The Incremental Barrel
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The Incremental Barrel Increasing Returns on Invested Capital Core Laboratories 2014 Annual Report The Incremental Barrel Increasing Returns on Invested Capital Table of Contents Investor Update Message from the Executive Team 2014 – Another Record Year Consolidated Company Results Bright Future The Incremental Barrel Reservoir Description Production Enhancement Services Reservoir Management Services The Incremental Barrel Form 10K Corporate Information Core Laboratories is The Reservoir Optimization Company Core Laboratories is a leading provider of proprietary and patented reservoir description, production enhancement, and reservoir management services and products. These services and products enable the Company’s clients to optimize reservoir performance and maximize hydrocarbon recovery from their producing fields. The Company has over 70 offices in more than 50 countries and is located in every major oil-producing province in the world. Core Laboratories provides its services to the world’s major, national, and independent oil companies. Global Presence. Global Impact. Advanced Technology Centers ★ Aberdeen ★ Abu Dhabi ★ Calgary ★ Houston ★ Kuala Lumpur ★ Rotterdam Selected Regional Operating Centers ● Perth, Australia ● Brisbane, Australia ● Jakarta, Indonesia ● Bangkok, Thailand ● Shanghai, China ● Muscat, Oman ● Doha, Qatar ● Kuwait City, Kuwait ● Baku, Azerbaijan ● Aktau, Kazakhstan ● Moscow, Russia ● Abidjan, Ivory Coast ● Port Harcourt, Nigeria ● Luanda, Angola ● Edmonton, Alberta ● Bakersfield, California ● Anchorage, Alaska ● Bogota, Colombia Investors Update Core Laboratories enjoyed a banner year in 2014 and its most profit- able year ever. The Company set all-time annual records for earnings per diluted share (EPS), net income, operating income, operating margins, free cash flow (FCF), and revenue. In spite of these sterling accomplishments, weaker crude oil and natural gas prices, resulting from slack demand and increasing supplies, primarily from the United States, caused a severe correction in all energy-related stocks. Core Lab was not immune to the downdraft as our share price retreated from its all-time high of $221 to a year-end closing at $ 225 $120.34 (Figure 1). The fall of $ 200 CLB @ $120.34 on 31 Dec 2014 Core’s stock price was the first $ 175 since 2008, when share value $ 150 was also decreased because of $ 125 sharply lower commodity prices. $ 100 On 13 May 2014, Core cele- $ 75 brated the second anniversary $ 50 of its Euronext Exchange listing CLB IPO @ $2.78 on 21 Sep 1995 $ 25 in Amsterdam. Core’s Executive and Operating Management $ 0 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Team had the honor of banging the opening gong, a tradition that Figure 1. Stock Performance. dates back centuries for the oldest stock market in the world (Figure 2). Core’s European ownership climbed as high as 20% during the year, the highest European ownership of any major oilfield service company. Core continues to follow the three financial tenets that have led to our industry-leading total shareholder returns (TSR) over the long term (Table 1). Figure 2. Core Lab celebrates the second anniversary of its Euronext Amsterdam Exchange listing. Table 1: Annualized Total Shareholder Return, % Company 5 Years 10 Years 15 Years Since CLB IPO Core Laboratories 16.5% 27.2% 18.6% 21.7% National Oilwell Varco 11.8% 16.1% 16.6% 15.8% Schlumberger 7.1% 11.2% 9.1% 11.0% Superior Energy Services –3.4% 2.8% 7.6% 10.5% Halliburton 6.6% 8.4% 6.0% 8.9% CARBO Ceramics –9.1% –0.2% 8.1% 7.2% Weatherford International –8.6% –1.1% 3.7% 6.4% Baker Hughes 8.0% 3.9% 8.0% 4.1% Nabors Industries –9.5% –6.4% –1.0% 2.5% Transocean –23.5% –7.0% –3.2% –2.3% CGG –21.6% –6.8% –2.4% –3.1% Key Energy Services –28.2% –17.8% –7.3% –10.2% Source: Bloomberg, 19 February 2015 Table 2: Revenue to Free Cash Flow Conversion Ratio 1) Maximize Free Cash Flow Company Conversion % through fiscal discipline. Core Laboratories 24.6 Core follows a strict discipline for Schlumberger 14.9 allocating capital for investment Dril-Quip 13.7 in growing our business. Unless National Oilwell Varco 8.9 certain Return on Invested Superior Energy Services 6.2 Capital (ROIC) standards are CARBO Ceramics 5.6 met or exceeded, the capital Baker Hughes 4.7 expenditure is disallowed. On Key Energy Services 4.1 average over the past 30 years, Nabors Industries 3.9 the Company has determined Halliburton 2.4 that an appropriate capital CGG –1.5 allocation for a business generally Weatherford International –3.3 equals the amount of annual Transocean –3.4 depreciation. However, when clients request Core to invest Source: Bloomberg, 19 February 2015 capital for high-return projects, Table 3: Return on Invested Capital, % Company Return on Invested Capital Weighted Average Returns above Weighted Cost of Capital Average