility that comes with that, and we'll be able to service them when they want a preassembled guns solution. I think the Oriented GoGun in particular, where we made a sort of a design breakthrough in being able to bring together a string of GoGuns and get all those perforations aligned exactly the way the client wants them in the string is offers us a real opportunity to make inroads with clients that see that preferred orientation stimulation technique as the way of the future. So we're ready for that. I also don't want to overlook our international exposure in energetics and in downhole product solutions here. In the past that business had been about two-thirds, U.S. and about one-third international. Well, today it's slipped into sub–equal maybe tilting more towards the international side where we've got very nice exposure there. So we’re able to participate in the U.S. or North American markets with both components and preassembled guns and we’re able to service our, I would say proportionally growing international clients with a wide diversity of project, both for completions and for P&A app or plug-in abandonment applications.

Got it. That makes sense. Thanks, Larry. Want to shift the energy transition. You talked a lot about carbon capture and the large diversified peers are starting to talk about this more and more. It's my understanding that it's very reservoir and subsurface centric. So it makes sense that in terms of an at-scale project, you guys are squarely in the middle of things. I was wondering how this reservoir piece fits into the broader carbon capture value chain. Like, if we were to think about a tam for carbon capture overall, what piece of it Core Lab serves? And are there any things in the equipment realm, compression or otherwise that you would look to take a look at, maybe strategically to add to that carbon capture offering?

Yes. I'll take the last part of that first, the asset-light business model at Core Lab has been very successful for a long time requires us to stay away from a lot of things that rust like compressed. So I think there is a good market there. I think there is people that play well in that market, but I don't think it fits our business model. Because there is not much that we can do to bring our technological wheelhouse, which is understanding the rocks and the reservoir to compression, say pump compression. So I don't think that's really something that will play in. But you're exactly right in your earlier comments there it's in a – the overriding topic here is moving fluids through the rocks. And in that regard, we're the best on the planet at doing that, understanding that from a laboratory measurement and I always say reservoir engineers or in this case sequestrations engineers, if you will, they're not much different than financial analysts. They get hard data points and then they use those to model performance. And we provide those hard data points, so when they're injecting gases into a reservoir to say for an EOR project, they need our services or where they're trying to inject gas, in this case for CO2 to sequestration, they still have to know how much gas can be put away, the rate that's most efficient for putting that away. And is the container, that the geologic container is it going to hold that gas. In this case we're talking about a kilometer or so deep in the subsurface, so a good sealing capacity, but the details of the overlying straight and how good of a seal that is, will helping to evaluate that. And then the last point I want to make on that is one of the things that served Core Lab very well is follow the needs of our clients. And our clients, as you pointed out are starting to look at investments and opportunities to spend on projects on the carbon capture area. And so we're following our client's needs for there. We've got some other ideas, we're not quite ready to go public on yet in terms of how we'll assist our clients in that. But for right now we'll lean pretty heavily on our ability to make laboratory measurements as they relate to injecting gas into subsurface formations.

Got it. Appreciate the look there. But I would imagine sequestration engineers are a lot smarter than financial analysts. One more quickly if I can on working capital. Chris, it was a source of a positive cash flow for you in the quarter. And it seems like DSOs have a little bit of room to move down. So I'm just wondering how sustainable, I guess the collections lever in cash flow is here moving forward and what you expect from a working capital standpoint?

Yes. I think that the contribution from working capital will be definitely less for Q4, that's what we're projecting, especially if you think about revenues increasing a little bit, so you could see receivables grow a little bit and actually absorb some, but we'll think that the decrease in inventory will somewhat neutralize that as well. And if we do really well in that regard, it could even contribute – net contribute to a cash flow. But yes, as we sort of reach the bottom here and you start going sideways, the contributions from working capital, you would expect those to be less.

Got it. Thanks for the time guys.

Thank you, Blake.

The next question comes from Sean Meakim from JP Morgan. Please go ahead.

Thank you, Good morning.

Hi, Sean.

Hi, Sean.

So we've often talked about Core is having one of the best positions in services for a return to a longer cycle E&P projects, that your business model is able to grow substantially even back to prior cycle peaks in terms of revenue at attractive returns with fairly minimal capital deployed, but you just need the demand. The most recent international E&P CapEx cycle seems like it barely got off the ground. You were able to secure some contracts with some of those best-in-class projects, but the broader opportunities that aren't being really limited. And of course the pandemic end of the cycle. So if we look forward, as we discussed earlier here, some of your core IOC customers are going to direct more capital away from upstream towards renewables. Independence are being forced to apply more cash flow to their balance sheet rather than put in the ground. So if we think about those dynamics, how would you characterize the coming international spending cycle as the economy and oil demand eventually re-couple post pandemic? How do you think about international upstream spending, including offshore given those dynamics?

