David M. Demshur - Core Laboratories NV Gwendolyn Y. Schreffler - Core Laboratories NV Lawrence Bruno - Core Laboratories NV Monty L. Davis - Core Laboratories NV.

James West - Evercore ISI Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc. Scott A. Gruber - Citigroup Global Markets, Inc. Sean C. Meakim - JPMorgan Securities LLC Marc Bianchi - Cowen & Co.

LLC James Wicklund - Credit Suisse Securities (USA) LLC Chase Mulvehill - Wolfe Research LLC Kurt Hallead - RBC Capital Markets LLC Ian Macpherson - Simmons & Company.

Good day and welcome to the Core Laboratories' Q1 FY 2018 Earnings Conference Call and Webcast. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Mr. David Demshur.

Thank you and over to you, sir..

Thank you, Zed. Good morning in North America, good afternoon in Europe and good evening in Asia-Pacific. We'd like to welcome all of our shareholders, analysts, and most importantly our employees to Core Laboratories' first quarter 2018 earnings conference call.

This morning I am joined by Dick Bergmark, Core's Executive Vice President and CFO; Core's COO Monty Davis who will present the detailed operational review. Larry Bruno, who was recently elevated to the President of Core Lab; and Gwen Schreffler, Core's Head of IR. Chris Hill is on assignment in Brazil. The call will be divided into five segments.

Gwen will start by making remarks regarding forward-looking statements. And then we'll come back and do a review of the current macro environment, updating industry trends that should be beneficial to Core Lab. We will then review Core's three financial tenets which the company employs to build long-term shareholder value.

Gwen will then follow with a detailed financial overview and additional comments regarding building shareholder value, followed by Larry establishing Core's second quarter 2018 outlook and a general industry outlook as it pertains to Core's prospects.

Then Monty Davis will go over Core's two operating segments, detailing our progress and discussing the continued successful introduction of new Core Lab technologies and then highlighting some of Core's operations and major projects worldwide. We will then open the phones for a Q&A session.

I'll turn it over to Gwen for remarks regarding forward-looking statements.

Gwen?.

Before we start the conference call this morning, I'll mention that some of the statements that we make during this call may include projections, estimates and other forward-looking information. This would include any discussion of the company's business outlook.

These types of forward-looking statements are subject to a number of risk and uncertainties relating to the oil and gas industry, business conditions, international markets, international political climate, and other factors including those discussed in our 1934 Act filings that may affect our outcome.

Should one or more of these risk or uncertainties materialize or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in the forward-looking statements.

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

For a more detailed discussion of some of the foregoing risk and uncertainties, see Item 1A Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, as well as other reports and registration statements filed by us with the SEC and the AFM. Our comments include non-GAAP financial measures.

Reconciliation to the most directly comparable GAAP financial measures is included in the press release announcing our first quarter results. Those non-GAAP measures can also be found on our website. With that said, I'll pass the discussion back to Dave..

Well, thanks Gwen. First for some industry trends. Core's encouraged that operating companies are buying into living within free cash flow and emphasizing returns on invested capital as demanded by today's investors. If we look at the projected 2018 U.S. related CapEx.

It is still 45% below 2014 peak levels when record amounts of capital were being employed but destroyed leading to over 130 U.S. E&P bankruptcies. Core projects that in the U.S.

in 2018 we will drill 18,000 less wells when compared to 2014, but still add about 1 million barrels a day of production to our 10 plus million barrels of oil being produced per day.

The industry is drilling fewer wells but better, more efficient wells which benefits Core Lab as E&Ps are high grading reservoir quality to Tier 1 zones employing new Core Lab technologies like our Digital Rock Characterization services, our digital analytics, Core's FlowProfiler engineered delivery systems and our HEROPerFRAC completion systems to name a few.

A new emerging trend will be the upsizing of well spacings as we learn more and more about the deleterious effects of down spacing on parent-child well relationships. Several operators including Pioneer Natural Resources have already signaled this trend.

The industry will continue to add perf clusters per stage yielding less stages while lateral lengths are near maximum owing to frictional forces. Perf clusters per stage could increase from an average of five to six to as many as 15 per stage reducing the time and cost for a well completion and stimulation program owing to the lower stage count.

Pad sizes are also set to increase with as many as 24 wells per pad being drilled. This will add to additional DUCs over the next year as operators will only frac the pad after all wells have been drilled.

Core's clients see the largest potential increases in their returns on invested capital, tied to boosting recovery rates from unconventional reservoirs.

Extensive proprietary studies have shown great promise with some recovery factors increasing from an average of 9% from unconventionals into the low and mid-teens, adding 500,000 barrels of oil over the life of a well that originally had a type curve of 1 million barrels for an incremental CapEx spend of about $2 million is a real return winner.

