Core Laboratories: Not a Buy Yet, But Still Worth Holding On

Core Laboratories Inc. CLB, a global oilfield services provider specializing in reservoir management and production enhancement, has struggled to keep pace with the broader oil and energy  industry. Over the past six months, CLB stock has plunged 28.4%, sharply underperforming the sector, which posted a 2.4% gain, and the Oil & Gas Field Services sub-industry, which declined a modest 7.7%. CLB also lagged behind its key peers during the period. TechnipFMC FTI delivered a robust 29.7% gain, while Baker Hughes BKR edged up 1.6%. Even Archrock Inc. AROC, despite falling 4.6%, fared significantly better than CLB.

6-Month Price Performance Comparison

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Despite its recent decline, the Houston, TX-based oil and gas equipment and services company continues to draw investor interest, as some view its depressed valuation as a potential buying opportunity. With attention shifting toward what lies ahead, it’s important to examine the factors influencing the stock’s performance. Are the challenges signaling deeper risks, or could they set the stage for a recovery? Let’s take a closer look at the key drivers behind CLB’s movement and the risks that could shape its future.

The Fundamentals Supporting CLB’s Growth

Strategic Expansion in Key International Markets: The oilfield services provider is proactively expanding its technological footprint in high-growth international regions, notably the Middle East. The opening of a new state-of-the-art Unconventional Core Analysis Laboratory in Dammam, Saudi Arabia, is a prime example. This facility is equipped with proprietary technology and designed to support the early-stage development of unconventional resources in the region, deepening the company's strategic partnership with Saudi Aramco and positioning it to capture long-term revenues from this emerging play.

Like TechnipFMC and Baker Hughes, which have also been expanding their Middle Eastern operations to align with national energy strategies, CLB is positioning itself for growth by aligning with regional priorities and local content initiatives.

Strengthening Balance Sheet and Reduced Leverage: The company has made a concerted effort to fortify its financial position. In the second quarter, CLB reduced its net debt by $9.1 million, bringing its leverage ratio down to 1.27, which management notes is its lowest level in eight years. This conservative financial management contrasts with some peers like Archrock Inc., which operates in more capital-intensive segments like compression services, where balance sheet strength can be more volatile. CLB’s lighter asset model and improved leverage give it added resilience and strategic optionality.

Diversification Into Energy Transition and Adjacent Markets: CLB is successfully applying its core expertise to adjacent growth markets, such as carbon capture and storage (CCS) and geothermal energy. In Colombia, the company is using its PVT technology to assess CO2 phase behavior for sequestration projects. Furthermore, its proprietary thermal profiler tracers are being deployed in North American geothermal projects to map flow patterns in extreme temperatures, opening new revenue streams beyond traditional oil and gas.

Favorable Long-Term Macroeconomic Outlook for International Activity: CLB’s management reinforces a constructive long-term view based on forecasts from the IEA, EIA, and OPEC+, which project global oil demand growth of 700,000 to 1.3 million barrels per day for 2025 and beyond. With U.S. production growth expected to be minimal, CLB posits that meeting this future demand will require increased investment in international, conventional offshore developments — a trend that directly benefits the company's global Reservoir Description services. TechnipFMC and Baker Hughes are similarly positioned to benefit from this trend due to their strong offshore capabilities. CLB complements this shift by providing upstream reservoir insight critical to these complex international projects.

Improved Operational Efficiency and Margin Expansion: The company successfully expanded its second-quarter operating margins by 160 basis points sequentially to 11% (ex-items), driven by a 5% increase in revenues. This demonstrates effective cost management and operating leverage. Specifically, the cost of sales improved significantly due to better manufacturing efficiency and absorption of fixed costs, highlighting management's ability to convert top-line growth into stronger profitability even amid some cost pressures.

Breaking Down the Potential Weaknesses in CLB

Impact of Tariffs on Input Costs and Manufacturing: While most of CLB’s services are not subject to tariffs, the company acknowledges that "certain raw materials imported and used in Production Enhancement's U.S. manufacturing of products are attracting import tariffs." This imposes a direct cost pressure on a portion of its business. This mirrors challenges faced by equipment-heavy players like TechnipFMC and Baker Hughes, which also deal with global supply chains and exposure to raw material cost fluctuations.

Sequential Decline in High-Margin Diagnostic Services: After reaching a five-year high in the first quarter, the company experienced a sequential decrease in demand for its high-margin diagnostic services within the United States during the second quarter. This volatility in a key service line highlights the lumpy and sometimes unpredictable nature of demand, even for their advanced technologies, and can lead to quarterly earnings unpredictability.

Ongoing Softness in the U.S. Onshore Market: CLB is facing a challenging environment in its domestic market. The company anticipates a "soft market for the remainder of the year" for its Production Enhancement services linked to U.S. land activity. This is a structural headwind that offsets some of the strength seen in international markets, and a prolonged downturn in the prolific U.S. shale sector would continue to be a drag on the company's overall growth and profitability.

Dependence on Client Geological Success Rates: A unique risk factor for CLB is that its revenue opportunity on awarded international projects is explicitly "dependent on our clients' geological success rate." If exploration and appraisal wells drilled by its clients are unsuccessful, the extensive reservoir description work that follows (CLB’s core service) may be reduced or canceled. The company itself noted that a "noticeable decrease in success rates over the past 12 months" has negatively impacted anticipated growth in 2025. This risk is somewhat mitigated for more diversified service providers like TechnipFMC and Baker Hughes, which generate revenues across multiple stages of project development. CLB’s niche, while high-value, increases exposure to front-end exploration risk.

Final Thoughts on CLB Stock

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This article originally published on Zacks Investment Research (zacks.com).

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