Core Laboratories NV (NYSE:CLB) Q4 2018 Earnings Conference Call January 31, 2019 8:30 AM ET

Company Participants

David Demshur – Chairman and Chief Executive Officer
Gwen Schreffler – Head-Investor Relations
Chris Hill – Chief Financial Officer
Larry Bruno – President

Conference Call Participants

Byron Pope – Tudor, Pickering, Holt
Ian Macpherson – Simmons

Operator

Good morning, and welcome to the Fourth Quarter Core Laboratories 2018 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] Please note, the event is being recorded.

I would now like to turn the conference over to Mr. David Demshur, CEO and Chairman of Core Laboratories. Please go ahead, sir.

David Demshur

Thank you, Judith. Good morning in North America, good afternoon in Europe and good evening in Asia-Pacific. We’d like to welcome all of our shareholders, analysts and most importantly, our employees, to Core Laboratories' fourth quarter 2018 earnings conference call.

This morning I am joined by Chris Hill, Core's CFO, who will give a detailed financial review; followed by Gwen Schreffler, Core's Head of IR, who will make some comments on what Core projects for the first quarter of 2019; and then Larry Bruno, Core's President, who will present a detailed operational review.

The call will be divided into five segments. Gwen will start by making remarks regarding forward-looking statements. We'll then review of the current macro environment, updating industry trends related to optimal well spacings, well positioning, parent-child well relationships and then new cutting-edge technology offerings from Core Laboratories. We will then review Core's three financial tenets, which the company employs to build long-term shareholder value.

Chris, will then follow with a detailed financial overview and additional comments on regarding building shareholder value, followed by Gwen, discussing Core's first quarter 2019 outlook and a general industry outlook as it pertains to Core's prospects.

Then Larry will go over Core's two operating segments, detailing our progress and discussing the continued successful introduction of new Core Lab technologies, and then highlighting some of Core's operations and major projects worldwide. And then we'll open the phones for a Q&A session.

I'll turn it back over to Gwen, for remarks regarding forward-looking statements. Gwen?

Gwen Schreffler

Thank you, Dave. 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 relating to the oil and gas industry, business conditions, international markets, international political climate, and other factors including those discussed in our 34 Act filings that may affect our outcome.

Should one or more of these risks or uncertainties materialize or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. For a more detailed discussion of some of the foregoing risks and uncertainties, see Item 1A Risk Factors in our most recent Annual Report on Form 10-K as well as other reports and registration statements filed by us with the SEC and the AFM.

Our comments include non-GAAP financial measures. Reconciliation to the most directly comparable GAAP financial measures is included in the press release announcing our fourth quarter results. Those non-GAAP measures can also be found on our website.

With that said, I'll pass the discussion back to Dave.

David Demshur

Well, thanks, Gwen. First, let's look at some macro and industry investment trends, then we'll have some comments on horizontal parent-child well relationships. This has been a topic of immense interest from all of our clients involved in tight-oil reservoir developments, and we have a number of projects in-house to try to define what is the proper upsizing, rightsizing and well positioning, and then some information on some new cutting-edge technological offerings from Core.

Core is encouraged that operating companies are buying into operating within free cash flow and emphasizing returns on invested capital as demanded by today's investors. This trend benefits Core's – Core, whose clients tend to be technologically sophisticated and are heavy users of technology over commodity-driven solutions offered by drillers, pressure pumpers and/or wireline providers.

During the fourth quarter, Core hosted several conference calls and industry sessions for various industry groups and analysts to discuss optimal well spacing, rightsizing, upsizing, well positioning and parent-child well relationship. Core Lab is uniquely positioned to provide technology-driven datasets to determine optimal well spacing and well positioning to eliminate the deleterious effects of horizontal well interference.

To ultimately determine well spacings and cite better well locations associated with pad drilling, Core's most technologically advanced clients are cutting vertical and horizontal cores through the entire target pay-zone and also taking multiple reservoir fluid samples throughout that pay-zone. Detailed analysis of these cores and fluid sample provide information to the operator on micro-lithology, rock competence, rock mechanics, crude oil types and qualities, all datasets necessary to determine optimal well spacings and well positioning.

