CLB

Good morning, and welcome to the Core Laboratories First Quarter 2026 Earnings Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. 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, Valentina. Good morning in the Americas, good afternoon in Europe, Africa, and the Middle East, 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 2026 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 Q1 performance. In addition, we'll review Core strategies and the three financial tenets that Core Lab 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 technologies, as well as highlighting some of Core's operations, recent client interactions, and major projects worldwide. We'll then open the phones for Q&A session. I'll now turn the call over to Gwen Gresham for remarks on forward-looking statements.

Before we start the conference 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 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 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, I'll turn it back to Larry Bruno.

Thanks, Gwen. Moving now to some high-level comments about our first quarter. The military conflict in the Middle East introduced geopolitical uncertainties that created meaningful disruptions across the Middle East countries in which we operate. As the company announced on March 23rd, the conflict closed many client offices and resulted in project delays. In addition, the suspension of maritime hydrocarbon transportation from the Middle East region forced operators to halt hydrocarbon production. For Core Lab, the disruption to hydrocarbon transportation routes extends beyond the Middle East region and into the company's global assay laboratory network that services the market for the maritime transportation and trading of crude oil, natural gas, and refined products.

The biggest impacts of the conflict have been on Reservoir Description and the service side of Production Enhancement due to their roles in actively supporting reservoir rock and fluid characterization studies, completion diagnostic programs, and hydrocarbon assay work, all of which require predictable client activity levels and field access for sample acquisition. To date, production enhancements completion products have been comparatively less affected by the Middle East conflict, although shipments of energetic products into the region were delayed or temporarily suspended. As a result of these factors, Core lowered its forecast for the first quarter of 2026 revenue and earnings compared to the guidance we provided in our earnings call on February 4th. The situation remains volatile and unpredictable shifts in the conflict will affect our operations. Other factors also impacted the first quarter.

Demand for assay services was also negatively impacted by the ongoing geopolitical conflict in Russia, Ukraine. Attacks on hydrocarbon transportation and refining infrastructure, along with evolving Western sanctions, continue to create demand uncertainties and operational inefficiencies. Early in 2026, severe cold weather in North America affected onshore client completion activities and resulted in the temporary closure of Core Lab's manufacturing facilities. Additionally, adverse weather in the Mediterranean Sea related to Storm Harry temporarily suspended the demand for lab services across several countries and caused significant damage to one of the company's facilities, creating further revenue and margin headwinds for the quarter. We are still in the progress of restoring service at the damaged location. Looking at Reservoir Description, first quarter revenue was down 11% from Q4 of 2025 and flat compared to Q1 of last year.

First quarter operating margins in Reservoir Description, ex items, were 6%, down sequentially by nearly 800 basis points, and margins also down year-over-year. Despite the multiple factors impacting Core Lab's first quarter results, the company maintained its focus on creating new technology offerings, maximizing operating efficiency, and on leveraging its global network to continue to support Core's clients. In Production Enhancement, first quarter revenue was down 13% compared to Q4 of 2025. Ex items, first quarter 2026 operating margins in Production Enhancement were 5%, down from 7% in Q4 of 2025. Sequential margins were impacted by the Middle East conflict, which delayed certain energetic shipments to the region and halted completion diagnostic field programs.

Soft sequential U.S. land activity, amplified by severe cold weather in North America, also reduced U.S. completion activity and resulted in the temporary closure of Core's manufacturing facilities. These headwinds were partially offset by strong demand for Core's proprietary completion diagnostic services across both onshore and offshore markets outside of the Middle East. The company continued its long-standing commitment to shareholder returns during the quarter, returning free cash to our shareholders through our quarterly dividend and by repurchasing more than 51,000 shares of company stock, representing a value of $900,000. Q1 marks the sixth consecutive quarter of share buybacks. Core intends to continue to use free cash to fund our quarterly dividend, pursue growth opportunities, and improve shareholder value through opportunistic share repurchases. Looking ahead now to the mid and longer term, Core Lab has persevered through previous conflicts in the Middle East.

The company and its dedicated employees remain committed to serving our long-standing clients throughout this vital region. Despite near-term headwinds, Core Lab's global operations, asset-light business model, and diversified technology portfolio continue to position the company for long-term success. For 90 years, Core Lab's resilience, technical leadership, and unwavering client focus has enabled the company to deliver differentiated scientific and technological solutions that help its clients de-risk their operational decisions. Core strengths, together with disciplined capital deployment, continued free cash flow generation, and the company's commitment to returning excess capital to its owners will drive long-term value creation for the company's shareholders.

