Core Labs (NYSE:CLB) was the third largest detractor from our relative performance during the third quarter. While “energy” continues to be a four-letter word at this point in the cycle of U.S. growth investing,5 we continue to think that Core Labs’ value proposition is worthy of multi-cycle consideration. We estimate that roughly 85% of the Company’s revenues are generated by providing equipment and services for the upkeep of their customers’ existing carbon producing fields. As such, the majority of the value that Core Labs provides its customers is not directly predicated on the activity of drillings rigs, or even on the short-term price of oil. For instance, the Company’s Reservoir Description business generated over 60% of consolidated revenues during the trailing 12 months. Reservoir Description revenues have declined just -16% from their trailing 12-month peak (set during late 2013 through mid 2014 – when oil traded at twice today’s levels). A significant portion of Core Labs’ revenues are generated outside the United States, so we estimate revenues in Reservoir Description have probably fallen by a high single digit percent, constant currency – despite the E&P industry (Core Labs’ customers) drastically cutting budgets by between - 30% and -75% during that timeframe. Thus, a significant portion of Core Labs’ business is very well insulated from the vagaries of short-term oil price fluctuations. Although the margins of this segment have suffered more than revenues, we expect that margins have bottomed and should rapidly rebound with E&P spending budgets, as Core Labs’ management has prudently balanced costs without sacrificing personnel capacity.
From David Rolfe (Trades, Portfolio)'s Wedgewood Partners third-quarter 2016 shareholder letter.
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