Another strike is the company’s dependence on its two top customers, which made up 35.2% and 13.7% of total revenue. A little detective work shows that these customers are energy giants Halliburton Company (NYSE:HAL) and Schlumberger Limited. (NYSE:SLB), listed in no particular order. The good news is that neither Halliburton Company (NYSE:HAL) nor Schlumberger Limited. (NYSE:SLB) will be ceasing their energy operations anytime soon. As two of the leading fracking companies in the United States, both maximize their profits and reserves by utilizing ceramic proppants from CARBO. The bad news is they may not be as dependent on CARBO as CARBO is on them.
3. Raw material costs
Ceramic proppants may provide enhanced recovery and economic profiles compared to sand or resin-coated proppants, but those advantages are facing pressure from raw material prices. The process starts with an alumina containing ore such as bauxite or kaolin, which is mined and then transformed into tiny beads. CARBO Ceramics Inc. (NYSE:CRR) purchases the majority of its kaolin at market prices via supply contracts. One problem: kaolin prices are extremely volatile. Consider that the average price per ton in 2000 was just $63, but tipped the scales at $121 just three years later. In fact, the doubling in price came despite falling consumption and exports!
Source: United States Geological Survey
A quickly growing proppant industry has drastically increased demand for kaolin. When demand increases, prices are never far behind. And in a strange catch-22 for CARBO, increasing natural gas prices could also lead to stagnant or declining margins. The natural gas industry is cheering for higher natural gas prices for better economics. While that would lead to an increase in drilling activity and more business for CARBO, the company’s manufacturing costs (it uses natural gas to create its products) would eat away at margins.
Foolish bottom line
These are just three of the risks facing CARBO Ceramics. While they may not override the growth potential behind the company, all investors should give them serious thought. This is especially true of the firm’s overdependence on one line of products and two customers. Still, it could behoove you to invest in unobvious derivatives of the natural gas boom. CARBO Ceramics Inc. (NYSE:CRR) offers just the opportunity.
The article 3 Red Flags at CARBO Ceramics originally appeared on Fool.com and is written by Maxx Chatsko.
Fool contributor Maxx Chatsko has no position in any stocks mentioned. Check out his personal portfolio, his CAPS page, or follow him on Twitter @BlacknGoldFool to keep up with his writing on energy, bioprocessing, and emerging technologies.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 HLDGS INC COM USD0.01.
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