As horizontal wells are drilled and completed and stimulated, Core's SPECTRASTIM, SPECTRASCAN and FLOWPROFILER EDS completion diagnostics technology can verify that wells are not interfering with neighboring wells on the pad, eliminating loss production and maximizing producible reserve. This becomes more critical as well pads will soon see 24 or more wells drilled from a single pad location. We will see an industry trend of upsizing well locations in 2019.

The combination of Core Lab Reservoir Description and Production Enhancement technology maximizes our clients' free cash flow and return on their invested capital. Their current investment goals and ensures Core Lab revenue growth will be greater than activity levels again in 2019.

Related to that, the industry will continue to add perf clusters per stage yielding less stages, while lateral lengths or near maximum lengths owing to frictional forces. Perf clusters per stage could increase from an average of 5 or 6 or to as many as 15 or more, reducing the time and cost for well completion and stimulation programs, mainly owing to the lower stage count. The reason for more perf clusters and fewer stages are our clients are changing the way reservoir rock is being stimulated to produce the maximum amount of stimulated reservoir rock in close proximity to the wellbore.

Long frac channels are now at as they have become the source of deleterious parent-child well relationship. It is possible to rubblize more stimulated reservoir rock volumes in the near wellbore region and avoid the costly interference problems that comes with long linear fracture.

We are also starting to observe the use of micro proppants in complex completions in the Permian Basin with some 200-mesh sand being incorporated in the stimulation programs. One particular well stimulation program only utilized 200-mesh sand to encouraging results. That well is still being monitored. Core continues to test the effectiveness of both 200- and 400-mesh sand in complex completion.

Addressing a new and growing market, the recent acquisition of Guardian Global Technologies has been a technological windfall for Core Laboratories. We have released the industry-leading preassembled energetic system via the company's GoGun. The GoGun is an open architecture, allowing all perforating systems to be used. Therefore, each perforating program can be specifically designed based on reservoir properties and reservoir types. Our new addressable Select Fire Switch can fire multiple downhole elements at onetime and it requires no electrical ramping.

The GoGun combined with Guardian’s new Ballistics Delivery System, which can simultaneously fire individual and independent energetic systems, orient perforating guns while engaging a master data collection system will quickly gain market share in all of the U.S. unconventional title-oil play. This system will also play a key role in eliminating well interference as well.

The last and most important trend for Core is that client discussions have continued to increase for international and deepwater long cycle projects that will be needed to meet future production demand. The foreshadow of this increase in activity has been evident in the 20 FIDs approved in 2017 with another 30 announced in 2018 and 30 more queued up for 2019. Revenue from longer cycle projects have been mainly absent from Core's Reservoir Description revenue streams, dating back to 2015, and should start to bolster Reservoir Description revenue in 2019.

Core’s revenue opportunity usually occurs four to five quarters after the FID is sanctioned as rigs need to be mobilized, wells drilled and the core and fluid samples from the reservoir zone. Q1 2018 Reservoir Description results we said marked the bottom of the international and deepwater cycle, while Q4 Reservoir Description revenues reached a two-year high. Increases in global demand, increases in net decline curves, coupled with steeply falling production in Mexico, Venezuela, Colombia, Angola, Libya, Iran and China will continue to tighten global crude market.

The acute fourth quarter global crude oil inventory build owing to expanded production from the Middle East and Russia and the issuance of Iranian expert waivers for six months should self-correct in the first half of 2019. Remember, the decline curve still always wins and never sleep. Now to review the three financial tenets by which Core has used to build shareholder value over our 23-plus year history of being a publicly traded company.

During the fourth quarter of 2018, Core generated over $32 million in free cash and converted 18% of every revenue dollar and 150% of net income, one of the highest in all oilfield services. In 2019, Core sets a target, converting 90% of net income into free cash. And once again, Core produced the oilfield industry-leading return on invested capital for the 37th consecutive quarter with an ROIC of 24.5%, over double Core's weighted average cost of capital. Core's 24.5% ROIC is a multiple of any other company listed in the OSX.

Also during the fourth quarter of 2018, Core returned approximately $27 million back to our shareholders via our quarterly dividend and share repurchases. In 2019, Core will return all excess capital back to its shareholders via these quarterly dividends and expanded share repurchases as free cash flow levels continue to increase.

