CARBO Ceramics Inc. (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 provider of the industry’s most widely used fracture simulation software; and a provider of fracture design and consulting services. The company also provides a broad range of technologies for spill prevention, containment and countermeasures.
CRR announced its Q3’13 results on October 31, 2013, and reported net income of $30.1 million, or $1.31 per share, on revenues of $201.5 million for the quarter ended September 30, 2013.The revenue increase is a 33% rise, driven by a 48% increase in proppant sales, with North American sales increasing 63%. Operating profit increased $9.2 million and net income increased $6.3 million, both 26% boosts TTM.
Business Highlights
CARBO introduced its KRYPTOSPHERE proppant on September 30, 2013, and anticipates sales to begin in the first half of 2014. The company also utilized its new SCALEGUARDTM program in addition to its CARBOROSLITE proppant. CRR began construction on its Millen plant in Q2’12, and expects Millen Line 1 to be completed by Q2’14. The line will increase annual ceramic capacity to 2 billion lbs. from 1.75 billion lbs. The planning stages of Millen Line 2 are being accelerated, and will provide 250 million lbs. per year of capacity. Completion is expected by mid-year 2015. Falcon Technologies®, CRR’s Environmental Solutions business, expanded its Engineered to Protect® product suite during the quarter by installing its first Surface Mounted Impoundment solution. The impoundments assist clients with waste water throughout the completion process. Gary Kolstad, President and Chief Executive Officer of CARBO Ceramics, said the company anticipates typical reductions in Q4’13 due to holidays and seasonality. A sequential decline in sales volume is also expected due to a large drawdown of inventory caused by high demand in Q3’13.
CARBO Ceramics Commentary
CRR conducted a conference call on October 31, 2013 to discuss Q3’13 results. Concerning inventory drawdown, Kolstad said: “Our manufacturing capacity is something around 435 million a quarter, slightly more than that, the stated plant capacity. So I think when you look at the fourth quarter, you have to kind of take that figure because we reduce down. If we sold about 535 million in Q3, that means we drew down inventory roughly 100 million pounds on the ceramics side. So looking at the fourth quarter, we’d expect it to be something along manufacturing capacity less the seasonality and weather that we always see, especially in December.”
Kolstad said the increase in sales is largely due to the addition of new clients. “When we look at the major plays, the Bakken is absolutely seeing more client acceptance of ceramics and the need for ceramics there in a major way. And then the Permian and Eagle Ford also grew in ceramics for us. I’ve been saying since 2011 that in the industry today, we should expect more quarterly movements because of the fact of where we’re working. So, we historically have always had Canada, having its normal Spring breakup in Q2 where activity goes down to about nothing, but you have to think in that same terms for North Dakota and Montana with the Bakken. So we will continue to see it. So Q3, logically for the Bakken is a good time usually for weather and everything else. No road bans, et cetera. So it’s a combination kind of all those five, six things.”
Despite the 63% increase in North American sales, international sales dipped 17%. Kolstad said: “It’s a very small portion of our business. North America is the majority of our business. So, if the international business changes a little bit it’s a large percentage. So we didn’t really see anything too alarming there. It’s a small volume. Probably the one that was down more than others was the China markets and you’d fully expect that given their excess capacity sitting in China.”
Kolstad added: “We have more opportunities in front of us today than we’ve had in our company’s 34-year history. While we talked about building manufacturing capacity, we didn’t really talk too much about the technology platforms we’re setting forth, and those will drive our business in the future as well. So we are not just a capacity story and a high-quality story and a conductivity story, we’re also a technology story and we are extremely focused on improving production and recovery.
Research Commentary
Oil & Gas 360® compiled a few paragraphs from research analysts who wrote on CARBO Ceramics 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.
Barclays Earnings at a Glance Note – 10.31.13
We believe CARBO Ceramics’ 3Q13 earnings release has positive implications for the stock. Third quarter earnings were well above below our estimate and consensus driven by strong volume growth (+33% sequentially). The company is accelerating its capacity expansion plans and is gaining traction in its campaign to educate customers of the benefits of CARBO proppant over Chinese substitutes.
CARBO Ceramics reported 3Q13 EPS of $1.31, above our estimate of $0.83 and consensus of $0.82.
CEO Gary Kolstad highlighted the strong market environment in various plays, including the Bakken, Eagle Ford, Permian, and Canada, and stated that the company was able to grow volumes by drawing down on inventory. Kolstad added that 2H13 is proving to be stronger than 1H13, as suggested early in the year. The company is expanding ceramic capacity to capitalize on these conditions and Kolstad also noted that the company’s resin-coated sand product is seeing expansion, but that margins should remain under pressure until oversupply dissipates.
The company is moving forward with plans to add incremental ceramic capacity based on the strengthening demand for ceramic proppant currently unfolding. CARBO is accelerating the planning stages of Millen Line 2 and the company has already purchased a number of long-lead time items for the facility. Millen Line 1 remains on schedule as well with an expected completion by the end of 2Q14. Both lines are expected to add 250 million pounds annually, representing a 29% expansion from current capacity of 1.75 billion pounds.
Revenue of $201 million was up 31% sequentially and well above our $163 million estimate. Total proppant volumes of 609 million pounds improved from 457 million pounds in the previous quarter and were above our 480 million pound estimate.
Gross profit of $63 million was up from $39 million in 2Q and compared to our $44 million estimate. The margin at 31.1% expanded from 25.6% in 2Q13 and topped our 27.2% estimate.
SG&A expense at $19 million was up from $15.5 million in the prior quarter and above our $16 million estimate. Operating income of $44 million was up from $24 million in 2Q and beat our $29 million forecast. Operating margin at 21.9% improved from 15.5% in the prior period and was above our 17.5% estimate.
Capital One Morning Energy Summary – 10.31.13
Crushed it. 3Q EPS of $1.31 vs our est of 77c and the Street’s 82c. Ceramic volumes of 534MM lbs well exceeded our est of 400MM lbs and 2Q of 378MM lbs. Nameplate manufacturing capacity is ~437.5MM lbs/qtr, and CRR drew down inventory to meet demand in the Bakken, Eagle Ford, Permian, and Canada. Gross margins improved substantially q/q from 33.1% to 37% (33.6% est) and are back at 1Q levels. Demand picture is fairly clear at this point, and CRR is accelerating the planning process of Millen 2 (modeling early ’15 start-up). KRYPTOSPHERE is still scheduled for its initial sale in 1H14, and a new lightweight (CAROROSLITE) was used in Russia. RCS continues to be challenging, and volumes moderated slightly q/q from 68MM lbs to 59MM lbs. 3Q won’t be repeatable due to the inventory drawdown and upcoming seasonality, but it’s pretty evident that the demand for ceramics is strong which gives us further confidence in our ’14 est of $5.27 (Street est of $4.38).
Global Hunter Securities Dirty Energy Daily Note – 10.31.13
Q3 First Look: Blows away estimates on volume beat
- CRR printed $1.31, well above GHS/cons 85c/82c on a 29% volume beat vs. our expectations.
- Trying to finish up Millen Line 1 ASAP and starting Line 2 expansion long lead orders.
- Temper our enthusiasm by saying that pricing appears to have gone down close to 2% per pound and management does not expect it to increase much, but that really does not matter as volumes drastically beat, which led to margin pull-through and a huge quarter. Stock likely rips through our high-on-the-Street price target that we will revise after the call.
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