Core Laboratories (CLB) told you what you needed to know -- maybe all you needed to know -- when it sliced its dividend from $0.55 to $0.25 as the year began.
If you don't know Core, it's perhaps the most sophisticated oil service company out there when it comes to finding oil and getting the most out of a reservoir of the stuff.
You bring them in when you think you have found something big or you need to maximize what you have.
And, with oil going up rather nicely because of geopolitical concerns, how's business?
I would say the worst I have ever seen it, worse even than in January of 2016 when oil traded briefly below $30, less than half of where it is right now.
I don't think so. Core is a thoughtful company that bases its decisions on traditional return on equity not on a "drill baby drill" hypotheses and it wouldn't be cutting that dividend, which has been both sacrosanct and a chief reason to own the stock, if it weren't for longer-term concerns that the oil business itself just isn't coming back the way it's supposed to when oil prices go higher.
The cut in the dividend is startling. Core only cut its estimates for the fourth quarter (the one just concluded) by about seven cents, guiding down from 44 to 45 cents to 37 to 38 cents, hardly a decline meriting taking such a hatchet to the dividend... unless the company, long one of the remaining bulls on oil, has come to the conclusion that oil business has fundamentally changed.
The statement it gave you with the news of the dividend slash was pretty innocuous, at least on its surface: "The decline in the U.S. onshore activity has proven to be more pronounced than originally forecast in Core Lab's third-quarter earnings release from October 23."
But in many ways, it speaks incredibly loudly: Despite an obviously uncertain world where the Straits of Hormuz could be shut at any time and the major international oil companies and countries have let their production in many cases run down and run down drastically, drilling is not picking up. In fact, one could argue, if you look at the Baker Hughes land rotary rig count, my favorite indicator of drilling demand, it's collapsing. One year ago, there were 1050 rigs operating on land. Now there are 773 and the rate of decline is just staggering, especially when you consider that oil was at $52 last year, $10 LOWER than it is now.
In many ways, these stats tell you more about how to relate the Mideast's current tensions to the stock market than the news flow itself. The chief reason why you sell stocks off of a Mideast flare-up, at least historically, is inflation, a sudden jack-up in all things related to oil because of the raw cost boost.
But we aren't seeing that happen. If you are a huge user of oil, you can lock in prices out five years that are much lower than they are today. They haven't budged much at all.
- World growth, no matter how strong or muted, seems to produce little-to-no increase in oil use. The world used only 800,000 more barrels per day last year than the year before. Substitution, conservation, preservation, you name it, you can tell when you have a wasting asset on your hands.
- President Trump has accomplished something that most thought not possible: by being so pro oil he has created an environment where we have the spare capacity now that makes it so oil can't go nuts to the upside.
- Technology has enabled oil companies to get so much more oil per rig than ever imagined.
So the inflation we would have once expected simply isn't there. If we didn't see it after 25 drones shut down half of the Saudi oil production in September of last year, maybe we won't see it if whole countries go off line for days or even weeks at a time.
Plus all the jeremiads about how there is no spare capacity away from the U.S. are just nonsense. The Saudis could easily produce another million barrels a day. The Russians are eating up this blip and want to encourage it, until they take advantage of it and flood the world with oil.
There's simply oil oil everywhere and not a drop to take out.
And Core Labs, the brains of the oil outfit, with that dividend cut is saying that it will only get worse, not better. Therefore, the only conclusion one can reach is that there has to be something else besides oil that can jar the market coming from Iran.
Right now? There just isn't anything the market seems to care about.