Core's testing shows that every formation and basin will have unique designs needed for EOR in unconventional reservoirs to be successful. The engineered gases that enable greater recovery rates will require extensive testing and specifications, services that today are only available from Core Lab.

The last and most important trend for Core and for our future is that client discussions have increased significantly for international and deepwater longer cycle projects that will be needed to meet future production demands.

The foreshadow of this increase in activity has been evident in the 20 FIDs approved back in 2017 with another 25 to 30 expected in 2018. Revenues from longer cycle projects have been mainly absent from Core's Reservoir Description revenue streams dating back to mid-2015 and should start to bolster Reservoir Description revenue in late 2018.

Q1 2018 Reservoir Description results marked the bottom of the international and deepwater cycle.

Increases in global demand, increases in net decline curve rates and decreases in global inventories that have been occurring since July of 2016, coupled with steeply falling production in Mexico, Venezuela, Colombia, Angola, China and the North Sea have tightened global crude markets to the point where longer dated barrels on the futures curve have to increase in price to ensure greater international and deepwater investment for that future supply.

Remember the decline curve always wins and it never sleeps. Now to review the three financial tenets by which Core used to build shareholder value over the past 22-year history of being a publicly-traded company.

During the first quarter of 2018, Core generated almost $19 million of free cash flow and converted 11% of every revenue dollar into free cash, the highest in all of oilfield services. The dip in Q1 free cash flow is typical as operations consuming working capital and anticipation of growing their businesses for the remainder of 2018.

Once again, Core produced oilfield industry-leading return on investment capital for the 34th consecutive quarter. Also during Q1 of 2018, Core returned over $24 million back to our shareholders via our quarterly dividend and share repurchases.

Core will continue to return all excess capital back to its shareholders in future quarters via quarterly dividends and opportunistic share repurchases. I'll now turn it back over to Gwen for that detailed financial review.

Gwen?.

Thanks, Dave. Now looking at the income statement. Revenue from continuing operations were $170 million in the first quarter as anticipated in our guidance, and up nicely more than 8% from the same quarter in 2017, and flat sequentially, all of which compare favorably to industry results announced to date and as we guided on our prior call.

Of this revenue, service revenue, which is more international, was $119.8 million for the quarter, similar to the last year but down slightly sequentially, primarily attributable to normal seasonal patterns as discussed on the earnings call.

Product sales, which are tied more to North America activities, were $50.2 million for the quarter, up $6 million or 12.4% sequentially compared to the EIA completion activity of 9%. We continue to gain share in the energetics products market as we benefit from our client's acceptance of products, such as HEROPerFRAC technology.

Moving on to cost of services. At 70% of service revenue remained relatively consistent from the previous quarter. Cost of sales in the quarter was 72% of product sales revenue, a nice improvement from the 77% last quarter and 83% in the same quarter last year.

We continue to see improvements in our operating leverage and the absorption of our fixed costs on higher levels of revenue. G&A for the quarter which was $12.7 million, for the full year we expect G&A to be around $48 million to $50 million. Depreciation and amortization for the quarter was $5.8 million, similar to the last several quarters.

Depreciation expense is expected to be approximately $25 million to $26 million for the full year. In the guidance, which we gave on our last call and past calls, specifically exclude the impact of any FX gains or losses and assumed an effective tax rate of 15% for the first quarter.

So accordingly, our discussion today excludes any foreign exchange gain or loss for the current or prior periods and is adjusted to the guided tax rate of 15%. EBIT, ex-items from continuing operations for the quarter was $32.7 million and continues to represent best-in-class EBIT margin of 19%. GAAP EBIT was $32.3 million.

Income tax expense for the quarter was $4.4 million, using the guided effective tax rate of 15% and was $5.3 million on a GAAP basis, using the actual 18% effective tax rate. The difference resulted from FIN 48 adjustment. We expect the effective tax rate as the year progresses to be approximately 15%.

Net income from continuing operations ex-items for the quarter was $25.2 million, up 39% from $18.1 million in the quarter of last year. Earnings per diluted share from continuing operations ex-items was $0.57, also up 39% from Q1 2017. GAAP EPS was $0.54 for the quarter. Now we'll move on to the significant aspects of the balance sheet.

Receivables stood at $137.7 million, up from $133.1 million at year-end 2017, and our DSOs this quarter of 68 days continue to be in line with our historical range. Inventory, $36.4 million, up $3.1 million sequentially to support the continued growth in our product sales.

Importantly, inventories were 4.0, representing a 10% improvement in turns experienced in 2017. We expect this inventory turn performance to continue throughout the remainder of the year. And now the liability side of the balance sheet. Our accounts payable were $45.5 million, up $3.8 million from the balance at year-end.

Our long-term debt ended the quarter at $235 million, up from $227 million at year-end. Capital expenditures were $4.4 million for the quarter.

