Core Labs: "U.S. Oil Production Growth is slowing"

[dan_s]

Taken from the transcript of the Core Labs Q4 conference call.

David M. Demshur -- Chairman of the Board, Chief Executive Officer

Well, thanks, Gwen. Well, let's look at some macro in U.S. production trends and then talk about Core's three financial tenets.

Core continues to be encouraged that operating companies are furthering their commitments to operate within free cash flow and emphasizing returns on invested capital, as demanded by today's investors. These trends benefit Core whose clients tend to be technologically sophisticated and are heavy users of technology over commodity driven solutions. During the fourth quarter, Core continued to host several conference calls and industry sessions for various industry groups and analyst to discuss optimal well spacing, rightsizing, upsizing, well positioning and parent child well relationships. Proper upsizing and well spacing are two of the most discussion topics within Core's clients today. Further upspacing will be seen in 2020. Improving perforating efficiencies and effectiveness rank a close second, which has led Core to the recent commissioning of Core's cutting edge reservoir optimized completions laboratory or rock lab and Cores Fit-For-Reservoir strategy for completions. The Fit-For-Reservoir strategy is yielding significant changes in stimulation and completion practices.

Now some specific comments on future U.S. crude oil supply. Currently, the U.S. produces about 12.5 million barrels of oil per day. 9.14 million of that is from unconventional reservoirs led by the Permian at approximately 4.54 million barrels a day, with the Eagle Ford play at 1.2 million barrels per day.

We believe that the Eagle Ford play now is in permanent decline owing to the lack of Tier 1 properties. We also note that we believe that the Bakken is near peak once again owing to the lack of additional Tier 1 properties. The U.S. produces about 3.35 million barrels of oil per day from conventional reservoirs. This is led by record Gulf of Mexico production that totals about 2 million barrels of oil per day currently. We are once again revising U.S. 2020 production growth trend downwards.

Last quarter we quoted 700,000 barrels of oil a day of gains in 2020 (year-over-year production growth). We are now revising that lower to a gain of about 200,000 barrels of oil per day for 2020. If current U.S. drilling trends hold, the U.S. could be flat to down exiting 2020. Remember that the decline curve always wins and it never sleeps. < The only reason that U.S. oil production will be up 200,000 BOPD year-over-year is because we are starting from a much higher rate of production in 2020. See slides 11 & 12 of my February 8th podcast. - Dan.

Now let me go on my our three financial tenets that Core has used to build shareholder value over our last 25-year history.

During the fourth quarter, Core generated over $16.5 million in free cash flow marking the 73rd consecutive quarter of generating positive free cash. Also in the fourth quarter, Core once again produced oilfield leading return on invested capital for the 41st consecutive quarter with an ROIC exceeding 20%.

And Core's third financial tenet. We returned approximately $25 million back to our shareholders in Q4, via our quarterly dividend. Core will continue to return capital back to its shareholders via quarterly dividends and share repurchases as free cash flow levels increase. In January of 2020, Core reinitiated its share repurchase program. Core anticipates further opportunistic share repurchases in Q1 while also reducing outstanding debt on its revolving credit line. I'll now turn it over to Chris for a detailed financial review.

Link to full text of the conference call: https://www.fool.com/amp/earnings/call- ... l-tra.aspx

[dan_s]

"We believe, new underappreciated forces are now at work in the shales. As we progress through 2020, the retrenchment of drilling activity, combined with the inability for drilling productivity to rise because of “high grading” will produce the potential for a significant disappointment in oil production. If rig counts turn much lower or if productivity continues to disappoint, US shale production growth might even start to turn negative as we reach the end of 2020. Most analysts are still very optimistic about US oil growth in 2020. Estimates range from as low as 1.1 mm b/d to as high as 1.7 mm b/d, but we believe these growth estimates are far too aggressive. Several prominent oil industry veterans are calling for growth as low as 400,000 b/d, which could also turn out to be optimistic." - By Goehring & Rozencwajg Team, February 11, 2020