XLE - Core Laboratories: A Pricey Oil Services Name At Technical Resistance

Summary

• The Energy sector often performs particularly poorly at the onset of a recession, and recent LEI data suggest we might already be in contraction.
• One energy equipment name features a high EV/EBITDA multiple and technical resistance.
• I highlight some key price levels to watch and why shares are not attractive after a big Q4 run-up.

Energy stocks are not a great place to be once a recession begins. According to Ned Davis Research, the cyclical sector on average returns -5.3% in the two quarter-period after an economic downturn and goes on to further losses even after the culmination of GDP contraction. With Energy sector stocks recently in favor, is it time to book profits? Maybe so.

One international oil company appears to fit that mold when looking at the fundamentals and technicals. Let's dive into Core Laboratories.

LEIs Flash Recession Worries

According to Bank of America Global Research, Core Laboratories ( CLB ) is the leading independent provider of reservoir description services. CLB provides high-value technology which addresses the top two oilfield value propositions of increasing ultimate recoverable reserves and accelerating production. Greater than 70% of revenues are generated outside of North America.

The Netherlands-based $1.1 billion market cap Energy Equipment & Services industry company within the Energy sector trades at a high 73.7 trailing 12-month GAAP price-to-earnings ratio and pays a small 0.2% dividend yield, according to The Wall Street Journal .

The stock has a slightly elevated 8% short interest which could be a bullish catalyst on a further leg higher. Fundamentally, the firm recently announced it will redomesticate to the U.S. from the Netherlands. This news came after the firm beat on earnings last October while missing revenue estimates.

On valuation , analysts at BofA see earnings having risen sharply in 2022 with additional gains expected this year and in 2024. The Bloomberg consensus forecast is less upbeat compared with BofA's outlook when assessing '24 EPS. Dividends are seen as remaining steady at just $0.04 as free cash flow is not exceptionally high (considering other energy firms are big FCF producers).

Even with impressive per-share profit growth in the cards, both CLB's operating and GAAP P/E ratios are high and would not hit attractive levels for several quarters. On a stock like this, I like to look at the PEG ratio - it's decent at 0.97 per Seeking Alpha, but that is actually 41% higher than the sector average. Finally, shares trade at a very high EV/EBITDA multiple compared to the market - that might have to come in before value investors can be attracted to CLB.

I like the growth story here, but the valuation has some question marks, and earnings could be hit if the economic cycle turns worse.

Core Laboratories: Earnings, Valuation, Free Cash Flow Forecasts

Looking ahead, corporate event data from Wall Street Horizon show a confirmed Q4 2022 earnings date of Wednesday, February 1, after the closing bell with a conference call immediately after results cross the wires. You can listen live here . I see few volatility catalysts on the calendar aside from next week's earnings.

Corporate Event Risk Calendar

The Technical Take

CLB has recovered impressively off its September 2022 low near $13. Shares are a near double from that nadir, but now encroach on resistance. Notice in the chart below that the stock has risen slightly above its November high, which is great, but it is just now getting back to its downtrend resistance line off the June 2021 high. It's at a critical juncture.

What's bullish, though, is that CLB recently surged above its falling 200-day moving average and featured a bullish golden cross with the long-term moving average eclipsing the shorter-term 50-day moving average. The upward thrust came on decent RSI momentum, but that reading just matches the same RSI level from November while volume has been unimpressive of late. Also, take note of significant volume by price in the $24 to $27 range that could be problematic for the bulls on a further move higher.

Overall, I think right now is more of a time for profit taking in this name rather than adding to it. A breakout into the upper $20s would help support a bearish to bullish reversal confirmation, but we are not there yet.

CLB: Shares Rally To Resistance

The Bottom Line

While there are positive aspects to CLB's growth outlook, the valuation is high compared to its peers. The chart also suggests a pullback is more likely than not and shares broadly remain in a downtrend. I would go with other cheaper and more technically sound energy names.

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