We expect capital expenditures for the year to be in the $20 million range, and we continue to adhere to our strict capital discipline as we evaluate the capital expenditures opportunities throughout the year based on client demand. Looking at cash flow. In the first quarter, cash flow from operating activities was $23.1 million.

And after paying for our $4.4 million in CapEx, our free cash flow in the quarter was $18.7 million. As revenue and business activities increase as they have over the last year, investment and working capital and capital expenditures are also expected to increase but in line with our receivable days and inventory turns.

Our free cash flow conversion ratio, which is free cash flow divided by net income, continues to be one of the highest in the industry at 79% for the quarter and is expected to improve as we progress through the year. We believe this is an important metric for shareholders when comparing companies' financial results.

Now I will turn it over to Larry for an update on our guidance and outlook..

Thanks, Gwen. We believe second quarter 2018 international exploration and production activity levels will be flat sequentially with most international development projects continuing to be funded largely from operating budgets. We expect the average second quarter 2018 U.S.

rig count to be slightly up sequentially with completion activity levels showing modest growth. We believe the U.S. completion growth rate will moderate until logistical bottlenecks are resolved.

And here we are referring to the industry's need to hire and train new frac crews, acquire and/or update pressure pumping equipment and optimize their supply chain. In addition, an emerging trend to larger pad drilling sites, increasing up to 24 wells, will create an increase in drilled but uncompleted wells over the next several quarters.

Combined, these issues could impact the rate of revenue growth opportunity for any company that is reliant on completions as a catalyst for growth. We expect Reservoir Description revenue and operating margins to be similar to the first quarter of 2018 due to continued muted international activity.

This is consistent with other international service company commentary. Production Enhancement is expected to experience continued growth with year-over-year incremental margins in line with historical 60% levels.

Therefore, we expect consolidated second quarter 2018 revenue of approximately $177 million to $179 million and operating income of approximately $36.2 million to $37.2 million, yielding operating margins that exceed 20%, up 100 basis points sequentially. Based on these ranges, incremental margins of 50% are expected in the second quarter.

EPS for the second quarter of 2018 is expected to be in the range of $0.64 to $0.66. This second quarter 2018 guidance excludes gains or losses in foreign exchange and assumes an effective tax rate of 15%.

Several consecutive years of significant international underinvestment will lead to steepening legacy declines in crude oil production outside of North America, the Middle East and the former Soviet Union.

Therefore, we have an optimistic view for 2018's industry activity and our financial performance for the following reasons; Crude oil industry fundamentals continue to improve with falling global crude oil inventories; continued increases in worldwide crude demand, a tightening in the number of days of consumption held in global crude oil inventory; and the impact these fundamentals have on increasing the price of crude oil.

We are also encouraged by the increased focus of our major clients on capital management, return on invested capital, free cash flow and returning capital back to their shareholders as opposed to just production growth at any cost.

E&P companies adopting value versus volume metrics tend to be more technologically sophisticated operators and form the foundation of our worldwide client base. Client planning for international and offshore projects are in the early stages but progressing. This will benefit our leverage to both markets, especially in late-2018 and 2019.

Additionally, renewed investment at a global level is critical in order to meet future supply needs. Oil company recognition of the need for investment is evidenced by the approximately 25 to 30 final investment decisions estimated to be announced in 2018, with six already announced year-to-date.

These FIDs would follow the more than 20 FIDs announced in 2017. The oil company's ability to invest is due to their successful efforts in increasing their EURs along with reduced capital project cost that are better aligned with today's crude oil price per barrel.

Although the FID activity is positive and shows progress of a global crude oil industry recovery, sustainability of supply needs when compared to demand projections will require more projects and on a larger scale, which Core expects in the future. And with that guidance, will turn the call over to Monty for an operational review..

Thanks, Larry. During our first quarter business with Core Lab clients, the CEO of a major independent oil company told us that Core Lab was the best value of their capital spend. That was a very nice complement because delivering value and helping our clients increase returns on their investment capital is exactly what we strive to do every day.

Our employees are providing innovative solutions, integrity and superior services to our clients every day and we thank them. In Q1 Core's Alaska last operation received several cores (20:57) from discovery wells drilled on the North Slope and delineating a major oilfield discovery.

These emerging opportunities have allowed Core Lab to expand our current laboratory capabilities. One of the new technologies deployed in the region in addition to our CT scanner is a Core Lab proprietary dual detector, high-resolution gamma logger.

The gamma logger is designed to acquire and quantify nationally occurring gamma radiation in order to characterize the different formations or reservoirs in a wellbore.

The technology greatly improves the quality of core gamma log and assist our clients in identifying pay zones, lithology modeling and permeability barriers throughout the drilled intervals. Core's U.S.

reservoir fluids laboratories received a large number of PVT samples from one of the largest crude oil discoveries in the Gulf of Mexico in the past decade. Core's work included both field and laboratory services.

