Good morning and welcome to the Core Laboratories Fourth Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Larry Bruno, Chairman and CEO. Please go ahead.

Thanks, Andrea. Good morning in the Americas, good afternoon in Europe, Africa and the Middle East, and good evening to Asia Pacific. We'd like to welcome all of our shareholders, analysts and most importantly, our employees to Core Laboratories' Fourth Quarter 2023 Earnings Call. This morning, I'm joined by Chris Hill, Core's Chief Financial Officer; and Gwen Gresham, Core's Senior Vice President and Head of Investor Relations. The call will be divided into six segments. Gwen will start by making remarks regarding forward-looking statements. We'll then have some opening comments, including a high-level review of important factors in Core's Q4 performance. In addition, we'll review Core strategies in the three financial tenets that the company employs to build long-term shareholder value. Chris will then give a detailed financial overview and have additional comments regarding shareholder value. Following Chris, Gwen will provide some comments on the company's outlook and guidance. I'll then review Core's two operating segments, detailing our progress and discussing the continued successful introduction and deployment of Core Lab's technologies as well as highlighting some of Core's operations and major projects worldwide. Then we'll open the phones for a Q&A session. I'll now turn the call over to Gwen for remarks on forward-looking statements.

Before we start the conference this morning, I'll mention some of the statements we'll 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 risks and uncertainties that could cause actual results to materially differ from our forward-looking statements. These risks and uncertainties are discussed in our most recent annual report on Form 10-K as well as other reports and registration statements filed by us with the SEC. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Our comments also include non-GAAP financial measures. Reconciliation to those directly comparable GAAP financial measures is included in the press release announcing our fourth quarter results. These non-GAAP measures can also be found on our website. With that said, I'll pass the discussion back to Larry.

Thanks, Gwen. Moving now to some high level comments about the fourth quarter of 2023. Core continued to build on the operational momentum established over the past few quarters. Revenue was up 2% compared to Q3. Softness in US land completion activity late in the quarter, along with disruptions to the demand for crude oil assay work in response to the Middle East conflict that emerged in Q4 produced headwinds. Offsetting those headwinds, we saw a continued improvement in the demand for Reservoir Core and Fluid Analysis and there was a rebound in both international product sales and the demand for completion diagnostic services for production enhancement compared to the third quarter. Ex items, operating income for the fourth quarter was $15 million, and operating margins were 12%, down slightly from 13% in Q3 of 2023. Fourth quarter 2023 operating margins ex items, remained strong in Reservoir Description at 15%, although we're down from 17% in Q3 due to increased labor costs. As noted, demand for Reservoir Rock and Fluid Analysis across our global client base continues to rise and more projects are progressing from the planned and committed phase and into the early stages of execution. Demand for Reservoir Description assay work on crude oil and derived products was somewhat uneven during the fourth quarter as geopolitical conflicts in both Ukraine and the Middle East impacted maritime hydrocarbon cargo movement and trading patterns. We anticipate volatility and uncertainties to remain in the demand for these laboratory services as these conflicts continue. Production Enhancement revenue, operating income and margins all improved sequentially, but US land completion activity, particularly in December, was below our earlier expectations. For Q4, operating margins, Production Enhancement ex items were 6%, up from 4% in Q3. In line with our stated financial strategy, Core dedicated free…

Thanks, Larry. Before we review the financial performance for the quarter, the guidance we gave on our last call and past calls specifically excluded the impact of any FX gains or losses and assumed an effective tax rate of 20%. So accordingly, our discussion today excludes any foreign exchange gain or loss for current and prior periods. So now looking at the income statement. Revenue was $128.2 million in the fourth quarter, up 2% compared to the prior quarter and flat year-over-year. Activity associated with international upstream projects and product sales to international clients continues to expand. However, the growth was partially offset by lower level of product sales in the US land market. Additionally, laboratory services associated with crude assay analysis have been adversely impacted in certain regions due to the ongoing conflict in Ukraine, Russia and the Middle East causing disruptions to the trading and maritime movement of crude oil. Of this revenue, service revenue, which is more international, was $94.7 million for the quarter, up 2% sequentially and up 6% from last year. During the quarter, committed work volumes for traditional Reservoir Rock and Fluid Analysis as well as carbon capture and storage projects continue to build across our global laboratory network. Additionally, we experienced nice sequential growth in revenue from our well and completion diagnostic services associated with both international and Gulf of Mexico projects. However, sequential growth in service revenue was partially offset by lower levels of crude assay work due to the disruptions caused by the ongoing conflicts previously mentioned. For the full year of 2023, service revenue of $371.9 million was up over 7% compared to $347 million in 2022. As Larry mentioned earlier, client activity levels associated with international upstream projects improved nicely in 2023 and are expected to continue building throughout…

