A Look At Carbo Ceramics

By Eric Fox | June 13, 2011 AAA

Carbo Ceramics (NYSE:CRR) is leveraged to the ongoing trend of more service intensive drilling and the increased efficiency pursued by many operators working to develop onshore manufacturing oil and gas plays.

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Carbo Ceramics manufactures ceramic- and resin-coated sand proppant, which is used during the hydraulic fracturing process. The proppant is mixed into the drilling fluid and is left behind to hold open the fractures in the rock so the hydrocarbons can flow.

Carbo Ceramics is enjoying a booming business during the current upcycle in drilling activity in North America. The company sold 399 million pounds of proppant in the first quarter of 2011, and 1.35 billion pounds in 2010. Volume in 2010 was up 29% from 2009. Carbo Ceramics believes that its ceramic proppant leads to a 20% improvement in initial production and recovery rates for oil and gas wells.

This growth is led by the shift toward more horizontal drilling and fracturing of wells in the United States as operators moved capital into shale and other unconventional resource plays. The number of horizontal land rigs in the U.S. reached 1,065 in the week ending June 10, 2011, up from less than 400 two years earlier.

Expansion and Valuation
Carbo Ceramics is adding capacity to meet an expected increase in demand going forward. The company is adding a new manufacturing line to its facilities in Toomsboro and New Iberia, and will have proppant capacity of 2.1 billion pounds once these expansions are on line.

Carbo Ceramics is also expanding into the resin-coated sand market and recently purchased a manufacturing facility in Wisconsin to produce this type of proppant. The company is building a new plant here that will have initial annual capacity of 600 million pounds. The expansion is expected to be completed by the end of 2012.

This growth does not come cheap as the company trades at a 20 multiple to 2012 estimated earnings per share of $6.85.

Carbo Ceramics has a pristine balance sheet with no debt, and $54 million in cash at the end of the first quarter of 2011. The company has also increased its dividend every year since 2003. Other oil service companies with no debt include Oceaneering International (NYSE:OII), which makes products used to develop offshore oil and gas projects, and Lufkin Industries (NASDAQ:LUFK), which sells pumping units and power transmission products.

Revenue Concentration
Since several large companies dominate the hydraulic fracturing business, Carbo Ceramics has revenue concentration among these oil service operators. Both Schlumberger (NYSE:SLB) and Halliburton (NYSE:HAL) accounted for more than 10% of the company's revenues in 2009 and 2010.

Carbo Ceramics is seeing enormous growth in sales of proppant as the North American drilling cycle continues to move up from the trough. The company also benefits from the shift to horizontal drilling and the drive by exploration and production companies to increase efficiency. (For additional reading, also take a look at our Oil And Gas Industry Primer.)

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