Several PVT studies are currently ongoing using Core's proprietary, ultra-high pressure, high-temperature fully visual PVT cells, the only cell of its type being utilized in the industry today. At the end of 2017, our Middle East operations were awarded multiyear projects with national oil companies in the UAE and Qatar.

These projects include the provision of field services, PVT analysis and Enhanced Oil Recovery studies. As a result of these awards, activity has increased in bulk locations now receiving samples and initiating studies.

Operations have also noted a more positive sentiment emanating from our region partners – regional partners, who are now considering more advanced projects such as Enhanced Oil Recovery studies, which in the downturn were typically postponed or canceled.

There have also been an increased number of inquiries for flow assurance studies, specifically for determining potential asphalting problems that arise due to the natural depletion of the reservoir are caused by injecting gas to improve oil recovery.

By understanding the thermodynamic conditions and chemical changes that lead to their onset, Core Lab can provide recommendations to our clients on either how to avoid or mitigate potential problems that result in reduced or lost production.

In China, we are working with an ILC (23:40) for an upcoming tight gas coring project in the Shanbao block of the Shanxi (23:44) province. Core's experience in handling conventional cores in the South China Sea has been requested for an upcoming coring and fluid sampling job, following a recent oil discovery.

Following a deepwater discovery in Gabon, core and fluid samples have been received in our Kuala Lumpur ATC for analysis. Further drilling is expected later this year and our clients continue to show interest in Core Lab's regional geological studies off West Africa.

Core's FlowProfiler EDS is an engineered delivery system that addresses the industry need of accurately profiling hydrocarbon production in a fracked well. Developed by Core's team of research scientists, EDS is the only technology in the market to precisely place oil tracer within the fracture network within specific stages of the horizontal well.

Unique to the industry, EDS is available in multiple mesh sizes. This allows Core's engineers to align industry-leading expertise with unique technology to design diagnostic programs around Core – around client-specific completion designs.

Already widely utilized in diagnostic programs, FlowProfiler EDS is rapidly being adopted across all major basins in the U.S. and Canada. Core Lab's preview (25:22), another industry-first technology, provide immediate analysis of frac fluid cleanup on location.

Core Lab clients are utilizing this technology to quickly make operational decisions based on full lateral contribution. Canadian clients report savings of $100,000 per well in mobilization and rig time on average.

One operator has eliminated the need to mill out on every well, commenting that since utilizing preview (25:54), we have saved literally millions of dollars. Core Lab's Production Enhancement team continues to see significant growth in our perforating systems that are providing value for our clients in their pursuit of production optimization.

By maximizing stimulated reservoir volume, SRV, Core Lab's best-in-class HEROPerFRAC sales were up 13% in Q1 versus Q4, and up fourfold versus Q1 2017.

Our equal hole size perforating technology provides the industry's most consistent hole size around the wellbore, facilitating frac designs that allow operators to optimize hydraulic pump rates for maximum proppant placement. HEROPerFRAC's 100% cluster efficiency increases SRV and our clients' return on invested capital.

Currently, we have over 20 oil and gas operators in North America, specifying Core Lab's HEROPerFRAC technology.

Core Lab continues to focus away from commodity perforating gun market and on bringing value to our clients through unique solutions like our proprietary pinpoint perforating system for orienting stage perfs away from expensive control lines, providing reservoir pressure and temperature information.

Commodity based systems cannot be reliably oriented, often damaging the transmission lines. These fiber-optic cables used for reservoir monitoring can cost up to $1 million. Core's pinpoint perforating system is a solution for perforating these wells that are monitoring reservoir production and ensuring success for our clients' capital investment.

Another unique solution provided by Core's Production Enhancement team allows for repair of failed wells resulting from frac sleeves that are opened prematurely and casing splits from drilling-ware (28:04). Failures can occur in the heel portion of the well, shutting down the fracturing operations, resulting in expensive downtime for our customers.

Our patented X-SPAN system has seen significant growth in repairing horizontal wells that have experienced sleeve failures. Core Lab's X-SPAN system economically covers the failed sleeves or damaged casing and provides pressure integrity needed to continue the fracturing operation. Zed, we will now open the call for questions..

Thank you, sir. We will now begin question-and-answer session. The first question is from James West from Evercore ISI. Please go ahead..

Hey, good morning, everyone..

Morning, James..

Dave, could you perhaps – talk about deepwater (29:35) as well..

I am sorry to interrupt Mr. West....

Could you talk about the engagement around the deepwater area, maybe specifically just talk about how – I know there's been FIDs, but are customers or clients really moving forward with these projects or is it just the testing of the waters type of situation?.

