Carbo Ceramics ( NYSE - CRR ) -- Opens the Hole

Carbo Ceramics (CRR - $140) is the leading producer of ceramic proppants used in oil and gas fracking.  Today's horizontal drillers crack open underground rock formations to retrieve oil and gas.  The proppants keep those fractures open under extreme pressure.  Many land based wells are 8,000-10,000 feet deep.  Carbo has experienced a series of ups and downs over the years.  Natural gas prices collapsed a few years ago, causing overall activity to fall.  During a boom prior to that proppants fell into short supply, encouraging a swarm of Chinese competition.  The hoopla over fracking has generated competition in South America and elsewhere, too.  Most of those operators hoped to cash in on local energy projects.  International development has been slow to emerge, though for geological, political, and economic factors.  Some of that material gravitated to the United States, as well.

Carbo mounted a campaign to illustrate its products' price performance advantage.  That took some convincing.  Fracking operators have been focused on reducing costs to compete with "black oil" producers like the Saudis in the event an over supply condition arose.  That remains a primary emphasis.  But Carbo has persuaded a growing number of producing companies that its products may cost more, but they generate far more production than Chinese and other lower cost alternatives.

A new manufacturing technology could separate Carbo from the pack even further.  Its new Kryptosphere line is designed for extremely deep offshore deposits.  Huge oil and gas reserves are believed to exist offshore.  Standard straight down drilling, like the Horizon rig used before it exploded, is economic.  But horizontal fracking offers even greater rewards.  Up to now nobody had the proppants to make it feasible.  Carbo currently is demonstrating the new line to prospective customers.  Commercial introduction is scheduled for 2015.  A similar but less expensive version is being prepared, as well, for land based wells.  Pricing details remain secret.  But Carbo is intimating that costs won't be much higher than its existing products despite the performance improvement.

Meantime, poor weather affected Q1 financial results.  Drilling in North Dakota was stymied, reducing proppant demand.  Railroad bottlenecks contributed further problems.  Even so, earnings rose 6% on a 1% sales gain.  Sequential improvement is likely in upcoming periods.  Oil drilling remains robust.  Natural gas prices surged over the winter, moreover, and appear to be holding up at attractive levels.  That could encourage greater drilling activity.  The Obama Administration remains adamant in its opposition to LNG (liquified natural gas) exports.  That policy might change after the 2016 election, though, both for economic and geopolitical reasons.  Long term, international fracking promises additional leverage.

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