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.
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.
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.
ConocoPhillips (COP) and EOG Resources (EOG) are among the companies that have been experimenting with new well completion techniques that require significantly larger quantities of proppants. In most cases the use of cheaper sand proppants is the optimal choice.
Last month, Rosetta Resources (ROSE) , a Houston-based exploration and production company, changed its well completion design for most of its operations in South Texas. Rosetta Resources switched to the cheaper sand proppants because the new design requires "much larger volumes of proppant," the company said during its second-quarter conference call.
Even with increasing its use of proppants, Rosetta Resources said it cut costs by about 8% per well. That was a big blow to Carbo Ceramics because Rosetta was one of its biggest customers.
Others might follow in Rosetta's footsteps. Although Carbo Ceramics can reconcile the loss of one client, "it looks like more customers are evaluating ceramic, which could lead to a more significant impact," Kant wrote.
Carbo Ceramics has also been suffering from a delay in the well completion activity in some of its key target markets, which is stalling the company's growth and leading toward higher inventories.
During the second quarter, the company said it has been building inventories for its latest proppant from its Kryptosphere family of products due to order delays from the Gulf of Mexico. The high-quality proppant has been designed for deep well application at the Gulf, but the company hasn't attracted any major buyer.
However, Carbo Ceramics said during a conference this month that there is a "strong likelihood" that a client will use the new proppant in the fourth quarter while the company is targeting up to 16 Gulf of Mexico wells next year.
At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates CARBO CERAMICS INC as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:
"We rate CARBO CERAMICS INC (CRR) a BUY. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its compelling growth in net income, revenue growth, largely solid financial position with reasonable debt levels by most measures, expanding profit margins and notable return on equity. We feel these strengths outweigh the fact that the company has had lackluster performance in the stock itself."
You can view the full analysis from the report here: CRR Ratings Report
TheStreet Ratings team rates HI-CRUSH PARTNERS LP as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:
"We rate HI-CRUSH PARTNERS LP (HCLP) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, notable return on equity and solid stock price performance. However, as a counter to these strengths, we find that the company has favored debt over equity in the management of its balance sheet."
You can view the full analysis from the report here: HCLP Ratings Report
TheStreet Ratings team rates U S SILICA HOLDINGS INC as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:
"We rate U S SILICA HOLDINGS INC (SLCA) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its robust revenue growth, good cash flow from operations, solid stock price performance, growth in earnings per share and expanding profit margins. We feel these strengths outweigh the fact that the company is trading at a premium valuation based on our review of its current price compared to such things as earnings and book value."
You can view the full analysis from the report here: SLCA Ratings Report