No. Discussions have picked up significantly. I'm going to turn it over to Larry because we – actually, as we speak, we do have crews out collecting samples, rock and fluid samples, from rigs. So Larry, I'll turn that over to you..

Yeah, James. The conversations, as Dave said, have picked up significantly to the point where our clients are making sure that we've got assets in place to handle their rock and fluid needs at the well sites and to make sure that going forward, we'll be able to turn the analytical programs in a timely manner..

So James, if you look at Reservoir Description, first quarter 2018, that's going to be – probably going to mark the bottom of the deepwater and international cycle. So where we called for company-wide for that to occur in the third quarter of 2016, we are now calling for Reservoir Description for that to occur in Q1 of 2018..

That's very good. Thank you, Dave. And then a quick question for Monty, I'm talking about the shift away from commodity perf – perf guns and charges. I know that's been ongoing for several years.

But can you maybe give us a percentage of how much of your sales now are in the commodity side of the space versus the – or high-end space?.

It varies, James. But it's in the 10% or so. And it's not a market that we are pursuing. Sometimes, as a package, there's a little of that included..

Okay, I got it..

So that's down from maybe 20% in previous years. It is a – they are lower cost. So sometimes we do deliver those to clients if it's a demand..

And James, you can just look at revenue growth in Production Enhancement and also margin expansion versus U.S.

completions, so you can see that we are adding nice incremental margins and nice market penetration and gaining market share with the introduction of these new technologies and having the amount of commodity charges and gun systems actually lessen to, as Monty said, around 10%..

Okay. Got it. Thanks guys..

Okay, James..

Thank you. The next question is from the line of Byron Pope from Tudor, Pickering, Holt. Please go ahead..

Good morning..

Morning, Byron..

So Dave, with regards to those client discussions on deepwater.

Could you frame if those are potentially more skewed towards the Gulf of Mexico? Or is it broader-based than that, just as we think about the key deepwater theaters?.

Yeah. More broader-based, I would say, certainly Gulf of Mexico, offshore Guyana, south – in South America, some activities in the Middle East and Asia Pacific area. So it is pretty much wide scale. I would say the greatest concentration though right now is Gulf of Mexico, offshore Guyana and some offshore Northwest Africa..

Okay. And then, just one question as it relates to Production Enhancement. The Q2 guidance is certainly constructive with regard to sequential top line growth. But I wanted to just make sure I wasn't misinterpreting the commentary with regard to potential constraints on completions activity.

Is that a comment about just potential risks in the second half of the year, given some of the industry issues?.

Yeah, that's correct, because Byron, if you look at – we're projecting to add somewhere between $7 million and $9 million in revenue. All of that is owing pretty much to Production Enhancement. And with the increase in earnings that we're going to report, again, all that is owing to the growth in Production Enhancement.

So there might be some roadblocks out there for industry. We put that out there as a warning. We think actually some of those bottlenecks are clearing now. So we expect another stellar performance out of U.S. land and Production Enhancement..

Great. Thanks, Dave..

Yeah. Just need a little help on the Reservoir Description side to get that going and we'll be back to being the iron, Byron, that a lot of our investors expect to see..

I appreciate it, Dave..

Thank you. The next question is from the line of Scott Gruber from Citigroup. Please go ahead..

Good morning, everybody..

Morning Scott..

Dave, you highlighted the improving outlook for international partly on the back of greater FIDs to come, which is great, we certainly agree. But FIDs of this year will only have a modest impact on spending by the majors and have larger been budgeted for.

What you think the big operators do with their better-than-expected cash flow this year? Historically at this point in the cycle, exploration spending starts surprising to the upside.

Could that happen again this year?.

Yeah. We think we're seeing that now with that excess, well not excess, with our cash flow some of that being directed to more longer cycle projects. And that would certainly benefit international and deepwater, and we think we're seeing that as we speak, where but greater percentages or budgets will be for some of these longer-cycle projects..

Got it. And just on your base business you have very good exposure to have a development-oriented spending as people continue to reassess their reservoir. Could you actually see an unexpected bump on that side of the business? Right now your Reservoir Description business is growing broadly in line with the market.

It just appears to me that with customers having excess cash flow out, spending a bit more on characterization, flow dynamics, it's just kind of a logical incremental spend, doesn't cost them a whole lot, you get a lot of bang for your buck.

What's the potential for Reservoir Description to start outpacing the broader market into the second half and into 2019?.

Yeah. Certainly, discretionary spending will be increased with the additional cash flow coming in.

What we'd really like to see to juice (36:43) Reservoir Description revenues and incremental and margins would be the addition of some of these longer-term capital projects that we're seeing starting to take shape right now and believe will benefit us later this year. But you're right. Discretionary spending will be up.

So just from the OpEx budgets, we could see an outperformance of the market year-over-year in that as well..

The OpEx budgets your client picked up more than you thought during the downturn, it's kind of one thing I've been thinking about.

