Meet the rocket ship named CARBO Ceramics Inc. (NYSE:CRR). After being left for dead by Mr. Market in the last several months, the company reminded investors of its existence by beating Wall Street on both the top and bottom lines. There may be several good reasons to keep the world’s largest supplier of ceramic proppants — the tiny beads pumped into hydrocarbon wells to keep gas and oil flowing to the surface — on your investing radar. However, there are several serious threats to the company’s business even with the upbeat second quarter.
Shares popped because expectations were so low: Analysts had called for earnings of just $0.67 per share on revenue of $146 million. The company lifted the curtain to reveal earnings of $0.71 per share on revenue of $153.7 million. That may have walloped Wall Street, but revenue fell 13% and operating profit fell 49% compared to last year’s second quarter.
Profits were affected by slow drilling activity, less than optimal utilization of production facilities for resin-coated sand, increased production of lower-cost sand-based products, and a lower average selling price for ceramic proppants — a trend that has crept up on the industry for several years now. Interestingly, research and development into commercializing its new proppant technology slashed an impressive $0.08 per share off earnings. If the company’s reportedly best-in-class ultra-deepwater proppant under development can impress enough drillers, the market opportunity could be huge.
The truth is that 2013 was penciled in as a poor year for CARBO Ceramics Inc. (NYSE:CRR) from the start thanks to a challenging drilling environment and falling well totals. So if the company can manage to float through this year without scraping bottom, what can it do in 2014 and 2015 when drilling activity is expected to increase? That’s the question being asked by investors right now, who seem to like the answer.
CARBO Ceramics Inc. (NYSE:CRR) is still very dependent on ceramic proppant sales, but it does wield a portfolio of quickly growing services. The company’s Fracpro fracture design software and environmental business, Falcon Technologies, witnessed increases in client base and revenue. StrataGen consulting is also looking to grow domestically. However, it appears that the quickest and largest growth will come from resin-coated-sand proppants — a 600 million pound per year facility is waiting for market conditions to improve before being completed. Unfortunately, the market remains oversupplied and an official completion date cannot be set just yet.