I'll now turn the call back to Chris for a detailed financial review. Chris?

Chris Hill

Thanks, David. The guidance we gave on our last call and past calls typically excluded the impact of any FX gains or losses and assumed an effective tax rate of 15%. So accordingly, our discussion today excludes any foreign exchange gain or loss for current and prior periods. Additionally, we have excluded a $10 million non-cash charge recognized in the fourth quarter of 2018 for stock compensation expense. Although these performance share awards continue to be subject to future vesting schedules and company financial performance metrics, recognition of this expense is required by the FASB ASC 718 for employers when they attain their eligible retirement age.

Now looking at the income statement. Revenues were $173.2 million in the fourth quarter, up 2% from the same quarter in 2017 and within our guidance we gave during last quarter's earnings call. For the full year, revenues were a little over $700 million, so up over 8% from prior year. Of this revenue, service revenue, which is more international, was $120.8 million for the quarter, down 4% year-over-year as international activity remained relatively flat and completions activity slowed in the U.S. onshore market during the fourth quarter of 2018. Product sales, which are more tied to North American activity, were $52.4 million for the quarter, up 17% year-over-year and were up 28% for the full year.

Moving onto cost of services for the quarter are 71% of service revenue, remaining consistent with the last couple of quarters. For the full year, cost of services averaged 71% of our service operating – as our service operating margins continue to be some of the strongest amongst oilfield service companies. Cost of sales in the fourth quarter was 77% of revenue, up from last quarter due primarily to the absorption of our fixed cost on lower levels of revenue. For the full year, cost of sales averaged 72%, a strong improvement from 79% for the full year of 2017 as our operating leverage in the absorption of our fixed cost improves with higher levels of revenue.

G&A ex-items for the quarter was $14.7 million and $53 million for the full year. For 2019, we expect G&A to be around $45 million to $46 million. Depreciation and amortization for the quarter was $5.7 million, which is comparable to the last several quarters. For the full year 2018, depreciation and amortization expense was $23.1 million, so down a little from $24.5 million in the prior year. Looking forward to next year, we would expect depreciation expense to remain at similar levels and our capital expenditures to also be in line with our operations.

EBIT ex-items for the quarter was $28.4 million and continues to represent best-in-class EBIT margin of over 16%. Full year 2018 EBIT ex-items was $132 million and also generated industry-leading margins of 19% for the full year.

Income tax expense for the quarter was $3.7 million, using an effective tax rate of 15%. On a GAAP basis, income tax expense for the quarter was $5.8 million, which includes the impact of stock compensation expense recognized that is nondeductible for U.S. tax.

For the first quarter 2019, we continue to project our effective tax rate to be approximately 15%. The projected effective tax rate considers the company's ongoing evaluation of corporate restructuring, which is expected to yield a lower tax rate than previously forecasted. Additionally, as discussed in prior calls, the effective tax rate will continue to be somewhat sensitive to the geographic mix of earnings across the globe and the impact of items discrete to each quarter.

Income from continuing operations ex-items for the quarter was $21.1 million, down from $28.4 million last quarter. And for the full year 2018 ex-items, it was $100.9 million. GAAP income from continuing operations was $8.6 million for the fourth quarter and $79.8 million for the year. Earnings per diluted share from continuing operations ex-items was $0.48 for the quarter and $2.27 for the full year. GAAP EPS from continuing operations for the fourth quarter was $0.19 and $1.80 for the full year.

Now we'll move on to significant aspects of the balance sheet. Receivables stood at $129.2 million and decreased just over $14 million from last quarter end as our DSOs have remained consistent at 68 days for the quarter and 67 days for the full year 2018.

Inventory finished the year at $45.7 million, down 3% or about $1.5 million sequentially. Inventory turns were 3.6 for the full year, and we anticipate inventory turns to continue at similar levels. However, inventory levels may build slightly into 2019 as we launch new product offering like the new preassembled GoGun, which are being introduced as we complete the integration of Guardian.

And now on to the liability side of the balance sheet. Our long-term debt at year-end was $292 million, down $6 million from $298 million last quarter end, as we used free cash flow in excess of our dividend to reduce the balance on our revolver. Our debt is comprised of our senior notes at $150 million as well as $142 million under our bank revolving credit facility.

