The company makes proppants, which are used to keep a hydraulic fracture open, during or following a fracturing treatment in oil and gas wells. Propants can be man-made grains such as ceramics or natural grains like sand. Carbo Ceramics is the world's leading producer of ceramic proppants, which costs more than sand.
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The company's shares, at around $63, are down 46% for the year to date. Meanwhile, shares of sand-proppant producers Hi-Crush Partners (HCLP) and U.S. Silica (SLCA) have climbed 42% and 85%, respectively, in the same time period.
Carbo Ceramics could struggle in pricing and demand for its core product because of negative market dynamics, Avinash Kant, senior analyst at D.A. Davidson, wrote in a research report.
Last week, Carbo Ceramics said its ceramic proppant sales volume in this quarter will be similar to the first quarter. In other words, the company expects a sequential decline in ceramic-proppant sales, which stands in stark contrast to its previous expectations of a gain, predicted during a second-quarter conference call.
The change was attributed to increasing competition from domestic and international suppliers of its core product and the increasing use of the cheaper natural sand by energy companies, particularly by those operating in North Dakota's Bakken formation.
The main differences between synthetic and natural proppants are quality and price. Their strength, uniform size and shape make ceramic proppants superior in quality to their sand-based counterparts -- but ceramic is up to 11 times more expensive than sand, based on Carbo Ceramics' average sales price per pound in the second quarter.
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Kant said the market could witness a meaningful decline in prices of ceramic proppants in the near term, which could have an adverse impact on Carbo Ceramics' performance. Oil and gas producers are weighing the costs and have been shifting toward sand, he contends.