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BP Backlash to Benefit Niche Energy Firm

The backlash against BP and offshore drilling will likely benefit Carbo Ceramic, which sells software and materials used in land drilling and leak prevention.
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HOUSTON (TheStreet) -- BP's (BP) - Get Report devastating oil spill in the Gulf of Mexico will likely incite a backlash among taxpayers and legislators against offshore drilling. As offshore oil drillers fall out of favor, land-based, natural gas companies will benefit.

The United States' dependence on oil has been a top political issue for decades, but the fragility of the economic recovery put energy independence and environmental conservation on the back burner. Famed investor

T. Boone Pickens

has been trying since 2008 to generate support for a plan to shift from crude oil to natural gas and wind energy, which cause less environmental damage than fossil fuels and could create jobs in the U.S.

Fallout from the BP oil spill will bring natural gas back to the forefront. Natural gas is abundant domestically and is safer to extract than crude oil. One company that's benefiting from natural gas growth is

Carbo Ceramics

(CRR) - Get Report

, the world's largest maker of ceramic drilling materials and the provider of the world's most popular fracture simulation software. Carbo, led by CEO Gary Kolstad, has been featured in

TheStreet's

Under the Radar series.

Since 2007, Carbo has boosted revenue 5.2% annually, on average, and expanded earnings per share 2.5% a year. Its stock has delivered annualized gains of 16% over the same span, while the

S&P 500 Index

and

Dow Jones Industrial Average

lost value.

Carbo's focus on disruptive growth materials, also known as proppants, has helped it weather downturns better than peers and outgrow them during expansions. Proppants are beads used for oil and gas drilling. Fossil fuels are contained in the pores of rocks. Ceramic proppants are pumped, along with fluids, in a process called hydraulic fracturing. The proppants become lodged in pores, keeping them open and maximizing fuel release during the pumping process.

This technology maximizes the output of oil and gas wells. Typically, hydraulic fracturing is used when it appears that a well's production has peaked. Because drilling new wells is costly, companies use hydraulic methods to increase fuel extraction at existing wells. High-margin ceramic proppants are replacing sand-based alternatives, which are cheaper, but less effective. Proof of this trend is apparent in Carbo's quarterly earnings report.

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Its first-quarter profit increased 16% to $19 million, or 82 cents a share, as revenue rose 36% to $123 million. Its operating margin narrowed from 27% to 23%. More importantly, Carbo's worldwide proppant sales soared 47% and management noted accelerating demand, a trend that could hasten because of the BP fallout. Also, unlike larger energy peers, Carbo boasts $80 million of cash reserves, equal to a quick ratio of 3.2, and no debt.

While Carbo's proppant business is a compelling story in the energy industry, two of its subsidiaries offer comparable prospects. Its FracproPT software is used to model fracture drilling situations, allowing customers to create specialized situations. It is the most popular software of its type in the industry. And Falcon Technologies, purchased in 2009, focuses specifically on spill prevention and containment systems.

BP backlash will likely lead to more regulation in the energy industry, positioning these two businesses to grow. However, analysts still give Carbo mixed reviews. Of those covering the company, three, or 25%, advise purchasing its shares, seven recommend holding and two suggest selling them.

Howard Weil

expects the stock to rise 22% to $84.

Morgan Stanley

(MS) - Get Report

predicts it will climb 9% to $75.

The stock's valuation is a tad rich. It trades at a price-to-projected-earnings ratio of 21, on par with energy equipment and services peers. But it's expensive based on book value, sales and cash flow per share. With the economic recovery on uncertain footing and BP tarnishing the oil industry's already bad reputation, it's difficult to find sure bets in energy. But Carbo offers an outstanding track record and timely growth opportunities. We rate the company "buy."

-- Reported by Jake Lynch in Boston.

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