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Carbo Cooks With Gas: Under the Radar

Carbo Ceramics helps companies extract natural gas from shale. If there's a policy push for more natural gas, Carbo stands to benefit.

BOSTON (

TheStreet

) -- T. Boone Pickens' ambitions to wean the U.S. from foreign oil while fighting global warming may not be as altruistic as he claims but that doesn't mean his plan is without merit.

The billionaire oilman has proposed that America should invest $1 trillion in wind farms for the Midwest to provide clean energy in that region as well as the South and West, allowing the natural gas used for power generation in those areas to be diverted to heavy-vehicle transportation.

The plan would seem to be a boon for natural-gas stocks, such as

Chesapeake Energy

(CHK) - Get Chesapeake Energy Corporation Report

,

Southwestern Energy

(SWN) - Get Southwestern Energy Company Report

and

ConocoPhillips

(COP) - Get ConocoPhillips Report

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. The lesser-known

Carbo Ceramics

(CRR) - Get CARBO Ceramics Inc. Report

stands to be one of the main beneficiaries of a push toward natural gas.

Critics of the Pickens plan say there isn't enough natural gas to meet demand. To do so, companies would need to exploit more of the commodity that's locked in shale deposits. But that extraction process -- known as hydraulic fracturing -- is more complicated than conventional drilling.

In hydraulic fracturing, a fluid is injected into the shale to break it apart. The fluid has a proppant -- a sort of conduit -- suspended in it to prevent the opening from collapsing in on itself. Here's where Carbo Ceramics comes in. Carbo produces the ceramic proppant beads used to maintain the openings. Not very glamorous, but it's a vitally important part of the process.

Beyond proppant production, Carbo also produces widely used hydraulic-fracturing-simulation software and provides consulting services. That niche has proved profitable. Carbo's stock has risen 53% over the past year and has a return on equity of nearly 15%. That may not sound very high, but considering that the business is nearly 100% funded with equity, it's quite impressive.

Zero debt weighing on the balance sheet creates an ideal environment for equity holders. None of the profits are lost to debt servicing, and the company is able to grow from its own profit generation rather than from debt financing. The stock pays a dividend of 1.3%.

Even if the Pickens plan becomes America's energy plan, don't expect an immediate pop for this, or any other, stock. Infrastructure improvements this sweeping are sure to move at a glacial pace and be implemented in phases.

Consider Carbo a long-term play. Profits will steadily increase with a move to natural gas as production ramps up to meet demand. Even in a scenario in which the Pickens plan and similar schemes are scrapped completely, the depletion of easily accessible natural-gas deposits will require a big push into shale deposits to satisfy even the most basic natural-gas needs of the country. As that comes closer to reality, Carbo will reap the rewards.

Stocks associated with fossil fuels aren't usually accepted as "green" picks. Still, Carbo could play a big part in America's energy-independent future. Natural gas is far cleaner than oil, and the pairing with wind power makes the Pickens plan a favorite of environmentalists.

-- Reported by David MacDougall in Boston.

Prior to joining TheStreet.com Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level III CFA candidate.