Does that snap back more?.

Pretty much flat..

Okay. Got you. Okay, that's it for me. Thanks..

Thank you. Next question is from the line of Sean Meakim from JPMorgan. Please go ahead..

Thank you. Good morning..

Morning, Sean..

So Dave, what will you attribute the acceleration in the perf systems' sales in the quarter? I guess stage kind of likely outpaces completions, but any market share gains to speak of, are customers building inventory in advance of higher activity this year? Or just larger pad sizes all kind of..

Yeah we are just....

Yeah. Sorry about that..

Yeah Sean, the way we think of it because of licensing that's out there, really, our clients do not keep inventory. It's usually a call off of our inventory. When we see this technology gaining market acceptances, market penetration and market share, we expect to continue seeing our Production Enhancement energetics revenue clearly outpacing U.S.

completions. Couple of reasons behind that, again, greater market penetration, taking greater share, but if we look at the number of perf clusters per stage, we believe that, that still has a long way to run. Average perf cluster per stage right now is 5 to 6. We've seen some of our clients experiment with as many as 15 perf clusters per stage.

That's a big incremental push for us. So a combination of all those factors we still should see our energetic systems continue to grow at a rate greater than U.S. completions margin expansion due to higher incremental margins..

Got it. Thank you very much for that. And then, yeah, I've noticed that your tax rate's been running above your expectations the last couple of quarters. Presumably there are just higher mix in U.S. given where PE is in cycle versus Reservoir Description.

But just how do we think about the long-term mix versus last cycle? And how does that inform your 15% guidance as we think about the shift between Production Enhancement, perhaps moving more towards RD in the long run?.

Sean, last cycle, that tax rate varied between 20% to 22%, I believe. And this past quarter, we saw some FIN 48 adjustment that led to the 18%. We believe, for the rest of the year that plays out to be about 15% effective tax rate. So it could slightly increase as the cycle continues. Just think about those revenues earned in the U.S.

as an example, as the revenue continues to grow. So maybe around 20% potentially..

Got it. Yes, I know forecasting taxes is particularly difficult in this business. So I appreciate you guys putting forth the guidance. Thank you..

Thank you. The next question is from the line of Marc Bianchi from Cowen. Please go ahead..

Thank you..

Hello, Marc..

Dave, how are you?.

I'm doing well..

Good. My question – first question has to do with the Reservoir Description outlook here, talking about it being similar in second quarter but also talking about it bottom in the first. So I suspect that means maybe slightly up in the second quarter but not enough to really count for earnings.

But just kind of curious about the drivers there, you commented in the press release about some of the commentary from the other diversified service companies as being sort of a – one of the reasons why that business would not have the seasonal increase in the second quarter that we usually see.

I had thought of this business or at least currently how it is being largely OpEx and production-driven while the diversified service companies are largely CapEx-driven.

So is there something changing with the Reservoir Description business? Or is it just an unusual quarter? Can you kind of provide some more color around the progression there?.

Yeah. Not at all. We did see your comments in your notes. All we were doing is referring to the diversified companies and their comments on international activity levels expected in the second quarter, and we would parallel that. We agreed, our business is very much different from what drives their businesses.

When we look at what it takes to get order service about 82 million barrels of production around the world from our clients, from their OpEx budgets, that is somewhere on the order of 100 million per quarter.

Now, we see that continuing into the second quarter, hopefully, getting a lift out of some added CapEx, and as earlier said, maybe some additional discretionary spending for additional OpEx projects. So we still draw that line that that business is way different than what we see from the diversifieds.

We were just using their comments to parallel what we're seeing for international activity levels in total..

Got it. Okay. And then it sounds like the leading indicators in terms of inquiries are very positive, and you'd expect a pretty sharp increase in the third quarter. I think last quarter we talked about the potential for margins to kind of get to a 20% level at the end of the year.

I mean, just given where we're talking about the second quarter still probably being in that 15% range, is the 20% aspiration still in the cards?.

That will be a stretch for us, but right now that is still our year-end target..

Okay. Very good. Thanks so much..

Okay, Marc..

Thank you. The next question is from the line of James Wicklund from Credit Suisse. Please go ahead..

Good morning, guys. Very comprehensive report. We appreciate it..

Morning, Jimmy..

Guys, could you – can you give us a breakdown just generally on your revenue base between IOCs, NOCs and independents?.

Sure can. If you look at it, about 30% of our revenue is from the large integrated oil companies, 15% from national oil companies, leaving 55% from all the independent operators worldwide. Now Jimmy, we would say that that might be slighted a little bit towards the majors and away from the NOCs.

For instance, we do a lot of work in the southern portions of Iraq. That work is done for BP, but it is paid for by the Southern Iraqi oil company. So that on a GAAP basis gets thrown into their basket, as opposed to BP's basket. But that gives you a kind of a good feel for our revenue mix worldwide..