Cost of Capital Core Laboratories 55.7 10.4 45.3 Dril-Quip 15.6 11.2 4.3 Halliburton 13.6 10.7 2.9 Schlumberger 10.4 9.4 1.0 National Oilwell Varco 8.0 9.5 –1.5 Baker Hughes 7.3 10.0 –2.7 Average 6.4 9.6 –3.2 Nabors Industries 4.3 10.0 –5.7 Weatherford International 1.5 9.7 –8.3 CARBO Ceramics 0.6 13.0 –12.5 Transocean –1.7 8.1 –9.7 Superior Energy Services –7.0 11.3 –18.3 CGG –12.4 4.3 –16.8 Key Energy Services –12.8 6.8 –19.6 Source: Bloomberg, 19 February 2015 as was the case in early 2014, the Company will increase capital allocations. This discipline produced our industry-leading Revenue to Free Cash Flow Conversion Ratio of over 24% during 2014 (Table 2). Core will continue to demonstrate strict fiscal discipline in 2015 and beyond. 2) Maximize Return on Invested Capital. Core’s Board established an incentive compensation program for the executive and senior management teams based on the Company’s producing an ROIC in the top decile for the oilfield service industry. Core’s Board believes that stock price performance over time is directly related to ROIC. Table 3 lists ROICs for major oilfield service companies as recently calculated by Bloomberg Financial. Core’s leading ROIC is more than eight times the industry average. Note that some oilfield service companies have ROICs below their Weighted Average Cost of Capital (WACC), a product of overinvestment in their company or vast overpayment for perceived growth via acquisitions. Table 4: Capital Returned to Core Lab Shareholders Core strives to have the industry- Total Capital Returned $2.02 billion leading ROIC through capital Share Repurchases, Warrant Settlements $1.68 billion discipline and continued execution of the three Growth Strategies Quarterly Dividends $271 million we set in 1994, the year before Special Dividends $69 million we made our initial public Per Share Capital Return $45.88 offering: 1. Develop new reservoir-optimizing technologies. 2. Leverage our international office network. 3. Acquire complementary and strategically positioned technologies. We believe that our continued commitment to this approach in 2015 will result in an ongoing dominance of long-term share price performance by Core versus other oilfield service companies. 3) Return excess capital to our shareholders. Since October 2002, Core Laboratories has returned excess capital to our shareholders in the form of share repurchases, warrant settle- ments, dividends, and special dividends. As indicated in Table 4, Core has returned over $2 billion, or almost $46 per share. As the energy markets mend in 2015, the Company will continue to return excess capital to our shareholders via dividends, as well as possible share repurchases depending on the stability of global financial networks. Message from the Executive Team 2014 – ANOTHER RECORD YEAR Core Laboratories’ 5,000 worldwide employees produced another record year, as oil companies utilized Core’s newest technologies to maximize their daily production of crude oil and natural gas while optimizing the estimated ultimate recovery (EUR) of hydrocarbons from their aging fields. On average the world’s oilfields produce only about 40% of their reserves, leaving 60% of the oil in place. By helping to optimize production and recovery of hydrocarbons, Core’s technologies deliver incremental barrels of oil and expand production well beyond 40% of the in-place oil. In some cases, Core can elevate production to 45% or more of the hydro- carbon reserves, thereby increasing our client’s Free Cash Flow (FCF) and Return on Invested Capital (ROIC). Core Laboratories The theme portion of this year’s Annual Report will investigate how will continue to Core Laboratories’ technologies enable our clients to recover those incremental – and the most economically produced – barrels from play a critical the reservoir. role in reservoir Although 2014 was another record year for Core, high activity levels technology for during the first half of the year gave way to significantly lower activity levels in the second half. The combination of lower demand growth, decades to come. especially in Europe and Asia, coupled with increasing supplies, primarily from North America and especially the United States, caused commodity prices to fall from nearly $120 per barrel in the summer months to below $60 at year’s end. Production of oil topped 9 million barrels per day in the U.S., a multi-decade high, leading the U.S. to become the third-leading producer in the world, behind only Russia and Saudi Arabia. In 2014, the United States became the world’s largest producer of natural gas. Currently the energy market is out of balance, with supply exceeding short-term demand, and that has driven commodity prices down- ward. However, the combination of demand, spurred by lower energy prices, along with the natural production decline in aging fields will soon put the energy markets back in balance.