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Carbo Ceramics A Slick Recovery Stock

Posted: Jan 07, 2009 15:55 PM by Eric Fox

Tickers in this Article: SLB, BJS, HAL, CRR

Carbo Ceramics (NYSE:CRR) products are seeing increased secular demand as the number of unconventional wells drilled continues to increase. Investors who can see beyond the trough of the current cyclical downturn in energy should consider this company.

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Carbo Ceramics is an oil services company that manufactures ceramic proppant for use in oil and gas drilling. A proppant is a particle that is added to the fluid used to fracture a well during a hydraulic fracturing operation. The purpose of the proppant is to keep open the fractures in the rock so that oil or gas can flow more efficiently to the wellhead. Other materials used as proppants are sand (either natural or coated with resin) or bauxite. CARBO is the market leader in ceramic proppants with a 35% share of the market. (For a background in energy sector investments, read Unearth Profits In Oil Exploration And Production.)

The company has a strong, secular growth trend underlying its business. In addition, wells are being drilled increasingly in unconventional resource plays across North America that require fracturing - some form of proppant is used in all of these fracturing operations. The market has grown at an 18.5% compound annual growth rate since 1979.

Carbo has gained market share from other types of proppant over time. Ceramic proppants had an 18% share of the overall market in 2007 versus 10% in 1996. Sand is still the market leader with more than 70%.

The company believes that its ceramic proppant is superior and allows exploration and production companies to have higher recovery rates on initial production. The reason is that ceramic materials are uniform in size compared to sand, and allow the most flow and porosity for the hydrocarbon. Also, the unconventional resource plays that need high levels of fracturing are usually high temperature and high pressure, and ceramic will resist heat and pressure better than other materials.

Risks
Carbo’s customer base is fairly concentrated. In 2007, 62% of the company’s revenues were to three companies: BJ Services (NYSE:BJS), Halliburton (NYSE:HAL) and Schlumberger Limited (NYSE:SLB).

Ceramic proppants do cost more than other types of proppants, and it is up to Carbo to convince the industry that the extra cost will be recovered through higher recovery rates. The company has an impressive array of studies on its website that support the use of ceramic proppants, but it is possible that some companies will use cheaper proppants during an economic downturn to save costs.

Financials
The company has no debt and $32 million in cash (last numbers available - September 30, 2008). After it reported its most recent quarter, the company closed on its sale of a portion of the assets of Pinnacle Technologies to Halliburton for $137 million. This shored up its balance sheet even further. In the end Carbo Ceramics is a play on a recovery in drilling in the energy sector, with strong leverage to the trend of more complex and unconventional drilling.

For more on evaluating energy companies, read the Oil And Gas Industry Primer.

By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator.

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