As we move ahead, Core will continue to execute on its key strategic objectives by, 1, introducing new product and service offerings in key geographic markets, 2, maintaining a lean and focused organization, and 3, maintaining our commitments to returning excess free cash to our shareholders and strengthening the company's balance sheet. The interest of our shareholders, clients, and employees will always be well served by Core Lab's resilient culture, which emphasizes innovation and the application of technology to de-risk client decisions, along with dedicated customer service. I'll talk more about some of our latest innovations in the operational review session of this call. To review Core Lab's financial tenets that have guided the company's shareholder value creation through our more than 31-year history as a publicly traded company. We will continue to pursue growth opportunities.

The company will remain focused on its three long-standing financial tenets, those being to maximize free cash flow, maximize return on invested capital, and returning excess free cash to our shareholders. I'll now turn it over to Chris for the detailed financial review.

Thanks, Larry. Before we review the financial performance for the quarter, the guidance we gave on our last call and past calls excluded the impact of any FX gains or losses and assumed an effective tax rate of 25%. Accordingly, our discussion today excludes any foreign exchange gain or loss for current and prior periods. Additionally, the financial results for the first quarter of 2026 includes a charge of $3.7 million for non-cash stock compensation expense associated with the future vesting of performance shares for certain employees who have reached eligible retirement age. We also recorded $600,000 of additional costs associated with exiting certain facilities as we continue to optimize our global footprint.

The comparison periods for the first and fourth quarter of 2025 also include items that were discussed in those calls and highlighted in our earnings release for those periods. These items have also been excluded from the discussion of the financial results today. You can find a summary of those items in the tables attached to our press release for the first quarter of 2026. Now looking at the income statement, revenue was $121.8 million in the first quarter, down 12% compared to the prior quarter and down 1% year-over-year. Core Lab will typically experience a seasonal decline in revenue from the fourth quarter to the first quarter of each year.

However, as Larry mentioned, in the first quarter of 2026 was also negatively impacted by the escalation of the conflict in the Middle East, along with severe weather events in North America and Europe. Of this revenue, service revenue, which is more international, was $94.3 million for the quarter, down 12% sequentially and 1% year-over-year. Our service revenue associated with crude assay services and regional studies continue to be impacted by the geopolitical conflicts in Russia, Ukraine, but particularly in the Middle East this quarter. Additionally, severe weather across North America, Europe, and the Mediterranean region negatively impacted certain laboratory operations and disrupted client activity this quarter. Offsetting some of the decline this quarter, we continue to see increased demand for our well completion diagnostic services, particularly in the Gulf of Mexico.

Product sales, which are more equally tied to North America and international activity, were $27.5 million for the quarter and were down 12% from last quarter and down 3% year-over-year. Our international product sales are typically larger bulk orders and can vary from one quarter to another and were down sequentially in the first quarter of 2026. The decrease in product sales this quarter when compared to the fourth quarter of 2025 was partially offset by a higher level of product sales in the U.S. Moving on to cost of services, ex items for the quarter was 81% of service revenue, which increased from 75% in the prior quarter and 77% last year.

The sequential increase was primarily caused by the conflict in the Middle East, which resulted in a sharp decrease in revenue as our clients were forced to suspend operations. As discussed in our previous calls, the service side of our business has been more impacted by the geopolitical conflicts and expanded sanctions. The volatility in crude oil prices and more recently, the geopolitical conflict in the Middle East caused disruptions to both our operations in the region and demand for crude assay services tied to the trading and maritime movement of crude oil and derived products. The company will continue to manage its cost structure as effectively as we can through these temporary disruptions in certain regions.

Cost of sales ex items in the first quarter was 94% of revenue, which is relatively flat compared to last quarter and was 91% last year. The company continues to face challenges with increased costs for raw materials and logistics, some of which we've had to absorb. Despite these challenges, we remain focused on improving cost efficiencies and anticipate the manufacturing absorption rate in future quarters will be in line with projected product sales. G&A ex items for the quarter was $11 million, up a little from $10.6 million in the prior quarter. For 2026, we expect G&A ex items to be approximately $42 million-$45 million. It is also important to note that 100% of our corporate G&A expenses are allocated and absorbed into the financial performance of the reported segments.