That was very helpful. That's very helpful. And if I could have a follow-up, on the wireline side, this is the first time you guys have actually called out equipment sales. It is appreciated. And there's a great deal of competition I realize out there. Companies that make perforating guns are ramping up activity.

You guys are the crème de la crème of the capability. I'm just curious though is there a wireline company that does more of your perforating guns than others? Some of the companies, I've seen (45:37) make their own perforating guns and they use those to (45:40) outside.

Is there any one or two or three wireline companies that predominantly use you guys or that you guys predominantly use?.

Yeah, Jim, the way we look at this is, our concentration is on energetic systems. We're not that interested in making perforating guns per se because the margin is not there. The margin is in the engineering design of the chargers and the gun systems.

So when you look at over the last several quarters, there's been a lot of talk about increased competition. Maybe a little different market that we're addressing. We're looking at the ultra-high-end market. And we continue to see an outperformance of our revenues and margins when compared to total U.S. completions.

So we believe that the introduction of HEROPerFRAC and similar energetic systems certainly are playing to us, capturing or creating new market in the ultra-high-end market of perforating guns.

Monty?.

Yeah, Jim, the other factor we need to keep in mind, we are selling these high-end energetics to the operators, who are the beneficiary of the value that they can bring. That's a key factor. We work for virtually all of the – with all the wireline companies on providing these systems.

But our sales point is really to the operator, who's the beneficiary of technology..

That was going to be my next question, so I appreciate it, that's helpful. And people are talking more and more about modular assembly on location.

I would assume because yours are energetic systems that modular assembly on location isn't something that applies to you guys, is that right?.

That is correct..

Okay. That's very helpful guys. I appreciate it. Thank you very much..

Thank you very much. The next question is from the line of Chase Mulvehill from Wolfe Research. Please go ahead..

Hey, good morning, Dave..

Morning, Chase..

I guess sticking with deepwater a bit here.

Could you contrast your outlook for deepwater development between greenfield and brownfield reservoirs and kind of what's the revenue opportunity for you of a greenfield versus a brownfield reservoir development?.

That's an interesting question. If you look at a greenfield, we could point at Exxon Liza. We will be generating revenue from that project over the next 20 years. But in saying that, we're going back and working on projects that are related to brownfield where you're getting the expansion of the production capacity of discovery.

A good example of that would be BP Mad Dog 2 in the Gulf of Mexico. So really, the revenue potential for both are about equal over the short-term. Over the long term, certainly the larger the project, the better.

We've had six discoveries, offshore Guyana and so from a development of those, certainly guarantees a revenue stream for us, probably over the next couple of decades..

Okay, thank you. That's very helpful.

If we kind of stick with Reservoir Description and just maybe if you could help us think about where you think you could exit the year on a year-over-year top line growth rate? And then how we should be thinking about maybe sequential incrementals for the Reservoir Description business as revenue starts to pick up – revenue growth starts to pick up later this year and into 2019?.

Yeah. We're looking at still – this kind of refers to what Marc Bianchi had asked. We're still looking at year-over-year growth internationally, somewhere around 5%, which should get us an exit rate somewhere year-over-year at 9%. And again, our margin target is still 20%..

Okay. All righty. Thank you. So some pretty strong growth in the back half of the year for Reservoir Description..

Yeah. Well, if we get these discussions that we're having now, those projects start up, that is correct..

Okay, helpful. Thanks, Dave..

All right, Chase..

Thank you. The next question is from the line of Kurt Hallead from RBC. Please go ahead..

Well, good morning..

Morning, Kurt..

Hey, Dave and team, I'm just kind of curious. You lay out a outlook in your commentary and you talk about the companies that are dependent upon completions might have a slowing growth rate. I was very much curious as to what does that infer for your Production Enhancement business.

And isn't Production Enhancement reliant on completion activity? Is there any kind of color or help in calibrating that comment? It would be helpful..

Yeah. Just a cautionary warning out there, our guidance suggests that growth will still be healthy. If you removed all those roadblocks that Larry Bruno referenced, we would probably be more aggressive on what the revenue, incremental margin and margin growth would be for that business. So there is a governor on that.

That governor happens to be service providers that are outside of our sphere of influence; namely, pressure pumpers, sand providers, things of that nature..

Great. Dave, that's great color. So my follow-up question, Dave, would be you talked about 25 to 30 FIDs coming this year versus the 20-or-so last year. You also mentioned, given the decline rates and everything else going internationally, is there going to be a need for more larger-scaled projects.

So what do you think the upside to that FID number could be maybe for 2018 and do you want to maybe proffer up a guess as to what we could expect for – or what a range of expectations could be for FIDs in 2019?.

