Carbo ceramics strategy change – carbo ceramics inc. (nyse crr) seeking alpha grade 6 electricity unit plan


Carbo Ceramics ( CRR) reported the first quarter results. Sales growth remains outstanding and the cash flow used by operations is declining. Far more important to shareholders was an important strategy change management mentioned almost as a footnote. Both the earnings report press release and the conference call mentioned that several of the new products were introduced to the wells drilled using sand rather than ceramic proppant. That strategy change considerably enhances the market appeal of the new products.

Many of the new products target some very large potential markets. However, the initial constraint upon introduction of the new products was use of ceramic proppant. The market for sand is far larger than the market for ceramic proppant. Therefore there are more opportunities to introduce these new products when allowing them to be attached to sand as well as ceramic proppant.

Clearly the company sand sales are larger in volume and growing faster at the current time. The company has developed many products that can slow or eliminate costly work-overs. But those products have to get into the well. The strategy change of allowing those products to be administered using sand opens up considerably more marketing opportunities in the future.

The sand itself is fairly cheap on a per pound basis. That cheap product has been getting the company salesman "in the door". But the growth of the technology products has always been the most important strategy objective. The value added part of the new products implies more future profitability than a commodity product like sand. Now, despite the large increase in sand sales, management has a way to sell more value added products to many more markets.

Currently the environmental products division is now in the black. This is an area where shareholders can see the progress of the new products on a quarterly basis. The environmental products are now shown as a seperate division. Shareholders need to hope more of these divisions are in the future as new product sales increase in materiality. The rest of the products are still lumped into the main division. Therefore the progress of the newly introduced product lines is not readily available to shareholders at the present time.

As shown above, cash used by operating activities has improved considerably. This was a billion dollar company in terms of market value with a no long term debt and a strong cash balance before the oil price crash a few years back. The collapse of the ceramic proppant market dealt a blow that would have been fatal to many companies. This management has been developing new products to lessen the future dependency on ceramic proppants. Operators have gotten so much improvement from well designs that they have not yet experimented with potential benefits derived from proppant. So the proppant market has yet to recover along with the oil price rise.

Carbo Ceramics management therefore "unhitched the wagon" from the ceramic proppant business and pinned the future hopes on an expanded technology product line offering. The ceramic proppant business has begun to grow somewhat. But the current clear future is introducing cost cutting products using sand as well as ceramic proppant. The strategy will succeed as long as the technology products have more profits to offset the inevitable price crunch caused by too many sand producers in the future. Right now though the sand business does contribute to cash flow so management benefits both from the sale of sand and the higher margin sale of the newer technology products.

Management also noted that the cash balance is $70 million. Roughly $60 million of that is unrestricted cash. For the first time, management has allowed the cash balance to fall below the long term debt balance. That may be a sign that management now has enough confidence in the future to not worry about paying off all the long term debt.

Long term debt is mostly owed to the Wilks Family companies, a major shareholder, and two board members. Not only is long term debt is also a relatively low percentage of fixed assets. The ownership of the debt by these related parties ensures minimal risk to other shareholders.

The TURNAROUND STRATEGY HAS TAKEN FAR LONGER and cost far more than most any reasonable observer could have anticipated. However, management is now guiding towards sales of $250 million this year. If that happens, that would be two years of rapid sales growth. The market has so far focused on the increasing commodity sand volume. However, the future of this company lies with the technology products and the cost reductions they promise.

The previous stock price highs were reached by primarily selling ceramic proppant. The problem was that far greater well improvements have come from well design and well technology changes. Operators have rightly concentrated on the largest cost savings and production improvements first

The recovering Carbo Ceramics has a far more diverse product line. No longer will the company be dependent solely upon either ceramic proppants or sand sales. The Carbo Ceramics listed above now have products that lower the effects of scaling in the wells (for example). There is another product that fights the effects of salt water.

Management has had some success with the foundary business, but expansion prospects in mining are now being explored. This company has the possibility of reaching those old stock price highs with a very different lineup of products. Many have noted the difficulties of the ceramic proppant business. However, this company has a lot of diversification planned to combat the ceramic proppant downturn.

The embrace of sand by management is a large step in the right direction. Now the company appears to have a viable vehicle to obtain cash flow from operations by the end of the year. As a result, this investment vehicle is gradually switching from an asset play to an earnings vehicle with a catalyst to achieve a far better stock price valuation. At the current pricing levels, this stock price does not have a lot of risk priced into it.

However, the new product introductions have so far proven far longer and more costly than originally perceived. So this investment is for patient and long term holders only. There has not been that many trading opportunities lately. Like many new product companies, an eventual success promises huge returns from the current price of the company. This company has an advantage with the new products in that many were developed at the request of existing customers. So these new products may have an easier time penetrating the market than many new products as they exit the introductory process.

Disclaimer: I am not an investment advisor, and this article is not meant to be a recommendation of the purchase or sale of stock. Investors are advised to review all company documents and press releases to see if the company fits their own investment qualifications.