Carbo Ceramics Improves Core Technology

Oct.26.12 | About: CARBO Ceramics (CRR)

Carbo Ceramics (NYSE:CRR) said it has identified a new technique for manufacturing ceramic proppant. The company already makes the highest performing products in the industry. The process currently is in the development stage. If it is commercialized Carbo expects the new line will deliver even higher levels of conductivity to the fracking industry, both in the petroleum and natural gas segments. Projected costs are expected to be similar to Carbo's existing products. The effort was spurred by competitive factors. Several start-up companies are trying to develop alternative ceramic based proppants. Those projects have been taking longer than expected to reach fruition because of technical problems. If Carbo's next generation reaches the market those efforts could become obsolete before they start.

New resin coated sand proppants are in the pipeline. That's a less expensive technology that can be applied in less challenging formations. Carbo has been gradually ramping up production of its lower cost sand based products. New capacity is slated to come on line in 2013.

Marketing efforts are gaining a receptive audience. Carbo has been swatting away competition from lower quality Chinese competition for the past several years. A technical marketing campaign was launched in 2012 to demonstrate explicitly why its products generate a higher rate of return. The data generally indicate that flow rates are 20% stronger using Carbo's proppants. Their greater strength and more consistent shape produce better conductivity.

International sales are picking up. They still represent a small fraction of total sales. But in the September period foreign business jumped 33%, partly offsetting a decline in North America. Carbo also benefited from growth in its non-proppant operations, particularly the Falcon spill containment business. That unit also is a small part of the overall company but it keeps growing at a 15%-20% pace.

Third quarter results were unspectacular, as expected. Income declined 32% to $1.09 a share. Consolidated revenues slid 10% to $151 million. Earnings could drop even further in the December quarter due to weather factors and holiday interruptions. Low natural gas prices are continuing to weigh on the overall drilling industry.

Absent a complete economic wipe-out at least a modest improvement appears likely to develop next year, though. Carbo is well positioned to boost its share of the market, moreover, creating the potential for a solid gain in financial performance. The long term outlook already looked positive. If the new production methods are implemented successfully results could accelerate at an even faster pace than previously thought.

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Disclosure: I am long CRR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.