Yes, Sean. I think the way to look at it here is the next wave, if you will, we’re coming out of a wave of extensive investment in unconventional reservoirs in North America. Some of that has worked out for investors, some of that hasn't. And I think the backdrop to that is that's where all the incremental barrels of oil have been coming from for the last several years. As that becomes an area that will be attracting less capital investment, we think that the next cycle and we can debate whether it's going to be a super cycle or a gradual cycle and the timing of it, but we think the next cycle is international conventional reservoirs. And part of that is that we don't see a global opportunity for unconventional reservoirs in the way that we define them in the U.S. to expand greatly across the planet. The shift is going to be more towards conventional reservoirs and it's going to be more international. There is just not that many conventional reservoir opportunities in North America here. So I think the development of existing fields will be there sort of in the near to midterm for us. And then I think longer-term and I'll admit it's open for debate, whether it's a couple of years or a little bit longer for that to unfold and sort of get up to full speed, but I think the next wave of investment is going to be international and it's going to be conventional reservoirs. And I just said, we're well positioned to achieve that.

Got it. Thank you. I appreciate that. And then just could we maybe talk a little bit about what the implications would be as we think about conventional reservoirs in terms of your mix within RD and what that could – what that means for maybe a normalized margin profile? Some of the best margin work you can get is going to be in these complex deep water reservoirs. And so could you just think through what the implications are for normalized margins under those types of conditions in the coming cycle?

Yes. I think they're pretty optimistic for us there, but with the sort of structural realignments we've made, you saw us maintain this quarter 15% margins last quarter 17%, a little bit North of 17% margins in reservoir description. And doing that at revenue levels sort of in the $80 million to $90 million range there, so as activity returns to a $100 million plus I think it's an easy step for us to jump to North of 20% margins to get into the mid 20% margins, I think is very achievable. I do think that we have to be a little bit cognizant that not only Core Lab, I think across the industry, it's not the most efficient operational times, we've got a lot of stop and start still going on, we've got capabilities that we're maintaining in anticipation of client projects that they've told us, that they intend to start spooling up. And so it's not maybe the most efficient time currently, but as things spool up and we get back into sort of a more robust demand for services, breaking 20% below $100 million in revenue is as I think very achievable for us.

That's really helpful feedback. Thanks, Larry.

Sure, Sean.

The next question comes from George O’Leary from Tudor, Pickering, Holt & Company. Please go ahead

Good morning, George. George O’Leary: Good morning. More of a question more than a curiosity than something focused purely on the numbers, but just given all the different ways that you guys touch the wall design and the production side and the completion side. Just curious as you work with your customers to solve various problems, where are they coming to you guys and asking you all for help with apart from just lower my costs, and they look to maximize production from individual wells, how are they thinking about changing the completions cocktail, the well-design you guys are just awesome on the front end of that. So curious for how that's evolving in this market.

Yes. So there is some things that I will talk about, some things that I won’t. That we're not quite ready to go public with, that we've got testing going on, right now we've got some clients that have given us some wells to try out new technology, they came to us with a problem, we're working on a solution for it. And they've said, okay, we can start doing this in certain upcoming wells. And some of those are underway right now, some of those are completed, some of those are underway, we've got a few more planned in the fourth quarter. But a good example of that is the one I talked about in the opening comments about our Oriented GoGun, group of clients came together and said, hey, we want to be able to have a series of guns lined up so that we’re very precisely, how the perforations all in a row. And we need to be able to put those assembled guns together very quickly at the wellsite. And so we went to work on it, and today announced the introduction of that patent pending design. And so I think the – there is always opportunities to tinker with the mechanical, which is more in our – and the chemical on the actual well construction side, deal with the mechanical design and optimization. In this case, they wanted the perforations very accurately aligned, preassembled guns, put them together quickly at the wellsite, and don't make the string too long with sub-assemblies, and so we accomplish that. So that I think is a theme. On the reservoir description side, we still got some very nice project work going on, on EOR opportunities in unconventionals, different cocktails of gases, CO2 injection opportunities. So we're still leveraging those, but on the well construction side, I would say the latest theme that’s come up has been on that we're rolling ready to talk about has come up on these orienting, the preassembled guns for uniform formation breakdown. George O’Leary: Very helpful Larry. And then just – you talk about conventional reservoirs internationally being an area of focus or an area of growth going forward, which makes perfect sense. How would you compare and contrast the outlook for offshore versus onshore activity in those international markets. And what's the level of – is there a major delta in the level of dialogue with customers with respect to onshore versus offshore activity?