Depreciation and amortization for the quarter was $3.8 million, and increased slightly compared to $3.7 million in the last quarter and the first quarter of last year. EBIT ex items for the quarter was $6.6 million, down from $15.7 million last quarter, yielding an EBIT margin of over 5%. Our EBIT for the quarter on a GAAP basis was $1.9 million. Interest expense of $2.9 million for the first quarter increased from $2.6 million in the prior quarter and the same quarter in the prior year. As mentioned last quarter, the increase in the interest expense is associated with the higher interest rate on the new term loan under our credit facility, which was used to retire $45 million of senior notes in January 2026.

Income tax expense at an effective tax rate of 25% and ex items was $900,000 for the quarter. On a GAAP basis, we recorded a tax benefit of $300,000 for the quarter. Net income ex items for the quarter was $2.7 million, down 72% sequentially and down 59% from first quarter of last year. On a GAAP basis, we had a net loss of $800,000 for the quarter. Earnings per diluted share ex items was $0.06 for the quarter compared to $0.21 in the prior quarter and $0.14 in the first quarter of last year. On a GAAP basis, we had a loss per diluted share of $0.02 for the quarter.

Turning to the balance sheet, receivables were $108.3 million and decreased approximately $5.3 million from the prior quarter. Our DSOs for the first quarter were at 74 days, up from 69 days last quarter. The increase in DSOs was primarily driven by the escalation of the conflict in the Middle East, which impacted revenue for the quarter and also slowed collections. We will continue to focus our collection efforts in the affected region and anticipate that our DSO will improve in future quarters. Inventory at March 31, 2026 was $57.8 million, up $3.3 million from last quarter end. Inventory turns for the quarter were 1.8 and down from 2.1 last quarter, which is primarily associated with the decrease in international bulk sales this quarter.

Now to the liability side of the balance sheet. Our long-term debt was $117 million as of March 31st, 2026. Considering cash of $22.8 million, net debt was $94.2 million, which increased $3.9 million from last quarter. Our leverage ratio is currently at 1.2 compared to 1.1 last quarter. Our debt is currently comprised of our senior notes at $65 million, a term loan of $50 million, and $2 million outstanding under our bank credit facility. As stated earlier, in the first quarter, we made a single draw of $50 million on a term loan under our credit facility and retired $45 million of senior notes in January of 2026.

Looking at cash flow for the first quarter of 2026, cash flow from operating activities was $4 million, and after paying approximately $3.5 million of CapEx for operations, our free cash flow for the quarter was $500,000. As discussed in prior quarters, the capital expenditures associated with rebuilding our U.K. facility, which was damaged by fire, are covered by the company's property and casualty insurance and have been excluded in the calculation of free cash flow. The capital expenditures associated with rebuilding the U.K. facility in the first quarter were $1.4 million. Looking ahead to the rest of the year, we will continue our strict capital discipline and asset-light business model with capital expenditures primarily targeted at growth opportunities.

Excluding the CapEx associated with rebuilding the U.K. facility, we expect capital expenditures to remain aligned with activity levels and for the full year 2026 to be in the range of $15 million-$18 million. Core Lab's operational leverage continues to provide the ability to grow revenue and profitability with minimal capital requirements. Capital expenditures for the operations has historically ranged from 2%-4% of revenue even during periods of significant growth. That same level of laboratory infrastructure, intellectual property and leverage exists in the business today. We believe evaluating a company's ability to generate free cash flow and free cash flow yield is an important metric for shareholders when comparing and projecting companies' financial results, particularly for those shareholders who utilize discounted cash flow models to assess valuations. I will now turn it over to Gwen for an update on our guidance and outlook.

Thank you, Chris. Turning to Core Lab's outlook for the second quarter of 2026, the IEA, the EIA, and OPEC are projecting crude oil demand growth in 2026 of approximately 600,000-1.4 million barrels per day, supporting constructive long-term market fundamentals despite near-term volatility. The IEA also continues to highlight that accelerating natural decline rates in existing producing fields remain a significant long-term supply risk, reinforcing the need for sustained investment. Recent disruptions, including the closure of the Strait of Hormuz and damage to regional refining infrastructure, have reduced global crude oil supply by approximately 20%. These geopolitical events are likely to support the need for new oil and gas developments to address energy security risk. In the U.S., year-over-year production is expected to remain measured as capital discipline and maturing shale plays offset efficiency gains.

