Last year, CARBO made almost half of its total revenue from just two customers: Halliburton Company (NYSE:HAL) and Schlumberger Limited. (NYSE:SLB). A dependence on major players can be part of the game in this energy niche, as much of the onshore drilling services industry is in fact dominated by Halliburton Company (NYSE:HAL) and Schlumberger Limited. (NYSE:SLB). However, CARBO’s deepwater proppant could help it diversify in a big way, provided the company can handle what are sure to be more bothersome logistics problems than already exist with its land-based delivery network. Creating more distribution hubs closer to oil fields can help CARBO reduce its transportation costs and further reduce its dependence on the big two’s infrastructure.
Hi-Crush Partners LP (NYSE:HCLP) and U.S. Silica Holdings Inc (NYSE:SLCA) could also pose a threat to CARBO’s higher-end products. CARBO has worked feverishly to convince drillers that ceramic proppants are much stronger than sand, and can withstand the high temperatures and pressures of deep, fractured wells. Since Hi-Crush Partners LP (NYSE:HCLP)’s IPO, however, it does appear that the tide has shifted to sand, as Carbo’s revenues have declined while Hi-Crush and U.S. Silica Holdings Inc (NYSE:SLCA) have gained. Increased competition from a number of Chinese companies that have flooded the domestic market with cheap ceramic proppants is also a danger to CARBO’s higher-quality products, provided that the cut-rate ceramics are actually up to the task.
The worldwide proppant consumption market (comprised of sand, resin-coated sand, and ceramics), has increased from three billion pounds in 2000 to more than 17 billion pounds this year. CARBO has over two billion pounds of proppant manufacturing capacity, so it alone makes up about an eighth of global proppant supply. It is also expanding production capacity by nearly a billion pounds every year to seize on worldwide growth, as it should — in 2012, 22.5% of CARBO’s sales came from international markets, which grew 12% compared to last year. Domestic sales, on the other hand, were essentially flat from the year before. International competition from other ceramic proppant manufacturers could crimp CARBO’s growth, as less than 10% of the company’s current manufacturing capacity is located outside of the United States. That must be handled quickly, if CARBO wishes to become a major player in offshore drilling.
Putting the pieces together
Today, CARBO Ceramics has many of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy — or to stay away from a stock that’s going nowhere.
The article Is CARBO Ceramics Destined for Greatness? originally appeared on Fool.com and is written by Alex Planes.
Fool contributor Alex Planes has no position in any stocks mentioned. The Motley Fool recommends Halliburton. The Motley Fool owns shares of HI-CRUSH PARTNERS LP (NYSE:HCLP) UNIT LTD PARTNER INTS and U.S. Silica Holdings.
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