Yes. First of all, we're pretty agnostic on onshore and offshore. All reservoirs need to be evaluated from a reservoir description sense. I will say though that offshore projects and this maybe Sean alluded to this earlier, offshore projects are tend to be a little bit more lucrative for us. The risks are so high for the clients to get things wrong. They tend to want to build very robust datasets so that they feel like they've minimized their uncertainties. So there is a bit of an upside for us on offshore projects. And so some places where we think that's coming and we've talked about this the greater South Atlantic margin. You see us, the work we've been doing for the last several years there is, it will be ongoing for awhile. And we've got a lab opening up in Brazil that will be operational in the fourth quarter, also offshore, Qatar the big opportunity for us there, new lab going in there. A few others in the Middle East, some of the Middle East opportunities though are onshore for us, whether it's in the neutral zone or in with some of our traditional great client relationships in Kuwait and Saudi Arabia and Abu Dhabi. George O’Leary: Thank you, Larry.

The next question comes from Scott Gruber from Citigroup. Please go ahead.

Good morning, Scott.

Yes, good morning. Good morning, Gwen and good morning, team. How are you?

Good.

Good.

The question here is something as a follow-up to Sean's line of questioning. There was a quote in the release that you continue to evaluate options to align the company's cost structure with client activity. What's behind that comment, does it reflect the IOC pivot and/or the consolidation way, the most DMPs here in the U.S. and is that what's needed to get back to those 20% plus margins, at the $100 million run rate or is this a different set of drivers? And thus, there could be some incremental benefit to the margin profile here.

No, it's not. I think at $100 million revenue, we should be beyond – 20% or beyond margins. That's just an activity call on our part of what we need to get to the point where our utilization of our facilities and our staff starts to get into that type of return. But what we're trying to get across there is we are looking at things like our geographic service mix. Does it make sense to offer certain services and certain regions anymore, or do we consolidate that into our traditional hub-and-spoke structure and make that more efficient. So that's an example of what we're talking about and referencing the – still looking at our cost structure and how we drive efficiencies through the organization.

And do you think there's sufficient opportunity there that we see it show up in the margins?

I would call it supplemental to, but not vast needle movers at this point, the heavy lifting in the cost structure. We got on that very quickly. We actually started doing that, taking steps right at the end of Q1, as things tightened up. Big efforts in Q2 completed all of the announced realignments and restructuring that we talked about in the third quarter. So that heavy lifting has been done, we're just talking about – we never sit on our laurels here. We're always looking at tweaking and turning knobs and making sure that we're as efficient as possible.

Got you. And then just one on the U.S., the completion activity obviously snapped back pretty good here in 3Q from a super-depressed trough in 2Q. When do you think we get back to that maintenance level of activity and there's a little debate on what that is, whether it's 175 or 200 frac crews running. When do you think we get back towards a maintenance level of activity, is that something happens first half of next year or is it more likely second half?

I would say, I put it this way. I don't see that there's going to be a rush back January 1. And so I think it'll gradually play out over the first quarter into the second quarter. And I think that's probably the best perspective on it that, that I don't see a big surge coming. And I'm going to predicate that a bit by saying that assumes commodity prices stay where they are. And that there's demand starts to gradually increase, inventory start to gradually come down. I think all of those have to play in. So if the premise of your question is with the landscape that we see today, if it continues, I think it plays out into more of the second quarter.

Got you. Yes, of course and somewhat flashy volume. Got you. Appreciate the color. I'll turn it back.

Okay, Scott.

Thanks Scott.

The next question comes from Mike Sabella from Bank of America. Please go ahead.

Good morning, Mike.

Hey, good morning, everyone.

Hey, Mike.

Good morning.

I just want to get kind of discuss the international outlook, heading into 4Q kind of relative to what we've heard other OFS companies say, so far this earnings, and you all see some upside in 4Q, others are seeing downside. And I know you guys mentioned there were some projects push and revenue push from 3Q to 4Q. Maybe just close the loop as to how kind of those projects, those delays impacted the mix between 3Q and 4Q revenue. And then maybe if you'd be so daring, how do you think it could – momentum would carry over into 1Q?

Yes. I'll make some thoughts and then maybe Gwen can run through some of our guidance, again, to make sure that we're clear on that. I think the – so let's talk a little bit about the way projects progress in reservoir description. So Q2, I would say, look at that as the most operationally challenged from a virus management perspective, where we couldn't get to well sites in places, we couldn't get people on flights in places, charter flights from certain clients to get to location or shut down. So that meant that new project initiation was really impaired in the second quarter. That starts to pick up and improve a bit as we move into the third quarter, excuse me. And so our call on the fourth quarter being sequentially improved over the third quarter is, some of that project work is now coming into the labs, has come into the labs in the third quarter. We get to start working on those projects, generating data and recognizing revenue on those. And so Gwen, some of the comments we made about guidance for RD and for the company.