Thank you, Chris. For 2024, the company will continue to execute our strategic plan of technology investments targeted to both solve client problems and capitalize on Core's growth opportunities. As part of the strategic plan, the company will remain focused on generating free cash, reducing debt and maximizing return on invested capital. We maintain our constructive outlook on international upstream projects for 2024 and anticipate sustainable activity growth in the years ahead to support crude oil demand and energy security. Crude oil demand increased in 2023 and is anticipated to continue growing in 2024. Consequently, increased investment in the development of onshore and offshore crude oil fields will be required to maintain and grow hydrocarbon production. In the near term, global crude oil markets may remain volatile due to global recession fears and the uncertainties related to the ongoing conflicts in Russia, Ukraine and the Middle East. As the international recovery continues, committed long-term upstream projects from the Middle East, South Atlantic margin, certain areas of Asia Pacific and West Africa support year-over-year growth for Core Lab as customary with typical seasonal patterns will cause activity in the first quarter of 2024 to decline in some regions. As such, the company anticipates Reservoir Description's first quarter revenue to be down low to mid-single digits. Increased client activity in some regions may help mitigate the typical seasonal decline. The geopolitical situation in Russia, Ukraine and the Middle East continue to create volatility with respect to trading patterns and maritime transportation of crude oil and derived products, along with the associated laboratory assay services that we provide. Now turning to the US. Onshore drilling and completion activity in 2024 is anticipated to be flat compared to 2023. However, market penetration of Core's proprietary energetic system and completion diagnostic service technologies are projected to outperform activity levels. For the first quarter of 2024, onshore drilling and completion activity was adversely impacted by extreme freezing conditions in January. However, activity is expected to improve as the quarter progresses. As a result of these factors, Reservoir Description's first quarter revenue is projected to range from $80 million to $84 million and operating income of $10.1 million to $11.9 million. Core's Production Enhancement segment's first quarter revenue is estimated to range from $42 million to $44 million and operating income of $1.5 million to $2.2 million. In summary, the company's first quarter 2024 revenue is projected to range from $122 million to $128 million, and operating income of $11.8 million to $14.3 million, yielding operating margins of approximately 10%. EPS for the first quarter is expected to range from $0.14 to $0.18. The company's first quarter 2024 guidance is based on projections for underlying operations and excludes gains and losses in foreign exchange. Our first quarter guidance also assumes an effective tax rate of 20%. And now I will pass the discussion back to Larry.

Thanks, Gwen. First, I'd like to thank our global team of employees for providing innovative solutions, integrity and superior service to our clients. The team's collective dedication to servicing our clients is the foundation of Core Lab's success. Looking at the macro outlook, the IEA recently updated its forecast for crude oil demand for 2024 to average a record high 103.5 million barrels per day. That's up by approximately 1.2 million barrels per day from 2023, even after assessing current global financial forecasts. This continues to bode well for the increasing demand for Reservoir Description services that will be required to grow production and replace the natural decline of existing producing fields. As we look ahead, we see the rising international rig count over the past 1.5 years as a harbinger of an improving landscape for Reservoir Description, a trend that we project will play out for the next several quarters, particularly in the Middle East, North and South America as well as most other regions. Production Enhancement in addition to its exposure to the US land market also has expanding opportunities in international areas, such as with unconventional plays in the Middle East and emerging conventional plays in a number of regions. Furthermore, Core continues to expand its line of innovative offerings for plug and abandonment programs in mature offshore basins around the globe. Now let's review the fourth quarter performance of our two business segments. Turning first to Reservoir Description. For the fourth quarter of 2023, revenue came in at $84.6 million, flat compared to Q3. Operating income for Reservoir Description ex items was $12.3 million and operating margins were 15%. While still strong, margins were down approximately 200 basis points compared to Q3 due to increased labor costs. For the full year 2023, Reservoir Description revenue was…

We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Patrick Ouellette of Stifel. Please go ahead.

