CARBO Ceramics (ticker: CRR) is the world’s largest supplier of ceramic proppant for fracturing oil and gas wells and a supplier of resin-coated sand proppant. The company faces challenges amid lower energy prices, global economic weakness, and an influx of Chinese proppant, all of which crippled demand for CRR’s products over recent quarters. It is well documented how the E&P space in North America created a natural gas bubble, drilling up acreage and adding production from areas like the Haynesville and Barnett. CRR has diligently worked to transition itself from its Haynesville Shale focus to incorporate rapidly growing oil plays like the Bakken and Eagle Ford. Further, the company has added products to meet customer demands. CRR added brought created new proppant supplies to compete with resin coated sand. Cautiously optimistic for Q4’12 and beyond, many analysts believe there may be nowhere to go from here but up.
CRR’s Value Propositions Include:
- 20% Increase in Production Rates
- 20% Increase in Estimated Ultimate Recovery (EUR)
- High ROI and rapid payout on initial investment (weeks/months)
- Indicated dividend yield over the trailing twelve months of 1.51%
- Total shareholder return of 84.7% from year-end 2008 through Q3’12 (assuming reinvestment of dividends).
Earnings Surprise
CRR reported Q3’12 earnings per share (EPS) of $1.04 beating analyst consensus estimates of $0.94 per share. Net income and revenue for the quarter were $23.9 million and $151.1 million, respectively representing year over year declines of 35% and 10%. What led to the beat? CRR’s general and administrative (G&A) expenses decreased $1.5 million, or 9.2% compared to Q3’11. In addition, the company paid approximately $8.3 million less in taxes than it did during Q3’11.
CRR reported operating profit for Q3’12 was $35.0 million, a sequential change of 26% from Q2’12. Over the preceding twelve months, CRR’s operating margin is 27.4%. In the mid-cap group of EnerCom’s OilService database, CRR’s operating margin easily beats the group’s median 16% (for the 12 months ended June 30, 2012). The change in operating profit was primarily the result of lower proppant sales volumes, a decrease in the average proppant selling price, higher fixed cost absorption, and an increase in freight and logistics costs, partially offset by a greater contribution from the company’s other business units and a decrease in SG&A expenses. OAG360 notes that CRR’s SG&A expense is approximately 10% of total revenues.
Looking Ahead is Always Best
Many analysts believe the worst is behind CRR pointing to new operational opportunities in the Eagle Ford and Bakken, as well as continued international expansion. During Q3’12, domestic volumes were down 11% while international proppant sales were up 33%. CRR’s products and services are now provided in more than 50 countries worldwide. OAG360 notes that operations focused in Mexico and China are leading CRR’s international growth.
Howard Weil said in its Morning Commentary report: “Ceramic volumes and gross margins were both better than we had modeled, and price declines were in line with our estimate… CRR anticipates that after a 4Q12 that witnesses some continued pressure from competitive Chinese product and the usual seasonal/holiday effects the channel to market should begin to clear somewhat. It also appears that the Company is close to opening a major distribution center in the Eagle Ford, sooner than we had anticipated. This, along with a more permanent distribution solution in the Bakken, is important highlights in terms of CRR regaining control of a more real time delivery mechanism”
Final Thoughts on CARBO
We posed the question earlier in this write-up, is the worst behind them? CRR reports that its clients are still working through inventories of the lower priced Chinese ceramic proppant, and that this 2012 oversupply of proppant has created significant volatility in the market. The company has been a true leader in the shale renaissance. Oil & Gas 360® believes over the longer term, supply and demand forces should rebalance. In the mean-time, CRR’s advances in greater conductivity and technology are expected to remain a driving factor and competitive advantage to re-gain market share.
Oil & Gas 360® compiled a few paragraphs from research analysts who wrote on CARBO following the announcement. OAG360 suggests that you contact the analyst and/or salesperson to receive a complete copy of the report. Please read the important disclosures at the end of this note.
Howard Weil (10.25.12)
CRR $61.00 (MP): Reports 3Q12 Results / Blake Hutchinson (713) 393-4507 blakeh@howardweil.com
Quick Take: Although 3Q12 expectations had ebbed as the quarter progressed, CRR’s release leaves reason to be optimistic that the worst is behind the Company. Ceramic volumes and gross margins were both better than we had modeled, and price declines were in line with our estimate. The Company also shed some light on the timing of significant/permanent distribution solutions in the Eagle Ford and Bakken. The major operating variance versus our estimate came at the RCS and third party ceramic proppant volume line. As more detail is provided this may prove a plus too, if the line is now representative of primarily CRR RCS product rather than dominated by working off third party product.
Earnings Detail: CRR reported earnings of $1.04/share versus our estimate of $0.92/share and consensus of $0.94/share. Consensus had fallen about 20% from mid 3Q12 expectations. We peg about $0.05/share to a lower than normal tax rate. Lower G&A helped, but is likely the product of slowing the development of Marshfield, therefore sticky to the model going forward. Ceramic proppant volume at 385 million lbs. was better than the 365 million lbs. we had modeled, while ASP for total volumes was off about 8.5% (also in line with our estimate, recall that the major pricing hit was taken late 2Q/early 3Q) which indicates to us that pressure eased somewhat as the period progressed. Gross margins at 33.2% were 170 bps better than we had modeled. We would assume that this is partially better plant level absorption, but mainly a better grasp on the transportation model. It would be quite favorable to see CRR gaining better control of the latter.
