Carbo Ceramics (NYSE:CRR) continues to generate prodigious growth in sales of proppant as the company benefits from the manic development of onshore unconventional resource plays in the U.S.
TUTORIAL: Commodity Investing 101
Carbo Ceramics manufactures and sells proppant, a product used during the hydraulic fracturing of wells. The proppant is placed into the well along with the fluid and remains behind to hold open the fractures created in the rock. Most of the company's sales are of ceramic proppant, a more expensive product that the company markets as superior to other alternatives.
Q2 2011 Results
Carbo Ceramics reported a net income of $29.9 million, or $1.29 per diluted share in the second quarter of 2011. Revenues came in at $149.7 million for the quarter, a 34% increase over the second quarter of 2010. The company sold 387 million pounds of proppant in the quarter, a 23% year-over-year increase. This growth is expected to continue going forward as the consensus earnings estimates for the company is at $7.08 per share in 2012, up from $5.39 in 2011.
Although many might be envious of the company's growth, the market was expecting more and the stock sold off sharply after the earnings release.
Carbo Ceramics recently raised its quarterly dividend to 24-cents per share, a 20% increase and the eleventh consecutive year that the company has increased its dividend. The current yield on the stock is only a paltry 0.60%, but most investors aren't buying it for the income stream.
Although proppant sales have been growing at double-digit rates since the rig count bottomed several years ago, oil service companies are developing a more efficient fracturing process that would use less proppant than current techniques.
Schlumberger (NYSE:SLB) is promoting the company's HiWAY hydraulic fracturing technique which creates a more conducive method for hydrocarbons to flow. Petrohawk Energy (NYSE:HK) uses this technology in the Black Hawk and Hawkville fields in Texas. The company said that using this fracturing technology required 40% less sand proppant than the previous process. Petrohawk Energy also found that wells fractured with the HiWAY technology are more productive than wells that undergo conventional fracturing techniques.
Some operators are substituting lower priced sand proppant in place of ceramic proppant if a well can be completed efficiently without the higher-end product. Pioneer Natural Resources (NYSE:PXD) is using sand proppant in place of ceramic proppant in the Northwest portion of its leasehold in Texas, where the Eagle Ford Shale is at a shallower depth. The company said that between 20 and 25% of the wells can be drilled efficiently with sand proppant, and each well drilled this way would reduce proppant cost by 60%, or between $600,000 and $800,000 per well.
Carbo Ceramics does make resin-coated sand proppant as well, but non ceramic proppant was only 6% of the company's volume in the quarter ending June 30, 2011. The company is adding resin-coated sand capacity and will have the ability to produce 350 million pounds annually.
The Bottom Line
Carbo Ceramics is arguably the fastest growing oil service company available to investors and remains an excellent way to play the growth in onshore drilling in the U.S. However, investors might also want to consider that the shareholder base has high expectations on future growth and any disappointment here might create above-average stock price volatility. (For additional reading, check out Peak Oil: Problems And Possibilities.)
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