Combined, these trends suggest that new hydrocarbon exploration will come from international offshore conventional reservoir targets. In the near term, geopolitical instability in the Middle East, sanctions, and evolving trade policies, along with OPEC+ production decisions, will continue to contribute to market volatility. A multi-year cycle of international offshore exploration and development activity will be required to support future demand. Core Lab maintains a constructive multi-year outlook and is positioned to support ongoing client investment needs. Recent changes in client activity levels across the Middle East are directly impacting Core's operations. Client-driven project disruptions have led to delays in project execution and logistical constraints. For Core Lab, the disruption of hydrocarbon trading routes extends beyond the Middle East region and into the company's global lab network, which services the maritime transportation and trading of crude oil, natural gas, and refined products.

The impact has been more pronounced in Reservoir Description and the service side of Production Enhancement due to Core Lab's unique role supporting regional client studies, reservoir rock and fluid characterization, completion diagnostics, and hydrocarbon assay testing. These services rely on predictable field access, sample movement, and laboratory operations. Production Enhancement products have been comparatively less affected, however, shipments of energetic systems into certain countries have experienced delays. U.S. land completion activity is expected to remain below prior year levels, with modest improvement likely driven by small to mid-size operators. Growth and demand for Core's diagnostic services, production optimization technologies, and proprietary energetic systems are expected to partially offset softer year-over-year U.S. onshore activity. Costs for certain imported raw materials used in Production Enhancement continue to increase and remain subject to tariffs and supply chain volatility. Client discussions indicate that international projects outside the Middle East are proceeding.

However, circumstances in the Middle East create difficulty in forecasting the pace and timing of activity recovery for the affected region. Collectively, these factors support expectations for modest sequential operational improvement for Core Lab. In summary, Reservoir Description's second quarter 2026 revenue is projected to range from $77.5 million-$82.5 million, with operating income of $3.5 million-$5.4 million. Production Enhancement's second quarter revenue is estimated to range from $45.5 million-$48.5 million, with operating income of $2.8 million-$4.7 million. In summary, Core Lab's second quarter 2026 revenue is projected to range from $123 million-$131 million, with operating income of $6.4 million-$10.2 million, yielding operating margins of 7%.

EPS for the second quarter 2026 is expected to range from $0.06-$0.12. The company's guidance is based on projections for underlying operations and excludes gains and losses in foreign exchange and assumes an effective tax rate of 25%. With that, I'll turn the call back over to Larry.

Thanks, Gwen. First, I'd like to thank our global team of employees for providing innovative solutions, integrity, and exceptional service to our clients. I'd particularly like to thank our dedicated staff in the Middle East for the uncertainties and stresses they've recently had to endure during the conflict. As we celebrate our 90th year, our staff's collective expertise and their dedication to servicing our clients has been the foundation of the company's success. Looking at the macro, even as global energy markets work through near-term economic headwinds and volatile commodity prices, the IEA, EIA, and OPEC are forecasting year-over-year growth in global crude oil demand to range between 0.6 and 1.4 million barrels per day for 2026. In addition to the forecasted growth in demand, new production will be needed to be brought online to offset the natural decline from existing producing fields.

Combined, these trends will require continued investment in the long-term development of new onshore and offshore crude oil fields. U.S. tight oil production has been by far the largest component of non-OPEC oil production growth since 2010. The most recent EIA short-term energy outlook for U.S. oil production projects approximately 13.5 million barrels per day for 2026, essentially flat to 2025, with modest growth expected in 2027 in response to projected stronger commodity prices. Growing global oil demand, combined with moderating incremental U.S. production growth, continue to support the thesis that future supply will need to come from new discoveries and field developments, largely driven from long-cycle offshore investments outside the continental U.S.

The most recent IEA long-term outlook under its current policy scenario shows global oil demand continuing to rise through 2050 to approximately 113 million barrels per day. As highlighted in the IEA September 2025 analysis, global field-by-field data show that the natural decline in existing producing oil fields is accelerating and has become a dominant long-term supply risk. The IEA estimates that absent reinvestment, global oil production would decline by approximately 8% per year due to natural field depletion. As a result, the majority of upstream capital spending globally is now required to simply offset decline rather than to meet incremental demand growth. The IEA also noted that nearly 90% of upstream investment since 2019 has gone towards sustaining existing production rather than expanding supply.