Looking at cash flow. In the fourth quarter, cash flow from operating activities was $37.9 million and after paying for a $5.7 million in CapEx, our free cash flow in Q4 was $32.2 million, representing more than 152% of income from continuing operations ex-items.

CapEx for the full year was $21.7 million and is in line with Core's long-standing tradition of aligning capital discipline with market conditions. For 2019, the company anticipates that its CapEx will be at similar levels to 2018 as we evaluate the capital expenditure opportunities based on client demand and adhere to our strict capital discipline.

Core’s strict capital discipline and asset-light business model continue to be demonstrated as the capital investments over the last three years are less than 3% of revenue. For the full year 2018, cash flow from operating activities was $111.8 million while free cash flow after paying for our CapEx program was $90.1 million.

Our free cash flow conversion ratio, which is free cash flow divided by income from continuing operations, continues to be one of the highest in the industry at over 152% for the fourth quarter and over 113% for 2018. We believe this is an important metric for shareholders when comparing company's financial results, particularly for those shareholders who utilize discounted cash flow models to assess valuation. In 2018, our free cash flow was higher than our net income as it has been for 13 out of the last 17 years.

I will now turn it over to Gwen for an update on our guidance and outlook.

Gwen Schreffler

Thank you, Chris. During the fourth quarter 2018, the worldwide crude-oil market added supply, likely in anticipation of the Iran sanctions. Consequently, during November and December, the per-barrel price of crude oil fell by more than 40% from the year’s peak in October 2018. However, global crude-oil inventories exited 2018 at approximately 38 days of consumption, consistent with a multi-year trend of declining crude-oil inventories related to demand.

The International Energy Agency's most recent estimated worldwide demand projections remain strong at 1.4 million additional barrels of oil per day anticipated to be needed in 2019. After five years of muted investment in international, offshore and deepwater projects, oil companies announced more than 30 upstream FIDs in 2018, an increase of more than 20% from 2017.

The renewed investment at a global level is critical in order to meet future supply needs. Recognition of the need for investment is evidenced by the FIDs announced over the last two years and Wood McKenzie's estimation of another 30 upstream projects for 2019. However, we anticipate a slowing in further project announcements until confidence in the balance of the global crude-oil market is restored.

Core believes there will be a positive correction in the temporary oversupply of crude oil by the end of the first quarter 2019, which should encourage additional FID approvals for projects announced.

As customary, we expect typical sequential seasonal industry patterns will cause Core’s first quarter 2019 to be down, and international field development spending will be funded largely from operating budgets. International recovery on a more broad-based scope is expected to improve as 2019 unfolds.

The Company believes that the 2019 international growth is expected to reach mid to high single-digit levels. Our Reservoir Description segment continues to discuss international projects with clients, which are in alignment with FIDs previously announced. The revenue opportunity for Reservoir Description occurs once the well has been drilled and core and fluid samples are taken and analyzed. Activity levels and revenue opportunities from these FIDs and the emerging international recovery are expected to have a positive impact on financial performance in 2019.

The average first quarter 2019 U.S. rig count is projected to be flat to modestly down sequentially, with U.S. completion activity to be flat to modestly up. Further improvement is expected when transitory industry takeaway constraints are resolved in the Permian Basin of West Texas.

Core expects the Production Enhancement segment to perform in line with industry completion activity sequentially with both revenue and margins increasing modestly in the first quarter. As operator completion activity improved, Production Enhancement’s products and services are uniquely positioned to respond as diagnostic services are mobile and our established distribution network can quickly provide completion products to all basins throughout the U.S.

Therefore, we expect consolidated first quarter 2019 revenue of approximately $164 million to $168 million, and operating income of approximately $26 million to $27 million, yielding operating margins of 16%. EPS for the first quarter of 2019 is expected to be approximately $0.42 to $0.45.

The Company's first quarter 2019 guidance is based upon projections for the underlying operations, excludes gains and losses in foreign exchange and assumes an effective tax rate of 15%. The projected effective tax rate considers the Company's on-going evaluation of corporate restructuring, which is expected to yield a lower tax rate than previously forecasted.