Yeah. So if we look at what we're living off of right now, those would have been the FIDs that would have been committed to and sanctioned last year. We are interested at 2018. Most of those we look at as being backlog for future projects, we may be talking about them this time next year.

And I'll turn it over to our FID expert, Gwen, on what she might suggest is in the pipeline in the future.

Gwen?.

Yeah. So we think, like Dave said, that 30 might be the high end on the FIDs for 2018. And because this reinvestment will likely continue, maybe we go into 2019 with something very similar. Maybe that also ends up to be 25 to 30 more..

And then just....

So on a longer....

Sorry, Dave (53:21).

Kurt, on – yeah. On a longer-term scale, you remember we started talking about crude oil prices and inventories and decline curves in July of 2016. And we continue to talk about, we thought crude oil prices had to strengthen owing to the laws of physics and thermodynamics plus some worldwide growth. We look at FIDs the same way.

With these FIDs being sanctioned, sooner or later that doesn't really hit our revenue line in Reservoir Description along with increasing incremental margins and margins. So we look at this as just a – essentially a backlog of projects for us to enter into over the next 6, 12 and 18 months..

That's great color. I appreciate it. Thank you..

Thank you very much. The next question is from the line of Ian Macpherson from Simmons. Please go ahead..

Hi. Thanks. Good morning..

Morning, Ian..

Hi, Dave, you mentioned earlier that your belief that the backend of the crude ships probably needs to move higher that it doesn't reflect the price signal required to balance the market and get over the medium term.

Do you think that fulfilling an aspiration of 25 to 30 FIDs over 2018 and 2019 can happen without that response in the backend of the curve? Or do you think that the curve movement a predicate to fulfilling that aspiration?.

Yeah. Curve movement, we're going to see first, because if we look at some of the first oil from these FIDs, we're looking at, for instance, first oil out of Exxon's Liza is 2020. First oil out of Exxon or sorry – out of Shell Vito is 2021.

So over the next year, year and half, you're going to have to see movement in that backend just due to the lack of investment that we have seen over the last couple three years.

And also more – most importantly, when we look at these FIDs that are listed, and if they're offshore, if you look at some of these breakeven prices, and I will just quote from BP. When BP first looked at FID-ing Mad Dog 2, Brent crude prices were at $110.

They now are going to make more money on – or better returns on BP Mad Dog two with a crude oil price of between $55 and $60. So these costs have come way down as well. And that's feeding into these FIDs.

However, we won't be able to produce enough oil soon enough out of these longer-cycle projects that will prohibit the curve from moving, It will move..

Okay, good..

Because I think backwardations today are somewhere between $5.50 and $6 the last time I looked, if we look at the script. And that's got to close..

Okay. And then switching gears, this has been discussed a bit. But with regard to your success in sort outgrowing the completions market and Production Enhancement in Q1 and Q2, really, on a kind of a secular basis.

One thing that you've overcome is really the overweighting of the private E&P activity, at least affected by rig count in the early part of this year that logically does not play to your strength. But you've continued to outperform the market notwithstanding that mix shift.

How do you see that customer mix shift evolving? And would it be wrong to characterize you as being inhabited by a continued over-waiting of the privates in the rig count as cash flows surprised with the upside with oil price?.

Yeah. If you look at – clearly, we are beneficiaries of short-cycle dollars coming into publicly traded oil companies. So they are giving a greater emphasis right now to the short-term projects. We're seeing some of their incremental cash flow being looked at on an international and deepwater front.

So overwhelmingly, our clients, as we look forward, are going to be these publicly traded entities. And so those additional incremental dollars that are flowing into these short-cycled projects in these unconventionals in the U.S., will continue to benefit us..

Very good and thanks for all the color today..

Okay, Ian, very good..

Thank you very much..

So with that, I think, we're going to go ahead and wrap it here now..

Sure..

So in summary, Core Lab's operations continue to position the company for activity levels in the second quarter of 2018. And we know that significant challenges await. However, we've never been better operationally or technologically positioned to help our clients maintain and expand their existing production base.

We remain uniquely focused and are the most technologically advanced reservoir optimization company on the planet. This positions Core well for the challenges ahead.

The company remains committed the industry-leading levels of free cash generation and returns on invested capital with excess capital being returned to our shareholders via dividends and future opportunistic share repurchases. So in closing our 91st quarterly earnings release, we thank all of our shareholders and the analysts that follow Core.

And as already noted by Monty Davis, the executive management of Core and the board of supervisors of Core Laboratories give special thanks to all of our worldwide employees that have made these results profitable. We are proud to be associated with their continuing achievements.

So thanks for spending time with us today and we look forward to updating you at the end of the next quarter. Thanks..

Thank you. Ladies and gentlemen, the conference call has now concluded. Thank you for attending today's presentation. You may now disconnect your lines..