Earnings Guidance: No explicit earnings guidance was offered; however, the Company did provide some notes of interest within the release. CRR anticipates that after a 4Q12 that witnesses some continued pressure from competitive Chinese product and the usual seasonal/holiday effects the channel to market should begin to clear somewhat. It also appears that the Company is close to opening a major distribution center in the Eagle Ford, sooner than we had anticipated. This, along with a more permanent distribution solution in the Bakken, are important highlights in terms of CRR regaining control of a more real time delivery mechanism. The Company also added that it is close to employing new manufacturing techniques to enhance the strength and conductivity of its ceramic product.
Barclays Capital (10.25.12)
We believe CARBO Ceramics’ 3Q12 earnings release has positive implications for the stock. Third quarter earnings were above our estimate and consensus, several U.S. customers appear to be moving to CRR’s ceramics and away from Chinese Intermediate Density Proppants, and CEO Gary Kolstad indicated that while challenges will persist in 4Q the company’s conversations with its customers “remain encouraging about increased usage of Carbo’s ceramic proppants”.
CARBO Ceramics reported 3Q12 operating EPS of $1.05, above our estimate of $0.88 and consensus of $0.93. From the results we excluded loss on disposal of assets and foreign currency losses which in aggregate reduced earnings by $0.01 per share. The earnings beat was primarily driven by lower-than-expected costs of goods sold. EBITDA of $46 million was above our $42 million estimate. A lower-than-expected tax rate helped by ~$0.05/sh, while lower-than-forecast SG&A contributed ~$0.04/sh.
Carbo announced it purchased property in North Dakota which it will use as a large distribution center to service the Bakken. Construction is expected to begin in the fourth quarter with expected completion in 1H13.
Revenue of $151 million decreased 15% sequentially and was lower than our $157 million estimate. Total proppant volumes of 412 million pounds declined from 454 million pounds in the previous quarter, but were in-line with our 411 million pound estimate.
Gross profit of $50 million fell 22% compared to the prior period but beat our $47 million estimate. The margin at 33.2% declined from 36.2% in 2Q12 but was above our 30.2% estimate.
SG&A expense at $15 million decreased 12% from the prior quarter and was lower than our $16.5 million estimate. Operating income of $35 million fell 26% from the prior quarter but beat our $31 million forecast. Operating margin at 23.2% declined from 26.6% in the prior period but was above our 19.6% estimate.
Global Hunter Securities (10.25.12)
CARBO Ceramics Inc. (NYSE: CRR; $61.00; Neutral; $60.00 PT) Q3 First Look: Beat on gross margins, G&A and tax rate; total proppant sales in line with expectations
Today, CRR reported Q3:12 EPS of $1.04 vs. GHS/consensus of 88c/93c.
Revenues: $151MM vs. GHS: $156MM vs. consensus: $155MM.
EBITDA: $46MM vs. GHS: $41MM vs. consensus: $44MM.
Segments:
Total Proppant: 412MM lbs sold (-<1% vs. GHS), $136MM revenues (-3% vs. GHS), $0.330 average price per lb (-2% vs. GHS).
Ceramics: 385MM lbs sold (+4% vs. GHS), $130MM revenues estimated (in line with GHS), $0.339 average price per lb estimated (-4% vs. GHS).
RCS/Other: 27MM lbs sold (-40% vs. GHS), $5MM revenues estimated (-43% vs. GHS), $0.200 average price per lb estimated (-4% vs. GHS).
Other: We use $15MM for other revenues to come up with pricing estimates above.
Takeaway: The higher volume of ceramics than we modeled helped the gross margin beat us by 320 bps, and 13c of the 16c delta vs. our number was G&A and tax rate. If the lower costs and greater international sales keeps those two numbers sustainable estimates will get a little help moving forward. However, the implied ceramic price of down 10% sequentially is highly negative, and while CRR may be taking some market share from Chinese competitors it is clearly through lower pricing. Management focused its discussion on international markets and new production technology as the pillars for future growth; at this point both are too early to move the needle on results, thus we remain in avoid mode.
Tudor Pickering Holt & Co. (10.25.12)
CRR Q3 quick look ($61.00 – A) – Positive, especially in light of low expectations and very weak industry anecdotes about the proppant market in general. Reported $1.04 vs. Street 91c / TPH 93c. Margins / expense improvements stood out. Revenues 1.5% light (volumes 2% better, pricing looked ~3% worse) yet gross margins didn’t erode as much as we thought and SG&A declined more than we thought. 7c beat from operations (2/3 at gross profit line, 1/3 lower SG&A) and 4c from tax rate. Still rightfully cautious commentary for Q4, listening for more color on call.
Capital One Southcoast (10.25.12)
CRR 3Q Quick Take: Margins Better, Pricing Weaker
Mixed results. Margins stronger, but ceramic prices weaker and volumes generally tracking assumptions. 3Q EPS was $1.04 vs our est of $0.83 and the Street’s $0.93. Beat of our est was due to higher margins and lower G&A partially offset by lower volumes and pricing. Total volumes came in at 412MM lbs vs our est of 418MM lbs, and it appears ceramic pricing declined 8% – 9% q/q vs our est of a 7% decline. However, gross margins were substantially better than expected and came in at 33.2% vs our est of 29.8% and 2Q’s 36.2%. While the price declines should lessen, they are coming in ahead of our ests. Even adjusting for higher margins, ’13 still looks to be in the low $4 range. S TX distribution facility should be completed by YE, Bakken facility should open in 1H13, and MG1 still on track for first production by YE13. Conference call at 10:30 AM Central.
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