The IEA states that significant annual investment in oil and gas resource development will be required for many years to come to ensure energy security and market stability. The U.S. EIA's long-term reference case forecast shows even higher crude oil demand through 2050, approaching 120 million barrels per day, reinforcing the conclusion that continued investment in new crude oil production will remain necessary. In summary, current demand forecasts support a multi-year investment cycle in which U.S. onshore production growth slows and in which future global supply growth will increasingly be driven by capital investment in long-cycle, international, conventional offshore opportunities, as well as with unconventional plays in the Middle East, trends that continue to support the demand for Core Lab services. Current supply disruptions and renewed concerns about energy security only strengthen the case for a geographically broad-based cycle of new hydrocarbon exploration, appraisal, and development.

Core's Reservoir Description and Production Enhancement technologies are directly aligned with the investment imperatives required to find and develop new oil and gas fields and to improve recovery from existing fields. Let's review the first quarter performance of our two business segments. Turning first to Reservoir Description. For the first quarter of 2026, revenue came in at $82 million, down 11% compared to Q4 of 2025. Operating income for Reservoir Description, ex items, was $5 million, down from $13 million in Q4, yielding operating margins of 6%. Incremental margins were negatively impacted by two factors: the conflict in the Middle East and severe weather in North America and in the Mediterranean.

While demand for Reservoir Description lab services remained strong in several regions across our global network, ongoing international geopolitical conflicts, along with sanctions that were enacted in 2025, further expanded throughout the year, and yet again in Q1 of 2026, continue to produce headwinds that negatively impact the demand for laboratory services tied to the trade and transportation of crude oil and derived products. Now for some operational highlights from Reservoir Description. In the first quarter of 2026, Core Lab continued to advance its integrated digital data strategy through the delivery of key reservoir datasets via our proprietary RAPID platform. These datasets include a wide array of laboratory data and mark an important milestone in the company's ongoing effort to standardize and digitize reservoir data across our global portfolio.

By making these data streams more accessible and easier to integrate into Core Lab's clients' existing workflows, Core Lab is improving turnaround times, reducing friction in data transfer, and helping clients make faster and more informed decisions. This digital offering continues to reinforce Core Lab's differentiated position as a technology-led provider of high-value reservoir solutions. Core Lab's proprietary RAPID Database delivers the highly structured, well-organized geological, petrophysical, and engineering data that will form a critical foundation for developing artificial intelligence initiatives by both Core Lab and its clients. Now to Production Enhancement, where Core Lab's technologies continue to help our clients optimize well completions and improve production. Revenue for Production Enhancement for the first quarter of 2026 came in at $40 million, down 7% year-over-year. Q1 2026 operating income for Production Enhancement, ex items, was $2 million, yielding operating margins of 5%.

Margins were negatively impacted by soft sequential U.S. land activity and severe cold weather that both reduced U.S. completions and temporarily closed Core Lab's completion product manufacturing facilities. In addition, the Middle East conflict reduced client activity in the region and delayed certain energetic product shipments. Diagnostic services benefited from strong demand in complex U.S. land completion designs and on offshore projects in both domestic and international markets. Now for some operational highlights from Production Enhancement. Early in the first quarter of 2026, Core Lab was engaged by a national oil company in the Middle East to address a significant excess water production issue affecting multiple wells which had led to shut-ins. The client deployed Core's GTX-SPAN extreme high temperature casing pack solution to address the issue.

Core Lab's GTX-SPAN proprietary technology is specifically engineered for harsh cyclic steam injection environments where temperatures can reach up to 600 degrees Fahrenheit. The GTX-SPAN installation significantly reduced water cut from the well from 99% down to 40%, and thus materially lowered water disposal and environmental remediation costs. Based on this success, the client initiated an additional 10-well campaign using Core's proprietary GTX-SPAN technology. Also in the first quarter, an independent operator in the Permian Basin deployed Core Lab's Flow Profiler solid oil tracers across a 30-stage horizontal well to evaluate stage-by-stage oil contribution within an upper bench test in an existing reservoir. Core's Flow Profiler engineered delivery system is designed to stay within the proppant pack of each individual frack stage and then slowly release the oil tracer as the produced oil moves past the engineered particles and into the production string.