Core's first quarter 2019 guidance compares favorably to other major oilfield service companies that have reported fourth quarter results, and have projected EPS declines from fourth quarter 2018 to first quarter 2019 ranging from approximately 15% to over 30%.

With that guidance, I'll turn the call over to Larry for an operational review.

Larry Bruno

Thanks, Gwen. I'd like to open by thanking our global team of employees for providing our clients with integrity, new technologies and innovative solutions to help them optimize their reservoirs. Our employers are Core Lab’s greatest asset. Looking first at Reservoir Description, during the fourth quarter, Core conducted analysis on shale core from our perspective unconventional play in Mexico that is in the early stages of being vetted by the operator.

In order to fully evaluate these geologic formations, Core Lab brought to bare a wide range of proven proprietary laboratory technologies that were developed for unconventional reservoirs in the United States and Canada. These technologies include specialized geo mechanical testing, which are used to determine if the rocks are suitable candidates for fracture stimulation. Reservoir fluid saturation measurements which determine the relative amounts of crude oil and natural gas and water in the rocks, along with porosity, permeability, and neurology were and are still being determined.

The results of this work will be used to assess the reservoir potential of this perspective, unconventional play as well as to determine the optimal completion strategies. This analytical program is ongoing. Also in Mexico, Core’s laboratory facility in Ciudad del Carmen has recently been expanded to handle the analytical challenges posed by conventional reservoir targets in the deepwater environment offshore Mexico.

Some of these projects will encounter weekly to unconsolidated sandstone formations. Core’s patented – Core’s stabilization technology can be used to protect the cores from damage, both during handling at the wellsite and while in transit to the laboratory. Once the core reaches the lab, Core has a wide array of proprietary technologies for assessing soft formations. Upcoming deepwater offshore Mexico core projects of this type have already been committed to Core Lab.

During the fourth quarter, a major oil company initiated an extensive multi-well coring program in the midcontinent region of the United States. These long cores often an excess of a 1,000 feet in length have recovered rock through multiple geologic formations. This analytical program is needed to determine the range of rock properties across a defined geographic region. Even in areas considered as mature, the detailed geological, petrophysical and engineering data provided by Core Lab are essential for validating reserves, identifying primary and secondary completion horizons, determining optimum well locations in wells spacing as well as for designing the most effective stimulation protocols.

One of the key analytical tools being used for this program is Core’s proprietary, Dual Energy CAT Scanning service. This CT work which is built upon Core’s proprietary database of physical measurements quickly and clearly identifies variations in rock type as well as parameter such as porosity and rock strength. In addition, the CT results form the foundation for sample selection for the traditional physical measurements testing program that will generate the hard data points needed for reservoir simulation. This work is ongoing and additional coring is planned.

The Analytical Program for Core’s unconventional enhanced oil recovery Permian Basin joint industry project announced in the third quarter of 2018 has begun. This study is focused on incremental oil recovery from cyclic engineered gas injection in the Wolfcamp Formation in both the Midland and Delaware basins. The Permian Basin EOR joint industry project allows – follows two highly successful Core Lab joint industry projects in the Midland and Delaware Basins which were conducted for over 75 operators. Those now completed studies focused on geological and petrophysical properties, target reservoir horizons, and provide a critical foundation for the recently initiated EOR joint industry project in the Wolfcamp.

Due to the steep decline curves and low recovery factors, there is a need to assess the effectiveness of enhanced oil recovery techniques in these nano-darcy rocks. Core Labs, proprietary analytical methods used in this new unconventional EOR project are the summation of years of experience in unconventional EOR testing and are providing analytical datasets to operators to help them optimize their reservoirs.

Turning now to Production Enhancement. The integration of Guardian Global Technologies into Core Lab's Production Enhancement business segment is well underway and progressing according to plan. As part of the integration, Core began the introduction of the new preassembled GoGun Adaptive Perforating System during the fourth quarter. This system combines Guardian’s best-in-class addressable Select Fire Switch technology with Core’s proprietary energetic, and prewired integrated perforating system.