Good morning, Patrick.

Good morning.

Hey, good morning. Yeah, Pat on for Stephen Gengaro. Thanks for taking the time. Could you give us an update on the competitive landscape for the US perforating market? And do you have any thoughts on the potential sale of DynaEnergetics and the impact that it has on the competition?

Yes. I mean I think it's a crowded market. There's no other way to look at it. There's been a lot of entrants into the field. I think from a Core Lab's perspective, we still maintain a strong competitive edge in the shaped charge energetics that are used to perforate the wells. That's always has been our wheelhouse. We offer competitive preassembled gun systems and a variety of other products into that market that we think offer a highly competitive set of solutions. Yes, the Dyna folks, I mean, I think that's a question best asked to the good folks up there. I think there -- you may be seeing some reflection of the landscape that they see that there's alternative products, including Core Labs that are gaining traction. Chris or Gwen, do you want to add anything to that?

No. I mean, when we look at it from the outside, it makes sense what they've announced. So it doesn't surprise us that they are looking at how to best maximize the businesses that they have and the shareholder value. So it makes sense to us that they're divesting some of the businesses that it looks like they projected they want to go with Arcadia.

Yes. They make good products for completions, no question about it, highly regarded. I think they run a good shop there. And we'll see how that plays out.

Great. Okay. Thanks for that. And then could you talk about margin progression in Reservoir Description? And any thoughts around the potential incrementals in the second half of 2024?

Yes. I think that segment is highly exposed to international activity, which we see that progressing, call it, low-double-digits next year. Again, I mean, I think we had a full year incremental margins in 2023 for Reservoir Description of over 85%. That's a pretty lofty number there. And so whether we can maintain that exact number might be a little bit challenging, but it's going to be high. Modeling that out at greater than 50%, 60% incremental margins on growth there on incremental revenue, I think, is very achievable for us. And our -- we always look at the -- our goal of getting back to that 20% operating margin as sort of the baseline that we'd like to see in a normal environment and then up from there. And we got kind of close in Q3. It was timely to do some merit increase at the beginning of Q4 that raised our labor cost. But we felt was needed to be done to -- with -- for our staff. So a little bit of a step back from 17% to 15% there. But we think it will progress up. And I think dialing in that low double-digit growth for international and applying a 50%, 60% incremental margins, probably toward the higher end of that is a good basis for coming up with a model for forecasting Reservoir Description performance.

Right. The only thing I would add that's a little bit of a headwind for us is -- and we mentioned it because it's real, the disruptions from the geopolitical -- and when these happen, it's very difficult for us to adjust our costs. So the impact, it's not just the revenue, it does impact the margins as well. And sometimes, they're temporary. So you just have to kind of manage your way through that with your cost structure. So that's a little bit of a headwind.

Yes. So for example, one of the things we dialed into our thoughts about Q1 was -- you saw a pickup in the conflict in Russia, Ukraine. And of course, the focus of a lot of that conflict has been on infrastructure that deals with the maritime transportation of hydrocarbons kind of -- and I think Core Lab maybe among our peer group, a little bit unique in having exposure to that -- those laboratory services that are needed for that cargo transportation. So it kind of lands on us a bit, and we dialed that into our thinking, seeing what happened both in the Red Sea and across some of the Russian ports. And so hard to predict that. And to Chris's point, it's also hard to manage your cost there. You don't want to reflexively start slashing costs if it's going to be a temporary disruption. So we'll make the right decision over time on those and we'll keep our costs aligned. But it's very hard to make those costs adjustments real time when things are unfolding at an unpredictable pace.

Yes, that all makes sense. Thanks a lot. I'll turn it back.

Thanks, Pat.

Okay. Thanks, Pat.

The next question comes from Don Crist of Johnson Rice. Please go ahead.

Hey, Don.

Good morning.

Good morning, guys. In your commentary in the press release, you talked about many of the Middle East projects kind of moving into implementation now. Where are we in the other parts of the world from the implementation standpoint i.e. is Brazil and Guyana really kind of ramping up now in the Far East as well? Or where are we in the life cycle of those projects?