Blow-back analysis of the produced oil provided clear insight into the production performance along the lateral length, showing that the strongest oil contribution came from the heel and toe sections of the well, with materially lower contribution from the mid-lateral. Core Lab's Flow Profiler diagnostic results are allowing the operator to optimize future drilling targets and completion design. Importantly, based on the success of this program, the client plans to deploy Flow Profiler in five additional wells, highlighting the value of Core's differentiated technology. That concludes our operational review. We appreciate your participation, and Valentina will now open the call for questions.

Thank you. We will now begin the question and answer session. To ask a question you may press star then one on your telephone keypad. If you're using a speaker phone, please pick up your handset before pressing the key. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Don Crist from Johnson Rice. Please go ahead.

Morning, Don.

Morning, everybody. Hope you all are doing well.

Yeah.

I wanted to touch on the Middle East. Obviously, it's unfortunate what's going on with the conflict there, but I just wanted to ensure that your facilities are undamaged, and once this conflict is resolved, everything should bounce back to pretty much normal. I mean, is that the correct read on the situation?

Yeah, absolutely, Don. First of all, thanks for the question. First of all, yeah, no damage to any of our infrastructure. Our staff has been beyond admirable in their ability to cope with a very challenging situation here. I do think it's important to understand that the flow of oil and refined products that normally underpins some of our revenue and Reservoir Description in the region has essentially come to a halt. When that happens, we have all the costs and none of the revenue. We're doing what we can to mitigate those costs. What we think will happen is, as the situation gets resolved, there's gonna be a strong rebound.

I hesitate to use the word surge, because that's gonna depend on things out of our control. A strong rebound in oil movement out of the region and into the rest of the global network. What we tried to illustrate in our comments was, we have a revenue opportunity on that assay work in the region. Then once it leaves the region and makes port in some other part of the world, we have another revenue opportunity. It extends beyond the region for us, but we think there's a very quick rebound in the flow of our work on tied to the maritime transportation of crude oil and refined products, natural gas as well, out of the region.

I think beyond that, the office closures that, and I'll call it the slowdown of field access that impaired acquisition of more upstream crude oil and rock samples, that'll start picking up. We've seen some early indications of that during the ceasefire, and we've kinda dialed that into our thinking already. We think that things are poised for a nice rebound for us across Reservoir Description, and then products will start moving in there as well.

Yeah, that's exactly as I thought that everything should get back to pretty quick. I wanted to touch on a topic that we've heard across many conference calls this earnings cycle, and it's the fact that worldwide supplies or storage has fallen significantly. A lot of investors are now thinking that there's a significant disconnect between the physical market and the paper market. You're in that physical market much more than a lot of other companies. I don't know if you have an opinion on that. Is it influencing any NOCs and IOCs around the world to get more urgent in developing resources closer to home from an energy security standpoint? Any comments around that? Because we're hearing that from a lot more investors now, whether they believe it or not.

Yeah. I do think that the worldwide supply, we've been burning through. There was apparently around 400 million barrels of oil committed out of strategic reserves that are flowing into the system. If you roughly balance that off at 20 million barrels a day disrupted from the Middle East, and I think it might be a little less than that, some stuff's coming out of Yanbu in western Saudi Arabia. Call it 20 million barrels a day, and then also refined products and all. I think inventory levels on both crude oil and on refined products are being consumed pretty quickly here.

I think that is inevitably gonna drive people to think about the longer term, "Hey, I don't wanna be in this position whenever, if I can avoid it." I would say, Don, long before the war started, we saw reinvestment and directional changes in places like Malaysia and Indonesia and other parts of the world to say, "Hey, we've got to get some things going closer to home than we have in the past to avoid disruptions that might be shipping related, conflict related, canal related," depending on the, on the, you know, the two big canal systems in the world that move oil around.

I think there's a growing awareness that you need to de-risk your energy supply, and that's going to mean a very, as I said in my comments there, a broad geographically based investment in new studies, new appraisals, and make sure that oil can get to market. To get into the Western Hemisphere, that could come from West Africa as well, but it could also mean more stuff in the Gulf of Mexico, more stuff in South Atlantic margin, having to be developed.

Yeah. Yeah. That, that supports what we're hearing there as well. I wanted to touch on one-

Don, I think the European.

Sorry, go ahead.

I think the European situation, maybe amplifies that they're pretty concerned about flow of oil from the Middle East right now.

Understandably.

Yeah.

