Back in February, I wrote about an energy stock that was music to my ears. In fact it sounded so good that I bought it for my Rising Star portfolio. Well, the music hasn't stopped and I'm ready to double-down on CARBO Ceramics (NYSE: CRR ) .
Again? So soon?
Natural gas prices are as low as they've been in some time, and there's no reason to expect this to change anytime soon. Oil services companies such as Halliburton (NYSE: HAL ) and Schlumberger (NYSE: SLB ) are moving crews and equipment away from the natural gas basins into the liquid-rich basins, which require a higher level of service.
Thanks to ceramic's high conductivity, CARBO has a strong selling point on its Tier 1 ceramic proppants, which help the exploration and production companies recover the most bang for their buck. This includes 20% increases in production rates to go along with 20%-plus increases in estimated ultimate recovery -- a value proposition that is tough to pass up.
The EPA and the energy industry have come together to form a new set of guidelines with regard to hydraulic fracturing, which is encouraging. Energy had a say in the matter as major E&Ps such as ExxonMobil (NYSE: XOM ) , Chevron (NYSE: CVX ) , and Conoco Phillips played a large role in forming the guidelines. Furthermore, the fact that these guidelines exist and aren't necessarily viewed as cumbersome by the E&Ps means that fracking will continue to serve as a prominent means of exploration, which means CARBO should keep busy for some time to come.
Earnings also just came out for CARBO's first quarter, and while they beat expectations on revenue they missed on earnings because of the costs of E&Ps relocating from natural gas to liquid-rich plays. This relocation is no news, though, and management has done an excellent job communicating every step of the way. While there may be some short-term challenges, I am much more interested in the fact that management takes a long-term view on the success of the company.
No such thing as risk-free
The risks I wrote about in the original recommendation are still the same. Also, there is the specter of legal risk in the form of class-action lawsuits regarding the recent drop in activity in the Haynesville shale management talked about last quarter. While I liken these suits at this point to nothing more than ambulance chasing, it would be naive to assume that they are immaterial. There is nothing that suggests to me today that management has done anything wrong here, so I hope to see this brought to a conclusion quickly.
The second time around
I said it before and I'll say it again: There's a lot to like about CARBO Ceramics. It plays an important role in the energy value chain from natural gas to the liquid-rich oil basins, and I suspect this role will only grow more important as time goes on. So I'm getting more while the getting is good.
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