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By Brendan Coffey

Make no mistake, becoming more ingenious is necessary to keep up with the world’s increasing energy consumption. Even in this difficult economic time, world energy usage is growing – the Energy Information Agency said in its September briefing that the slower than-expected energy growth will still require a drawdown of reserves to meet demand by year’s end. And a drawdown of reserves means more oil needs to be drilled to replace it.

In the 1940s and 1950s, when the giant oil fields of the Middle East were being discovered, getting oil out of the ground was akin to making a hole in a coconut and sticking in a straw. That’s one of the reasons the local governments there found it very easy to kick out the Western oil companies that started the fields–it didn’t take much expertise to tap all of that oil.

Today, however, finding so-called “giant” oil fields (generally meaning fields believed to have one billion or more recoverable barrels of oil) has become far more difficult. That has created the need for techniques like horizontal drilling, which requires the remarkable tech savvy to turn a drill 90 degrees deep underground in solid rock to reach what are called unconventional deposits.

In the past decade, four innovative technologies have evolved to help make such drilling more accurate–and profitable. One is 3D imaging for locating deposits and directing drills. Another is swell packers, simple packets first used in 2001 in Norway that swell when they meet hydrocarbon molecules, which helps isolate oil deposits deep underground, replacing the costly and often ineffective use of cement. The third is “perf and plug,” which controls how a company fractures rock by pre-fracturing between swell packets, which can better direct subsequent fracturing.

The fourth technology is the basis for my stock recommendation this issue. It’s ceramic proppant. Proppant does just what it sounds like it does–it props open rock. Once rock is fractured, usually by a controlled explosive device, the rock literally needs to be propped open to allow the flow and pooling of the target liquid to occur.

Proppant has historically been sand, generally easily available and cheap. However, industry studies have found that sand, being of irregularly sized granules, packs in tightly and therefore isn’t an ideal for maximizing flow. Sand is improved by coating it with resin, making for a slightly better and slightly pricier proppant, but it is still not ideal.

The best proppant is made of uniformly sized ceramic, which allows more space between each ball of proppant, resulting in improved flow of oil and gas through the rock.

CARBO Ceramics (NYSE:CRR) is the world’s largest producer of ceramic proppant, supplying leading oil services companies including Schlumberger (NYSE:SLB), Hughes Oil and Gas (NYSE:BHI) and many other independent oil and gas exploration firms. The Houston-based company makes a series of eight different types of proppants, some covered with resins for wells that need a slicker proppant, others made of bauxite for higher pressure environments, others of smaller size for various depths and densities of rock.

CARBO’s great advantage: data shows that wells that use its ceramic proppant produce twice as much oil and gas as similar wells using basic sand proppants. This is especially important in unconventional fields such as the Bakken in the Dakotas, where that production data was collected.

CARBO also sells software for modeling how to fracture rock, and recently added a business that provides quick-curing polymer linings used in oil and gas storage tanks and on the low walls that surround tanks and wells to prevent catastrophic spills from spreading.

CARBO is also expanding its resin-coated business, betting that it can convince users of sand to pay a little more for resin, and then eventually convert many of them into buying the costlier ceramic proppant. Right now, it’s believed that ceramic proppant is used by 25% of the world’s proppant market, with resin used by 15% and plain old sand by 60%.

CARBO generated $473 million in revenues in 2010, and has beaten expectations with over $300 million sales the first half of 2011. I expect the company to generate $5.51 in earnings per share for 2011, well over 2010′s $3.42 net income.

CARBO has held up well in the recent market turmoil, slipping from a high of 180 to find strong support around 150. Today around 154, it’s near where Cabot Global Energy Investor bought shares when we featured CARBO in June. Subscribers collected a 20-cents per share dividend along the way, but the real profits are to be made in the price growth of CARBO, which could be challenging 200 by year’s end.

Source: CARBO Ceramics Benefits From Simple And Profitable Innovation