Core Lab at GoGun is an open architecture system that gives the operator enhanced flexibility in completion designs for wellsite efficiency and reservoir performance. With the acquisition of Guardian Global Technologies, Core has introduced the Guardian Ballistics Delivery System. This advanced wellbore communication system was driven by client demand. The Ballistics Delivery System can be combined with Core’s wide variety of technologically advanced energetic products. By utilizing the advanced Ballistics Delivery System, the new preassembled GoGun and Core Lab’s proprietary energetics such as HEROPerFRAC, Core’s clients can optimize the downhole tool-string for each perforating operation, yielding faster, safer, more reliable and more effective operations.

Core’s patented and proprietary energetics and perforating systems now lead the market offerings for ultra-high-end completions in unconventional reservoirs. Together with Guardian Global Technologies, Core now provides technology across the entire completion string, from the cable head to the bridge plug, in a way not currently offered by other oilfield service providers. Core Lab expects Guardian’s addressable downhole capabilities, combined with Core’s differentiated perforating systems and energetics, to lead to the introduction of market-disruptive perforating technologies in 2019 and beyond, thus expanding its participation in the multi-billion dollar perforating market.

That concludes our operational review. We appreciate your participation. And Judith, we'll now take calls for questions.

Question-and-Answer Session

Operator

We’ll now being the question-and-answer session. [Operator Instructions] The first question comes from Byron Pope with Tudor, Pickering, Holt. Please go ahead.

Byron Pope

Good morning.

David Demshur

Good morning, Byron.

Byron Pope

Yes. I wasn't multitasking very well. And so I – as it relates to the Q1 guidance, I think, Gwen, I just wanted to confirm. With regard to Production Enhancement, was the guidance there that we could see the top line up there, sequentially slightly? And then part of the reason I posed the question is just trying to calibrate the exit rate for completions activity versus how activities trending on the completion type across the Production Enhancement portfolio as we start this year.

Gwen Schreffler

Yes, Byron. We see low single-digit increase for Production Enhancement as we go through Q1 and with completion activity, we think that that's going to be somewhat flat to modestly up at this stage in terms of how is trending as we exited 2019. So maybe we see that modestly up for Q1 is what we have put in our guidance

Byron Pope

Okay. And then…

David Demshur

Yes. So revenue up, margins up, operating profit up.

Byron Pope

Okay.

David Demshur

Sequentially for…

Byron Pope

Okay, great. And then, Dave or Larry, for either of you. Just as I think about Reservoir Description in an environment where we all see increased international activity and hopefully, an increase in offshore activity well. Could you just remind us how you’re position there in terms of offshore, onshore exposure; and then just in terms of the fluids work versus Core reservoir rock analysis?

Larry Bruno

Yes, Byron. I think the first thing is to recognize a long and often repeated pattern of seasonal slowdown from Q4 to Q1 and that's factoring into our perspectives here. We do see the trend moving in the right direction in terms of our clients' commitments to large offshore and major international projects as Gwen and Dave both mentioned. We saw FIDs increasing from 2017 to 2018. We think 2019 looks kind of like 2018 in terms of future FID approvals. So I think that long-term trend looks good for us. In terms of the blend of rock and fluid analysis, still running about 60% fluids, 40% rocks.

Byron Pope

Okay. Thanks. I appreciate it.

David Demshur

And Byron, additionally, if you look at the stacking effect of FIDs from 2016, 2017 and 2018, we are now starting to form a similar pattern that we saw with the stacking effect in 2011, 2012, 2013, 2014 and 2015 there that led to all-time revenue and margin highs for Reservoir Description. So if we can get a couple more years of stacking, we can return to those revenue and operating margin levels.

Byron Pope

Great. Thanks, guys. I’ll turn it back.

David Demshur

And also Byron, we appreciate the note this morning. We did check with the NYSE, and the symbol FCF unfortunately has been taken.

Byron Pope

That’s too bad. All right. Thanks, guys.

David Demshur

Okay, Byron.

Operator

The next question comes from Ian Macpherson with Simmons. Please go ahead.

Ian Macpherson

Hi, thanks. Good morning, everybody.

David Demshur

Good morning, Ian.

Ian Macpherson

Hey. I wanted to pick up where you left off in the prepared remarks on GoGun. We don't doubt that you guys have winning technology there, but I think we also observed that your competitors are moving broadly in the direction towards integration gun systems. So there is a general market push in that direction. And I wonder if you could speak to what the pricing or the competitive dynamics are that you're seeing out there? How this new paradigm gets priced?

