Frequently, the best road to success for a company is to do one thing really well — preferably something nobody else does but that’s in great demand all the same.

#-ad_banner-#This is exactly the approach of one unique energy firm, which refers to itself simply as “the reservoir optimization company.” Its sole job in life is to provide the research, technology and special expertise necessary to optimize extraction from oil and gas reservoirs.

This laser focus has certainly led to great success both for the company and its shareholders. Since 2004, the company’s earnings per share (EPS) have risen an astounding 2,364%, from $0.22 to $5.41. During the past 10 years, its stock has delivered total returns averaging nearly 33% a year.

I see Core Laboratories (NYSE: CLB) as a safer way to play the energy sector because it’s not an oil and gas producer. Producers, even the largest ones, can be highly risky because their profits and stocks often fluctuate wildly in response to any number of things such as energy prices, the economy, or unexpected delays, costs or disasters.

Core shields itself from these sorts of risks primarily by maintaining a diverse, global customer base of dozens of producers of all sizes and by providing these customers unique services with one main goal: to maximize production through analysis of the geologic and fluid characteristics of oil and gas reservoirs.

More specifically, the Netherlands-based company analyzes reservoir rock samples for hydrocarbon levels, a measurement typically used to determine potential oil and/or gas production rates from a reservoir. Core also studies how easily natural gas and fluids — particularly oil and hydraulic fracturing (aka fracking) fluids — flow through the rock to determine how best to extract reserves while preventing reservoir damage that inhibits production.

Along with information, Core provides equipment and technologies that facilitate fracking and other extraction methods. One example is a patented diagnostic tool called Spectrachem, which helps gauge the efficiency of fracking fluids. Another patented Core technology, Flowprofiler, helps optimize well spacing and the amount of fracking fluids used. The firm also makes state-of-the-art “perforating systems” made for efficient tunneling into oil and shale gas reservoirs.

Results with these and other Core technologies have been excellent. For instance, management estimates Flowprofiler improves well output by 40% to 60% in conjunction with proper well spacing and longer horizontal drilling distances. 

The competitive landscape is highly in Core’s favor and should remain so. The company has no direct competitors to speak of (although some of major energy companies have in-house well-optimization functions). What’s more, Core has accumulated so much knowledge and developed such expertise that it would take years for any new rivals to reach a comparable level of proficiency. New competitors could also be facing an elevated risk of patent-related legal action, since Core has patents for most of the technologies necessary for reservoir optimization. 

This high degree of dominance will be invaluable going forward. Profitable oil and gas reserves are becoming more difficult to find and extract, so Core will be the obvious choice for energy producers looking for the best possible assistance in maximizing output and efficiency.

One particularly lucrative activity for Core will be “multi-client reservoir characterization studies,” in which the firm serves large groups of producers who agree to share information on a specific region. One recent example is the Permian Basin of West Texas, which contains some of the largest proven oil reserves in the U.S. (tens of billions of barrels of extractable oil), as well as extensive natural gas reserves.

Core has contracted with 60 producers to study the Permian Basin’s geology and reservoir characteristics and disseminate the results. Such large group contracts should help cement Core’s position as the top expert on the regions it studies — perhaps for decades. The firm should also be well-positioned to keep generating strong revenues, high margins (for example, its net margin is currently 23%), and an attractive bottom line.

Risks to Consider: Although it’s not a producer, Core can be adversely affected by falling energy prices, since these may prompt producers to reduce spending on Core’s technologies and services. However, two factors mitigate this risk: Core’s end of the business is far less equipment and cost-intensive, and it focuses more on existing assets than exploration. During leaner times, producers are much more apt to slash spending on services related to the latter.

Action to Take –> Core is a novel energy services company with no true competitors and a degree of expertise energy producers clearly value, or else they’d “do it themselves.” Because increasingly difficult oil and gas extraction will further enhance demand for Core’s services, I believe the company can achieve projected EPS growth of 19% a year (EPS has grown 21% annually for the past five years).

This implies slightly more than 100% upside during the next five years to $387 from the current stock price of about $190, assuming a projected earnings multiple of 30. The forecast price-to-earnings (P/E) ratio is conservative and reasonable in my view since the current multiple is 35.

P.S. Just because a company isn’t based in the U.S. doesn’t automatically mean it is a “risky” growth stock. In fact, if you’re ignoring overseas markets, then you could be missing out on some of the market’s biggest income opportunities. All told, we’ve found 93 companies paying 12%-plus yields — and nearly a thousand more paying above 6%. That’s why we’ve created a special report that tells you everything you need to know about international high-yielders — including names and ticker symbols of some of our favorites. Click here to learn more.