How Badly Will Falling Oil Prices Hurt Core Laboratories N.V. Earnings?

Oil prices have taken a beating over the past few months, dragging Core Laboratories N.V. stock down along with them.

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Needless to say, the bear market in oil will likely have an impact when Core Labs reports third quarter results after the market closes on October 22. Here is where the drop in oil prices might have had an impact on Core Labs' business.

Oil prices and guidance
Along with its second quarter results Core Labs provided investors with guidance for the third and fourth quarters. However, among the factors leading to that guidance was stable oil prices. The company noted that "in response to very supportive Brent crude prices, the company projects modest growth through the end of 2014." Those very supportive oil prices of more than $100 per barrel are no longer part of the equation, suggesting that the company might have trouble meeting its guidance for modest growth for the balance of this year. 

In the third quarter the company expects revenue of $280-$290 million and earnings of $1.49-$1.52 per share. That would represent an increase in earnings of about 11% from last quarter. Meanwhile, in the fourth quarter the company expected revenue to be $285-$295 million with earnings of $1.56-$1.61 per share. While it's possible that the company might be able to meet its third quarter guidance given that oil prices were stable until after the quarter began, the continual drop in oil will almost assuredly have an impact on fourth quarter guidance. A deep cut in fourth quarter guidance would likely cut into Core Labs' stock price too.

Where oil prices might impact Core Labs
One area where falling oil prices could have had an impact on the company's results is in its Revenue Description operations. Even before oil prices started to fall, oil producers had noticeably slowed down investments in deepwater areas. Core Labs noted this last quarter as the company pointed out that while its Reservoir Description segment established a new second quarter record for revenue it experienced lower amounts of higher-margin revenue from deepwater sources. So, if Core Labs misses expectations this quarter it could have stemmed from falling oil prices causing an even bigger drop off in deepwater revenue.

Specifically, the company noted last quarter that several major coring programs, especially in the Gulf of Mexico, had been deferred but were now scheduled for the second half of this year. The company has nine coring programs in the Gulf of Mexico as part of this deferral, but because it adjusted for risk the company only included revenue of five of these projects in its second half revenue and earnings guidance. That being said, given that these are some of the company's highest revenue and margin opportunities in Revenue Description, which is the company's largest business segment, if these projects faced further delays due to the fall in oil prices it could have a big impact on quarterly results for both this quarter and the fourth quarter. 

Investor takeaway
Core Labs had expected to have a solid third quarter as it delivered modest growth in the second half of the year. But, those projections were based on supportive oil prices, and oil prices haven't been that supportive in the second half of the year. Because of that investors should realize that there is a very distinct possibility that Core Labs might miss expectations as well as reduce its guidance for the fourth quarter. Given the sell-off in shares it would appear that investors are already bracing for this to happen.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Core Laboratories. The Motley Fool owns shares of Core Laboratories. 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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