3 Compelling Reasons Core Laboratories Is Worth Buying Today

CLB EBIT Margin (TTM) Chart
CLB EBIT Margin (TTM) Chart

CLB EBIT Margin (TTM) data by YCharts .

The ability to preserve pricing power throughout the downturn is an extremely valuable trait in a commodity business, and Core has shown it has that power. Sure, it may see a few potential projects get shelved and total revenue could decline, but as long as the company can still generate high margins on that lower revenue base it should be very well positioned throughout the cycle.

Long term demand means increased spending on the horizon

So far this year, more than $220 billion in oil and gas development projects have been shelved as prices have declined. Over the near term, it's hard to argue against these moves. An oversupplied market like this one will make companies either redesign or even completely shelve projects that have higher-per-barrel breakeven costs.

The thing is, commodity markets are like physics: for every action there is an equal but opposite reaction. In this case, lowered capital spending today means less development, and less development to offset the constant decline of oil production from wells means that oversupply can change to undersupply in a hurry.

At a recent speaking event, Core Labs CEO David Demshur noted that the everyday production at existing wells getting smaller, and the global decline rate is about 2.5%. Even more surprising is that Demshur noted at today's drilling activity in the U.S., the decline rate is greater than 10%.

Eventually, these decline rates and the reduced levels of spending will catch up to the industry. As you can imagine, this will lead to higher prices and, in turn, greater spending and activity from producers as those producers look to play catch-up from delayed spending. Many companies will look to Core Labs to maintain production levels at existing facilities as well as evaluate the production potential of new sources. This combination could lead to a boom in Core's business in the coming years.

Valuation hasn't looked this good in a while

Even though the company has been reasonably able to maintain its profit margins during this decline, shares of the company have not reflected that. Over the past 18 months, shares of Core have been the worst performer when compared to those same oil services giants.

CLB data by YCharts .

You could argue that the Halliburtons and Schlumbergers of the world have the size and scale to manage a downturn like this, but based on Core's performance, it seems that shares have taken an unfairly large hit.

It can be hard to do a valuation for Core Labs because the company returns so much cash to shareholders. Since its cash flows exceeds its earnings, its price to earnings can make the company seem a little more expensive than it is. Also, because it has repurchased so many shares, the company technically has no common equity on the books -- repurchased shares are carried as treasury stock and are deducted from common equity. So, the best measure we can use to value Core is on a price-to-free-cash-flow basis. Looking at this metric, shares haven't been this cheap since 2010.

CLB Price to Free Cash Flow (TTM) data by YCharts .

What a Fool believes

There is no surefire method of determining whether we have hit the bottom of the cycle or not. There are lots of signs that the oil and gas market could improve, but there are just as many that suggest things could stay bad for a while.

Even if the oil market does remain less than ideal for a while longer, though, the case for buying shares of Core Labs for the long run looks pretty compelling. The company's ability to preserve its margins in a downturn, the longer-term potential for its services when the market does indeed turn, and today's bargain-basement prices suggest that those looking for a long-term investment should take a hard look at Core Labs' stock.

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The article 3 Compelling Reasons Core Laboratories Is Worth Buying Today originally appeared on

Tyler Crowe owns shares of Core Laboratories. You can follow him at Fool.comor on Twitter @TylerCroweFool.The Motley Fool owns and recommends Core Laboratories and Halliburton. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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