Carbo Ceramics (NYSE:CRR) navigated its way through the treacherous energy cycle during the first quarter of 2012, as the company deftly managed the natural gas to liquids development shift transition underway in the industry.

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First Quarter of 2012
The company reported a net income of $30.3 million, or $1.31 per diluted share in the first quarter of 2012, about flat with the same quarter of 2011. Top line growth was better for the company with revenues coming in at $163.2 million in the most recent quarter, up 8% over the first quarter of 2011.

Proppant Sales
It manufactures and sells ceramic and resin coated sand proppant used by its customers during the hydraulic fracturing of oil and gas wells. The company sold 404 million pounds of proppant during the quarter, up marginally from the 399 million pounds sold in the same quarter of 2011.

The reported volume increase masked a slight deterioration in North America, where Carbo Ceramics reported a 2% volume decrease on a year-over-year basis.

SEE: Investing In Oil And Gas UITs

Outlook
The company was not optimistic on conditions for the balance of 2012, with Gary Kolstad, the CEO of Carbo Ceramics, calling the year "challenging." It believes that the transfer of oil services capacity and supplies into crude oil and liquids areas will continue, and pricing pressure will "become more evident" during the rest of 2012.

It promised investors that it would exercise pricing discipline during the downturn and expects that the increased productivity derived from the use of its ceramic proppant product line will keep sales strong.

Other companies that are suffering from this transition away from natural gas development include Nabors Industries (NYSE:NBR), which provides hydraulic fracturing services in the onshore United States. The company recorded a $3 million charge related to the redeployment of supplies during the first quarter of 2012.

SEE: Unearth Profits In Oil Exploration And Production.

The Cycle
Carbo Ceramics has managed previous drilling cycles fairly well. During the most recent recession, the company reported only a slight decrease in year-over-year proppant volumes.

One issue that investors should incorporate into an investment thesis on Carbo Ceramics is the company's dependence on sales to several large customers. Schlumberger (NYSE:SLB) and Halliburton (NYSE:HAL) each accounted for more than 10% of company sales in 2011. This may limit the company's ability to maintain pricing during a downturn.

SEE: 5 Biggest Risks Faced By Oil And Gas Companies.

The Bottom Line
The management of Carbo Ceramics expects industry conditions to worsen slightly for the balance of 2012, and plans to manage the downturn through pricing discipline. The company will also attempt to convince its customer base that proppant is more technologically advanced will lead to greater well productivity and is worth the higher cost.

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At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.

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