CARBO Ceramics' CEO Discusses Q1 2012 Results - Earnings Call Transcript

CARBO Ceramics Inc. (CRR)

Q1 2012 Earnings Call

April 26, 2012 11:00 am ET

Executives

Gary Kolstad – President, Chief Executive Officer

Ernesto Bautista, III – Vice President, Chief Financial Officer

Analysts

Brian A. Uhlmer – Global Hunter Securities LLC

James West – Barclays Capital

Jeff Tillery – Tudor Pickering Holt & Co. Securities, Inc.

Doug Garber – Dahlman Rose & Co. LLC

Blake Hutchinson – Howard Weil, Inc.

John Daniel – Simmons & Co.

John Keller – Stephens Inc.

Presentation

Operator

Hello, and welcome to today’s CARBO Ceramics Inc. First Quarter 2012 Earnings Conference Call. At this time, all participants are in listen-only mode. After management’s remarks, we will conduct a question-and-answer session and instructions will follow at that time.

Please be advised, this call is being recorded today, April 26, 2012, and your participation implies consent to our recording of this conference. If you do not agree to these terms simply disconnect.

I would like to remind all participants that during the course of this conference call, the company will make statements that provide information other than historical information and will include projections concerning the company’s future prospects, revenues, expenses or profits.

These statements are considered forward-looking statements under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995, and are subject to risks and uncertainties that could cause actual results to differ materially from these projections. These statements reflect the company’s beliefs based on current conditions, but are subject to certain risks and uncertainties that are detailed in the company’s press release and public filings.

Your host for today’s call is Mr. Gary Kolstad, President and Chief Executive Officer of CARBO Ceramics Inc. Mr. Kolstad, please begin your call.

Gary Kolstad

Good morning. I want to thank you for joining us to discuss CARBO’s first quarter results along with our outlook for the remainder of 2012. Overall, in the first quarter CARBO made a lot of progress in managing the large transition and activity in North America from natural gas basins to liquids rich basins. I want to make couple of comments on proppant demand and supply chain challenges associated with this large transition.

First of all, in demand side compared to the fourth quarter of 2011, sales volumes rebounded up 4% to £404 million, while our average proppant price per pound remain relatively flat.

We were very pleased with the trend in the first quarter sales volume as we continue to place increased amounts of ceramic proppant to the liquids rich basins.

Importantly, our client base in these liquid rich basins also continue to expand as E&P operators achieve increased production results by utilizing our high conductivity, high quality ceramic proppant.

The industry transition in North America from gas-directed activity to oil-directed activity continues. However, for CARBO, this transition is largely complete as the vast majority of our U.S. ceramic proppant sales volume is now being sold into liquid rich basins. As mentioned in previous quarters, and over the previous business cycles, we remain confident in the demand for our ceramic proppant now and in the future.

The basic permit to that confidence is that our high conductivity ceramic proppant makes wells produce better and have higher EURs than all other proppants. The trends seen year-to-date during this transition and industry activity gives us confidence and long-term prospects for our proppant business.

Additionally, our top technology continues to grow. We have successfully demonstrated the value of CARBONRT, a non-radioactive detectable proppant on five continents around the globe. The backlog of CARBONRT jobs continues to grow as E&P operators choose to measure fracture height without the environmental concerns associated with radioactive material.

Finally, as I mentioned on the fourth quarter conference call, we’ve already seen some users of lower quality, lower conductivity Chinese ceramic proppant change their buying habits. That is, they switch from these lower quality proppants to a high quality, high conductivity proppant such as Carbo’s.

Now on the supply chain. On the supply chain challenges, we continue to work on the cost side. As previously discussed, the increased amount of activity in the infrastructure limited liquids rich basins introduce supply chain challenges to the industry. The challenges resulted in a higher supply chain cost this quarter for CARBO, and I’ll comment a little bit more on that later. CARBO is investing in strategic projects to strengthen our distribution in order to meet the present and future demands of our clients. We are pleased with the progress made thus far, and anticipate these investments should be completed before the end of the year.

Moving on to our other businesses. In late January, the start-up of our second resin-coating line in New Iberia was initiated. This line however produced minimal quantities during the quarter due to the limited availability of third-party supplied northern white sand.

Our consulting business StrataGen continues to see a growing demand for field consultants, Data and Neural Analysis or DANA studies in overall fracturing design and evaluation requests. Our environmental risk reduction business Falcon Technologies continue to see growth in both client base and geographical operations with a new operations center in Colorado.

Falcon also broadened its Engineered to Protect product suite by delivering its first location liner during the quarter. The location liner service has an independent role and efficient protector of the ground soil during the completion and fracturing operations, and has the ability to be transport and reused on multiple locations.

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