And part B of the question is, I just want to see where margins could head with this new product paradigm for PE? Because we had this big step down in margins from Q3 into Q4, maybe you could unpack that for us a little bit in terms of just volumetric decrementals versus leading-edge price or any other issues that we should think about as we think about margins normalizing for Production Enhancement with the new product mix throughout this year.

Larry Bruno

Okay, I'll take them, actually maybe the back-end of that first to kind of frame the picture here. The decrementals from three to four were on two – reflect two trends there. One was we had a very nice international sale volume in Production Enhancement products in Q3 that was non-recurring in Q4. And the other is you saw, as was reflected in the performance of everyone exposed to completions in North America, you saw that soft market, particularly in the back-end of the quarter and that impacted our Production Enhancement.

With respect to the GoGun, the preassembled GoGun, I think, yes, you're right. We do believe we've got superior technology there. We think that the trend is toward preassembled guns. It's a market that we have not been participating in until recently. And so we feel like that's additive exposure for us to get into that side of the market. And that with the architecture that we have, we think that 20% of the market that we haven't been participating in, maybe somewhere around there, we think that can – we can now access that and maybe get 30% to 40% of that markets over the next year or so.

Ian Macpherson

And again, I guess, just to revisit the question with regard to margin implications for that. Is there any pricing pressure and persistence in the market today, just given the recent slowdown or the slow start of the year in completion cadence?

Larry Bruno

I think the only pricing pressure that might be out there is the commodity part of the market, which we are not big participants in. That is in the simple raw guns, the tubulars and the milling of holes in the guns. We're not seeing a great deal of pressure in anyways on the high-quality energetics. We do think there's an opportunity to bring together the energetics and the preassembled gun with a Guardian technology to maybe offer us some margin improvement in that package system overselling individual components.

Ian Macpherson

Got it. Thanks, Larry. And then if I could squeeze in just one more. Can you highlight on your new Wolfcamp EOR program? Is that – how commercial is that? Really, how much of that is we're seeing in your P&L for Reservoir Description today versus opportunity in the future?

Larry Bruno

So let’s talk a little bit about how these joint industry projects work for us. And so those are never done on speculation. They're all subscribed and what we find is a threshold level that’s required to trigger the study. And so in the third quarter we announced that we had subscribed that study. We just then, as you moved into fourth quarter, started doing analysis. Only a small portion of revenue has been recognized. But I do think it's important that we're seeing broader acceptance of the idea that we brought to the market commercially that there is EOR opportunities in these unconventional. So we’ll continue to add companies to that study over time.

We now have the one going into Eagle Ford, and the one going now in the Wolfcamp. And so those will be building over – one in the Wolfcamp, in particular, will be building in terms of revenue into Reservoir Description over time. These are iterative projects. We have general directions and deliverables that we have committed to with our clients. But there’s always a discovery that goes on as we proceed with the testing. And then we collaborate very much with all the consortium members and we come up with redirections, let’s try something different, let’s try a different rate, different gas combination, different residence time for the injection gases, all those variables play into how the project unfolds. So still a lot of runway in front of us on that, as we add new clients and as we add new technology and come up with new technology to apply to these very challenging reservoirs.

Ian Macpherson

Good stuff. Thank you very much.

David Demshur

Ian, thanks.

Operator

[Operator Instructions]

David Demshur

Okay. Judith, we're going to go ahead and close. In summary, Core’s operations continue to position the company for activity levels in Q1 of 2019, and we know significant challenges await. However, we have never been better operationally or technologically positioned to help our clients maintain and expand their existing production base. We remain uniquely focused and are the most technologically advanced reservoir optimization company in all of the oilfield services. This positions Core well for the challenges ahead.

The Company remains committed to industry-leading levels of free cash generation, returns on invested capital with all excess capital being returned to our shareholders via dividends and future opportunistic share repurchases. So in closing, our 94th quarterly earnings release, we thank all of our shareholders and analysts that follow Core, and especially all of our employees and say thanks to them for producing another quality quarter at Core Laboratory. We are proud to be associated with their continued achievement.

So thanks for spending your time with us this morning, and we look forward to our next update at the end of Q1. Thank you.

Operator

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