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Core Laboratories Soars Despite Drawbacks

Core Laboratories


is hot.

On a percentage-gain basis this year, it is the best performer in the oil service sector; its shares have run from a split-adjusted 17 5/8 in January to 28 7/8 on Thursday. (Core hit 30 1/4 Thursday before settling back and closing up 7/8.)

What's more interesting is the fact that the stock's strong performance is coming in the face of what are normally powerful adversaries. Short interest in Core doubled in a month to 212,489 shares at April 15, the same period in which insiders filed to sell more than 600,000 shares. (For details on recent insider selling at Core, please see a related


story.) In addition, some analysts have downgraded the stock on valuation concerns.

So why all the fuss? There's little doubt that the company has something customers want: It helps oil companies get more oil out of existing fields. As both international and domestic oil companies put more emphasis on incremental production from existing fields, demand for Amsterdam-based Core's services has increased. Selective acquisitions made since December 1996 allow the company to offer reservoir-management services and engineering services as well as well-completion services.

"In a period of uncertainty, companies are more likely to spend money on what they know is in the ground," says Neal McAtee, an oil service analyst at Memphis-based

Morgan Keegan

, which has performed underwriting for Core. He rates the stock outperform.

Another reason for Core's rise may be its attractiveness as a takeover candidate.

One shareholder who declined to be named says that, although he is not an expert in energy, it would make sense for a


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or a


(SLB) - Get Free Report

to step in as a buyer. Both are major oil service companies with strong businesses in the wireline and data-interpretation segments of the oil service business. These segments take measurements inside wells.

Jim Wicklund, who follows the firm at

Dain Rauscher Wessels

in Dallas, concurs on the attractiveness of Core as a potential takeover or merger candidate, although he says the company has a strong desire to remain independent. Wicklund, whose firm has not performed underwriting for Core, recently downgraded the stock to buy from strong buy because of its strong run.

"Right now, there are all these other mid-cap service companies in the industry which would really like to get into the reservoir-description end of the business," Wicklund says. He adds to the list

Western Atlas


, the third primary company in the sector with a technologically advanced digital reservoir information business. "You could also make the argument that

companies like

Baker Hughes





, companies basically on the equipment end of things with no involvement in reservoir description, would be interested to get their feet in the water of reservoir description," he says.

The potential buyers either declined to comment or could not be reached. David Demshur, Core's president and chief executive, declined to comment on market rumors.

Core is attractive because its business is so robust. The company, with a $584 million market cap, more than doubled its revenue in 1997 to $215 million from $105 million in 1996.

First Call

consensus estimates call for 40% growth in earnings per share in 1998 to 93 cents from 67 cents in 1997. For 1999, the rate slows -- though to a still-healthy 28%.

Oil companies typically recover about 34% of the oil or gas in any given reservoir. But production-enhancement technology, which includes Core's business in reservoir description or the definition of rock and fluid properties found in the reservoir, may actually boost that percentage 5% to 10%. Even with lower oil prices, that translates to a lot of revenue.

By measuring and analyzing what it calls the "petrophysical" properties of rocks and the relationship of pressure to the temperature of fluids that come from the reservoir, Core can help an oil company assess accumulations of oil and gas. Its services complement the improving and growing technologies of seismic and wireline logging, which help oil companies pinpoint exact locations and properties of hydrocarbon deposits. The company commands 85% of the world market of its business, called core analysis.