Carbo Ceramics: Price Pressure Intensifies

| About: CARBO Ceramics (CRR)

CARBO Ceramics Inc. (NYSE:CRR) appears on track to produce lower-than-expected Q3 results. Energy prices have been rising lately, creating optimism that demand for Carbo's fracking technology will swing higher in upcoming periods. The company's CEO says the outlook is still bleak, though. And there is ample reason to believe him.

Carbo Ceramics is a leading producer of ceramic proppants used by natural gas and oil drillers to keep the rocks open after they're fractured, so the energy can flow to the surface. The company has become a victim of its own success. Natural gas production went through the roof in 2010 once the technology became perfected. Demand for proppants surged, as exploration companies began working their leases, which had expiration dates.

The demand exceeded Carbo's ability to supply, and the ability of competitor Saint Gobain's (SGO.PA), the other principal proppant manufacturer, too. Oil and gas operators turned to China for an answer, and the Chinese delivered proppants that worked well enough. The technology was in an early stage of development and few people knew the science involved.

The Chinese were in a position to force U.S. exploration companies to sign long-term supply agreements. Those deals still are being worked off. The surge in natural gas production, combined with weak GDP growth in the U.S., caused natural gas selling prices to plummet. So new natural gas drilling ground to a halt. That situation has continued and may persist in light of the the latest economic statistics.

Carbo has been able to replace some lost business with oil related fracking in North Dakota. Demand remains elevated in that sector, which is affected to a lesser extent by Chinese competition because it's new business for the most part. But Carbo has had trouble delivering the goods due to infrastructure problems - where was that infrastructure stimulus money spent anyway? There just aren't enough railroads and depots to support the business potential out there.

The combination of higher costs and residual Chinese competition is likely to wear on profits over the next few quarters. Production of proppants in China is believed to be declining, because U.S. operators have learned the technology better and realize now that Carbo's products deliver superior returns on investment no matter what the Chinese price is. Some of the earlier Chinese contracts are lingering, though. And the infrastructure build up out West probably will take a while, since the Obama Administration basically remains opposed to fossil fuel development.

This business has tremendous potential. The natural gas side of the business is essentially dormant for the moment. But that business holds exceptional opportunity for the United States of America. It could give us the lowest fuel costs in the industrial world. Production is virtually certain to rebound. The oil business has great potential, too, since 60% of the oil we use still is imported. Much of that comes from Mexico and Canada, which is fine. But plenty of room exists to replace OPEC imports.

Will Wall Street crush the stock when Carbo reports lower-than-expected Q3 results? Buy the stock here and don't worry if a sell-off materializes. Or play the market, and try to get a better price.

This is a great company. You can't really lose either way.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.