Yes. Don, I'd probably put them in that order, Middle East is the tip of the spear, and that's across multiple countries in the region. And then I'd say, South Atlantic margin picking up for us. I would throw in also some West Africa work as well. And then I would say, lagging that a bit is Asia Pac, although we've got some pretty bright spots in Australia and Indonesia.

Okay. And one question on the US, as basins mature, obviously, you go towards -- from Tier-1 acreage towards Tier 2, Tier 3. Where are we in the life cycle particularly in the Bakken, but number two, in the Permian, are you starting to get some inquiries to evaluate kind of Tier 2 and Tier 3 rock in the Permian?

Yes. I mean we've got -- because of the multi-company studies that we've done across all of the major unconventional basins in North America and in many cases, other parts of the world, we've got a pretty good sensibility of where the Tier 1, Tier 2 and Tier 3 rock is. And I've joked in the past that we sell that information where the good stuff is and where the intermediate stuff is and where the not-so-good stuff is. And clearly, there's been a progression moving toward the latter stages of Tier 1 and into Tier 2 and in some cases, the lower ends of Tier 2 rock. I think if you look at production in a lot of the fields, the only one that's really, in our mind, got some growth potential is the Permian. You have to dial that rock quality issue and also with things like lateral length expansion. That third mile on oil wells -- oil producing wells is becoming common practice. But the rock quality, clearly the best of the best has either been consumed or is rapidly being depleted across all of the basins. And now it's more of an engineering and completion optimization program, which our Production Enhancement group will play into to try to get the most out of those rocks. I'd add a little bit more to that too and say we do see, from time to time, companies taking refreshed looks at restimulation refracs and things like that to try to go into some of the older legacy wells to try to get to unstimulated rock where the stages were very far apart. But I do think the growth rate -- the key point here, Don, is the growth rate that we've seen in production in North America is either not going to continue or is going to be at a much lower pace.

Right. I think it's fair to say, too, it's still real early, but with some of the focus on capturing CO2. And as that becomes maybe more available, there might be opportunities -- better opportunities to look at EOR-type projects and unconventionals, where the availability of CO2 may have been a limiting factor in that in the past.

Right. And are you getting a lot of work in the Bakken to restimulate and try to go after that rock that maybe hadn't been stimulated the first time?

Less so than in some of the other basins, I say, is a generalization. And I would add that some EOR programs that we validated in the lab have seemed to work better in some of the other basins than in some of the parts of the Bakken. But look, Bakken's still a world-class field play and stratigraphic target. There's going to be a lot of oil coming out of that. The rate of growth is going to be from where we are today, it's going to be more determined by advancements in completion, technologies and things like that.

Right. But I think they're in the very, very early stages of kind of a refrac program in the basin if I'm reading that correctly, right?

I think that's right. And I think it's highly operator-dependent. I don't believe I would -- it's proper to characterize that as a broad-based approach among a large number of operators to look at re-stimulation and EOR in that area yet.

Right. Okay. I appreciate the conversation. I'll turn it back.

Thank you, Don.

This concludes our question-and-answer session. I would like to turn the conference back over to Larry Bruno for any closing remarks.

Okay. We'll wrap up here. In summary, Core's operational leadership continues to position the company for improving client activity levels for 2024 and beyond. We have never been better operationally or technologically positioned to help our clients -- global client base optimize their reservoirs and address their evolving needs. We remain uniquely focused and are the most technologically advanced, client-focused reservoir optimization company in the oilfield service sector. The company will remain focused on maximizing free cash and returns on invested capital. In addition to our quarterly dividends, we'll bring value to our shareholders via growth opportunities, driven by both the introduction of problem-solving technologies and new market penetration. In the near-term, Core will continue to use free cash to strengthen its balance sheet while always investing in growth opportunities. So in closing, we thank and appreciate all of our shareholders and the analysts that cover Core Lab. The executive management team and the Board of Core Laboratories give a special thanks to our worldwide employees that have made these results possible. We're proud to be associated with our continuing achievements. So thanks for spending time with us and we look forward to our next update. Goodbye for now.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.