3 Things to Watch at CARBO Ceramics

Here at The Motley Fool we believe it is crucially important to evaluate an investment on all of its merits and shortcomings. After all, taking a balanced approach to each potential investment allows you to make the best decisions when it comes to putting your hard-earned money to work. It's one of the reasons we call ourselves Foolish investors.

Over the last two weeks, we have looked at a number of catalysts and risks for the world's largest ceramic proppant manufacturer CARBO Ceramics . The list includes:

• What's a proppant?

• Opportunities

• Red flags

• Management

It can be difficult to sort out important news from all of the noise in today's investing environment. So today I will leave you with a brief list of developments to monitor over the coming months and years that can guide your research into the company.

1. Total rig count
Despite another record year of sales in 2012 -- in volume and dollars -- the company has struggled to prop up its share price for investors. One big reason is the slowdown in well drilling activity, which is, of course, tied to depressed natural gas prices. Unfortunately, the industry has yet to pick up after the first six months of 2013. Total rig count is down to 1,692 for onshore wells, which is a 12% drop compared to last year.

Source: EIA Note: Onshore rigs only.

You can see that the number would be much worse if not for soaring oil production. However, it is also important to consider that well activity for natural gas is heavily correlated to its price.

Source: EIA.

The good news is that oil prices should be kept aloft by major international demand from developing nations such as China. Hopefully for CARBO Ceramics, international forces will become a driving force for natural gas once liquefied natural gas, or LNG, exports begin in the next few years. A steady outflow of natural gas to international markets will support drilling activity and production, so investors would be wise to watch for major increases in natural gas rig counts. The EIA's website has monthly tallies (link opens PDF) readily available for public consumption, although data usually lags by at least one month.

2. Industry expansion
Annual worldwide proppant use has soared from just 3 billion pounds in 2000 to more than 17 billion pounds today. The market is broken into three categories of ascending price and quality: sand, resin-coated sand, and ceramics. CARBO currently possesses 1.75 billion pounds and 400 million pounds of ceramic proppant and resin-coated proppant manufacturing capacity, respectively. The company is also expanding production capacity by nearly 1 billion pounds per year by the end of the decade. That positions this titan of the industry near the head of the pack in seizing continuing worldwide growth.

While it's not likely for CARBO to lose its spot atop the industry, the competition for customers is certainly heating up. The following list contains the largest ceramic proppant manufacturers worldwide, some of which are expanding operations into America's kaolin-rich Southeast.

Source: CARBO Ceramics SEC Filings.

The list doesn't include a growing number of Chinese manufacturers. And don't forget that these companies could also affect CARBO's international revenues. Consider that 22.5% of company's 2012 revenue came from international markets, which grew 12% compared to 2011. That compares favorably to domestic revenue, which grew less than 1% on the same basis. Seeing that only 9.3% of the company's current manufacturing capacity is located outside of the United States, I imagine international competition could also affect domestic production and expansion for the company.

3. Improving logistics
Logistics pose a problem for many proppant suppliers. Transporting several million pounds of beads to a single well by train alone is impossible, since few wells are located near railroads. This requires trucking for at least part of a delivery. Couple that with relatively limited on-site storage at wells and you'll see why companies such as CARBO choose to make deliveries "on the spot" as a well is being drilled. Unfortunately, logistics posed a big problem to the company last year as customers shifted their focus from natural gas to oil. Transportation costs increased significantly (due to manufacturing facility location), which led to a 20% drop in net income compared to 2011 despite revenue growth of 3%.

Living on a spot market doesn't mean you can't have contracted customers, but it adds an interesting and unpredictable element to any business. With that in mind, any announcements of new partnerships with new customers will be big news. That is because CARBO generated 49% of its total revenue in 2012 from just two customers: Halliburton and Schlumberger. If the company's deepwater proppant -- due for launch by year end -- can impress drillers with large underwater reserves, then CARBO's future will instantly become much brighter. Additionally, creating distribution hubs closer to oil fields can help stave off increasing transportation costs. The company did just that in Bakken in 2012, so investors will want to eyeball any improvement to margins.

Foolish bottom line
There are many moving parts to every investment, but our work thus far should give you a pretty good look into CARBO's businesses. I encourage investors to keep up with SEC filings from all of their holdings and potential investments. These documents contain much more information than is found in press releases. You can find this company's latest annual paperwork in the SEC's database.

If you're on the lookout for some currently intriguing energy plays and CARBO doesn't fit the bill, check out The Motley Fool's "3 Stocks for $100 Oil." For FREE access to this special report, simply click here now.

The article 3 Things to Watch at CARBO Ceramics originally appeared on Fool.com.

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. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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