Thursday, April 25, 2013

Carbo Ceramics ( NYSE - CRR ) -- Market Share Expands Despite Intense Competition

Carbo Ceramics (CRR $72.00) reported lower than expected Q1 results.  Unit volume improved 7% even though the number of drilling rigs in operation declined by 12%.  Margins were compressed, however, as a result of renewed international competition.  That arose both from China and Brazil.  Prices fell 14% due to the pressure from lower quality competition.  Earnings finished at $.81 a share in the March quarter (excluding stock compensation expense), off 40% year to year.  Besides the need to discount prices profitability was impacted by high distribution costs in North Dakota and other oil producing regions.  Slow drilling activity is likely to keep a lid on financial performance in the June quarter, as well.  Natural gas activity is at a 15 year low, due to ongoing oversupply conditions.  Oil drilling remains fundamentally robust but is likely to moderate temporarily due to seasonal factors.  The natural gas segment is poised to start recovering later in 2013, bolstered by improved supply-demand conditions and rising market prices.  Fracked wells tend to deplete faster than conventional reserves, moreover.  The paucity of drilling over the last two years may cause existing output to diminish, requiring new efforts just to maintain supply.

Technology improvements are in the pipeline.  Carbo's existing line already yields better flow rates than competing products.  It's next generation is expected to enhance output further, and facilitate drilling in more difficult formations.  Pricing will remain an issue over the long haul due to the competitive nature of the energy industry.  But Carbo should be positioned effectively to blunt lower cost competitors by delivering superior performance, enhancing its customers' return on investment.  The fracking industry currently exists mainly in North America.  Expansion to other parts of the world is likely.  Weak economic conditions have delayed the energy industry's rebound, which in turn has affected Carbo's performance.  The long term outlook remains bright, though.

( Click on Table to Enlarge )

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