Yes, Larry. So to Larry's point, what that should result in Mike is, financial performance for RD would be low to mid single-digit increase in revenue. So as that project, now we're seeing the, let's say easing of some of those disruptions. And there'll be ebbs and flows to that, but we see some improvements. So we think they'll therefore be improvement in the revenue performance. And then also for production enhancement, someone said it earlier, there has been improvement off the bottom with the U.S. land activity. So we have no reason to believe that that wouldn't, let's say continue at a mild pace. We're not looking for anything that would be a heavy increase in activity, but also we had some delay on the international front and production enhancement with shipment of product due to COVID. And so now we've got the go ahead to get some of that product moving on an international front. So that'll be a contributor as well for the fourth quarter.

Mike, I know you had to ask about Q1 and you know, that I can't answer that yet. Nobody's really got that kind of crystal ball and clarity. I will say that we've got some things that we normally see in the, call it the early part of the year. Typically Q1 is a relatively soft quarter for us. There's a little seasonal rollover in places where weather slows down activity. But we have some – we also have some countercurrent projects, which pick up when things freeze over in the winter. And so we've got some opportunities there that play out into Q1, however, historically, unless we catch a big commodity price increase in the first quarter, it tends to be a seasonally slack quarter for us or slower quarter than Q4.

Thanks, Larry. It was worth a try, I guess. And then I know you all are – lots of moving pieces for free cash flow for next year. You mentioned lower working capital, less – probably less cash restructuring next year. Just kind of at a high level, if we think about free cash flow next year, do you think it's higher than it was in 2020 and just how those pieces could move around? Thanks.

Yes, I think it depends on how 2021 ends up playing out. I think as we kind of hit bottom and start going sideways a little bit, we won't see the pickups in working capital, so you might see reduced cash – free cash flow. And then as things start to pick up, you might see a little investment in receivables, but we would still expect inventories. Even if activities pick up and stay there, we expect inventories to continue working down. So you won't see us building inventory in response to improved activities, let's say in the U.S. onshore market. So maybe working capital is more neutral next year. And then if we get some growth in the back half, you'd see a grow up. So I think you can start to at least kind of model out what that might look like for next year.

Great. Thanks, guys.

The next question comes from Andrew Tierney from AKO Capital. Please go ahead.

Good morning, Andrew.

Good morning. Thank you very much for taking the question. I was just wondering if you could explain a little bit more on the puts and takes around the fluid-linked revenue in reservoir description. I appreciate the near-term guidance into Q4, but if on the assumption we have renewed weakness subsequent to that. Can you talk about how the things that you will be looking at to determine whether or not that 65% of activity which is linked to fluids is something that's robust and we can kind of hang our hats on versus something that might kind of erode away further?

Yes, I think the concept that to help and get folks heads around that is, unlike a coring, which requires a drilling rig on location, fluid sampling can be taken at a rig location during sort of active well development. But also fluid samples are taken at wellheads on established wells, where people are monitoring the fluids that are coming out of the ground as the reservoir progresses over time. And so that tends to be a pretty stable part of our business. One of the ways to look at that is to understand that the rocks, unless we're talking about soft formations are pretty static over the life of the reservoir. Once you've established the rock properties, they don't change very much. Other than that, they tend to compact a little bit as you depressurize the reservoir. The fluids in the other hand are very dynamic. They change over the life of the reservoir. The viscosity changes, the gas oil ratio changes. The bubble point can start to shift asphaltenes and waxes can start to come out of solution. And so those have to be monitored over the life of the field. And that gives us a sort of a very stabilizing part of our reservoir description business is that people have to keep testing the dynamic fluids over the life of the field.

Okay. Thank you.

Okay, I think we've got time for one more question.

Andrew?

Yes. Hi Gwen. A quick follow-up if I can, are you able to separate out what the disruption was in the recent quarter from COVID and also the Gulf of Mexico events?

Yes. So on the revenue change, probably about $2 million would be related to the Gulf of Mexico storms that we had come through. And then probably maybe another, let's say 9.5 would have been related to international COVID disruptions.

Okay, great. Thank you very much.

You're welcome.

Okay. I think we'll wrap up here. In summary, Core's operational leadership continue to position the company for anticipated activity levels in the remainder of 2020, as well as for the opportunities that lie ahead. We have never been better operationally or technologically positioned to help our clients maintain and expand their production base. We remain uniquely focused and are the most technologically advanced client-focused reservoir optimization company in the oilfield service sector. The company remains committed to the industry-leading levels of free cash conversion and returns on invested capital. We'll return value to our shareholders via growth opportunities driven by the introduction of problem solving technologies and quarterly dividends, as well as future opportunistic share repurchases as the sector recovers and as Core Lab’s free cash flow levels expand. In the near-term, Core Lab will use free cash to continue to reduce debt. So in closing, we thank and appreciate all of our shareholders and the analysts that cover Core Lab. The executive management team and the Board of Core Laboratories give a special thanks to our worldwide employees that have made these results possible. We're proud to be associated with the continuing achievements. So thanks for spending time with us, and we look forward to our next update. Goodbye for now.

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