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3 Things to Watch at CARBO Ceramics Inc. (CRR)

Here at The Motley Fool we believe it is crucially important to evaluate an investment on all of its merits and shortcomings. After all, taking a balanced approach to each potential investment allows you to make the best decisions when it comes to putting your hard-earned money to work. It’s one of the reasons we call ourselves Foolish investors.

Over the last two weeks, we have looked at a number of catalysts and risks for the world’s largest ceramic proppant manufacturer  (NYSE:CRR). The list includes:

1). What’s a proppant?
2). Opportunities
3). Red flags
4). Management

It can be difficult to sort out important news from all of the noise in today’s investing environment. So today I will leave you with a brief list of developments to monitor over the coming months and years that can guide your research into the company.

1. Total rig count

Despite another record year of sales in 2012 — in volume and dollars — the company has struggled to prop up its share price for investors. One big reason is the slowdown in well drilling activity, which is, of course, tied to depressed natural gas prices. Unfortunately, the industry has yet to pick up after the first six months of 2013. Total rig count is down to 1,692 for onshore wells, which is a 12% drop compared to last year.

Source: EIA Note: Onshore rigs only.

You can see that the number would be much worse if not for soaring oil production. However, it is also important to consider that well activity for natural gas is heavily correlated to its price.

Source: EIA.

The good news is that oil prices should be kept aloft by major international demand from developing nations such as China. Hopefully for CARBO Ceramics Inc. (NYSE:CRR), international forces will become a driving force for natural gas once liquefied natural gas, or LNG, exports begin in the next few years. A steady outflow of natural gas to international markets will support drilling activity and production, so investors would be wise to watch for major increases in natural gas rig counts. The EIA’s website has monthly tallies (link opens PDF) readily available for public consumption, although data usually lags by at least one month.

2. Industry expansion

Annual worldwide proppant use has soared from just 3 billion pounds in 2000 to more than 17 billion pounds today. The market is broken into three categories of ascending price and quality: sand, resin-coated sand, and ceramics. CARBO Ceramics Inc. (NYSE:CRR) currently possesses 1.75 billion pounds and 400 million pounds of ceramic proppant and resin-coated proppant manufacturing capacity, respectively. The company is also expanding production capacity by nearly 1 billion pounds per year by the end of the decade. That positions this titan of the industry near the head of the pack in seizing continuing worldwide growth.

While it’s not likely for CARBO Ceramics Inc. (NYSE:CRR) to lose its spot atop the industry, the competition for customers is certainly heating up. The following list contains the largest ceramic proppant manufacturers worldwide, some of which are expanding operations into America’s kaolin-rich Southeast.

Company Country of Origin Major International Locations
Saint Gobain France Arkansas, Europe, China
Curimbaba Brazil South America, Europe
Imerys France Georgia
Pyramax United States Georgia
Borovichi Russia Russia
FORES Russia Russia

Source: CARBO Ceramics SEC Filings.

The list doesn’t include a growing number of Chinese manufacturers. And don’t forget that these companies could also affect CARBO Ceramics Inc. (NYSE:CRR)’s international revenues. Consider that 22.5% of company’s 2012 revenue came from international markets, which grew 12% compared to 2011. That compares favorably to domestic revenue, which grew less than 1% on the same basis. Seeing that only 9.3% of the company’s current manufacturing capacity is located outside of the United States, I imagine international competition could also affect domestic production and expansion for the company.

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