CARBO Ceramics (CRR) is an oilfield services company that serves the exploration & production (E&P) and environmental sectors. The company primarily operates in North America in most of the major oil & gas shale plays, generating roughly 80% of its 2013 revenue from this market. Halliburton (HAL) and Schlumberger (SLB) are two of its biggest customers each accounting for over 10% of the company’s total sales over the last two years.
CARBO’s primary business is the manufacturing of proppant. Proppant is a sand-like grain used to enhance oil & gas production, designed to open fissures during the hydraulic fracturing process. The three types of proppant that are used in the industry are sand, resin-coated sand, and ceramic proppant. Sand is usually the cheapest material, while ceramic commands the highest price. Ceramic proppant’s more uniform size and shape, coupled the ability to maintain its form under higher pressure, boosts overall oil & gas recovery rates for E&Ps.
Products and Technology
The company manufactures six types of proppant. In addition, CARBO recently developed a new proppant, KRYPTOSPHERE-H, for ultra-deep and highly pressured wells. The manufacturer believes it is the strongest proppant in the industry, which will probably be initially used on the ultra-deepwater wells in the Gulf of Mexico. The company is already in the process of retrofitting an existing facility for production and educating customers on the effectiveness of this new technology.
Too, CARBO sells fracture simulation software under the brand name FracPro, while also providing consulting services to oil & gas companies. The FracPro software provides real-time information for the well, offering performance and post job analysis, while helping the customer better prepare and diagnose any unforeseen problems. The consulting firm, StrataGen, advises customers on best practices for well completion. The team provides information and expertise through the design and building stages, and ultimately optimizes productivity.
CARBO also owns a spill prevention and containment business through its Falcon Technologies and Services subsidiary. Falcon uses this technology to extend the life of its clients’ storage assets, and reduce any possible spillages. This business has some longer-term potential, given the greater amount of regulatory scrutiny for oil & gas operators.
Over the last seven years, the company has built significant capacity to meet the demand from the various oil & gas shale plays in North America. Indeed, production went from 750 million in 2006 proppant production to 1.75 billion at the end of 2013. Management plans on adding about 500 million pounds of proppant to its annual output over the next 18 months. We believe that capacity expansions are prudent, given the potential acceleration in unconventional drilling in North America.
The barriers to entry in the proppant business are quite low. There are a number of firms in Russia, China, and Brazil that have provided much competition over the last several years. Additionally, a division of a large French glass and materials company has been a major player in the industry as well. Due to the intense competition, pricing has been very weak since 2011. The Chinese firms, in particular, introduced a cheaper proppant that tested margins for the industry. However, we believe that oil & gas companies are beginning to shift back to a higher quality proppant, due to the better recovery rates and reliability.
Following the financial crisis the stock price surged on strong drilling activity in the North American shale plays. Yet, intense competition and a slowing rig count put pressure on shares from 2011 to 2013. Going forward, we expect pricing to be relatively flat in 2014, but more service-intensive wells should boost sales in North America. We believe the company’s newest proppant, coupled with increased drilling in unconventional wells, will boost the top and bottom lines in the coming years. But the stock will need to continue trading at a premium to its historical price-earnings ratio for it to be a worthwhile selection. For more information regarding CRR's long-term prospects, subscribers are encouraged to check out our full-page report in The Value Line Investment Survey.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.