Q4 results were impacted by a sharp reduction in natural gas drilling caused by the warm winter. That oversupply was exacerbated by a rapid build-up in production earlier in the year. A lift in oil fracking offset part of the natural gas decline in the quarter. Natural gas demand for Carbo's products is continuing fall, though. And the company probably won't be able to keep ramping up oil market deliveries in the near term due to intrastructure problems.
That infrastructure build-out in the Dakotas is likely to start bearing fruit by mid-year. Carbo is almost certain to benefit from the transition from natural gas to oil, once the company gets set up, because its superior technology works better on oil and the price of oil is apt to be less volatile since it's set by worldwide demand. Natural gas prices tend to be affected by local supply and demand factors. The company is building depots out west, and it's cultivating new and existing customers. The technology already is well established. Prospective customers are continuing to identify new drilling targets with computers. And overall drilling costs are coming down with experience.
Chinese competition remains a threat of vague proportions. Carbo is well positioned to deflect most attempts by the Chinese to break into the market. Carbo is a domestic company and it understands how the oil patch thinks and operates, so it should stay ahead of the pack from a marketing standpoint. Substantially lower costs naturally will attract attention, though. And some shift to Chinese suppliers is bound to happen, especially in the natural gas segment where proppant quality isn't always a critical factor. Chances are Carbo will become more of an oil play over time. The company is aggressively developing lower cost proppant product lines, though. It could remain a major factor in the natural gas area, as well.
Shale drilling remains in an early stage of development. We've reduced our 2012 estimates to reflect the levelling off in oil drilling that's likely to occur in the first half of 2012. Those logistical issues should be resolved by mid-year, opening the way for a resumption of above average growth extending well into the decade. Carbo also is developing several high potential software and spill containment product lines which could provide further leverage.
( Click on Table to Enlarge )