My last question, I'll turn back the queue. We saw a press release out of Libya this week, where a major is gonna start assessing the reservoirs in Libya. I don't know if you can talk specifically about that, but I think that kinda supports what has been talked about for the past couple quarters, that North Africa region is gonna be developed sooner rather than later. I don't know if you have any comments broadly on that.

Yeah. Don, I think several quarters ago on our earnings call, we talked about having conducted a client technology day focused on two things, improving recovery from existing fields and on unconventional development. We held that in Tunisia to address opportunities in Libya and in Algeria and into Egypt as well. Very well attended. 50 client companies represented here. We've had a number of discussions with operators and with government agencies about Core Lab's involvement and our availability and readiness to participate in getting those Libyan and other regional assets up to speed for the older fields that need a lot of remediation and for unconventional players. There is a nice unconventional opportunity in North Africa, very close to the European market.

I think it plays out very nicely. Core Lab has been on top of that, and we've got some of our top hands engaged in those conversations.

I appreciate the color. I'll let somebody else ask questions. Thanks.

Thanks very much, Don. Appreciate it.

The next question comes from Sean Mitchell from Daniel Energy Partners. Please go ahead.

Morning, Sean.

Good morning, guys. Congrats on 90 years. That's great. I'm gonna follow up.

Sean, I had to look it up. You know.

Yeah

Silver anniversary is 25, 50 is gold, 90th anniversary is the granite anniversary. I think it's quite appropriate that it's a rock of some type.

There we go. Maybe following on. Thanks for all the color on the macro. Maybe following on to what Don was asking about. Just when we think about, you know, recovery timelines in the Middle East, reopening the strait, is really just the first step. There's obviously It can move quickly, but restarting production requires tanker repositioning, infrastructure coordination, and really damage assessment across the value chain.

Right.

From what you're seeing on the ground, do you think the market is underestimating how complex and potentially prolonged this recovery could be? Any color on that front?

Yeah, I mean, I think there are some, there are some prior, and Core Lab's been through these. That's why I talk about our confidence that we'll navigate through this. There are prior disruptions, whether it was the wars in Kuwait and Iraq, you know, where there was, you know, considerable field damage. It doesn't appear that some of the, I'll call it the metal, there's not as much bent metal at this point as there was -

Right.

- during some of those conflicts. I think that won't take as long to get going. I do think there'll be a strong push and a rebound in trying to move as much crude oil and refined product as possible. Longer term, I think there's going to be maybe infrastructure opportunities, not all of which will affect Core Lab. I think there'll be more pipelines built to try to avoid choke points in the future. I think we saw some comments coming out of the UAE about that. I think it's going to be a costly process to get oil back into the system, get strategic reserves refilled.

I think the refining infrastructure hits that have occurred in the Middle East are going to compromise for a while natural gas and some crude oil exports.

Got it. Maybe just as that process plays out where you're bringing production back on, I'm assuming this might create some incremental demand for reservoir diagnostics and optimization.

Yeah. I mean, I think, you know, the clients, you know, are gonna wanna make up for lost time, so to speak. We have seen-

Yeah.

... by the way, and it relates to this a little bit, we have seen a few operators outside of the Middle East come to us and say, for example, "Hey, we wanna increase production, take advantage of the higher price here. We wanna run some PVT fluids testing to make sure that we understand exactly the phase behavior. If we start depleting the reservoir a little faster here, are we gonna create some type of a physical change in the properties of the oil viscosity change or bubble point, potentially being impacted?" We are seeing that, and I think that can ripple through the Middle East.

If people try to put more oil back on the market in a short term, there'll be some opportunities there for us to help them assess what ratcheting up production might mean for their reservoir models for the long term.

Got it. Well, as always, guys, appreciate the color, especially the macro commentary in the current environment. It's super helpful. Thank you.

Thank you, Sean.

Sure, Sean. Thanks very much for the call.

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 Lab's operational leadership continues to position the company for improving client activity levels in the coming quarters and years. For 90 years, Core Lab has navigated geopolitical conflicts and uncertainties, and we will do so again. We have never been better operationally or technologically positioned to help our global client base optimize their reservoirs and to address their evolving needs. We remain uniquely focused and are the most technologically advanced, client-focused reservoir optimization company in the oil field service sector. The company will remain focused on maximizing free cash and returns on invested capital. In addition to our quarterly dividend, 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 repurchase shares and strengthen its balance sheet, while always investing in growth opportunities and evaluating various methods to increase shareholder value. 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 their continuing achievements. 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. You may now disconnect.