Oil services company Carbo Ceramics (NYSE:CRR) used to primarily provide oil drillers with just the nuts and bolts -- well, maybe the grains and beads -- to help them get the liquid gold out of the ground. It now gives them the tools to map their progress, too.
Carbo is the leading (and largest) manufacturer of ceramic and sand proppants, tiny beads and grains that are used to prop open the fractures drillers create in their effort to get oil out of the ground. The ceramic beads, because of their smooth texture, actually help the oil flow more smoothly to the surface, increasing production. Ceramics, though, are higher-cost proppants, so the company makes a complete line also incorporating the standard, lower-cost sand proppants as well.
A majority of Carbo's revenues come from just three companies: Halliburton (NYSE:HAL), BJ Services (NYSE:BJS), and Schlumberger (NYSE:SLB).
As those companies drill for oil and natural gas, the need to see where the veins are has become essential in maximizing their own profits. Carbo's subsidiary, Pinnacle Technologies, helps them achieve that by selling fracture-simulation software, which maps the fractures as they're created. Pinnacle's technology is the leading software used worldwide, and oil and gas companies are jumping on it. Pinnacle had been a slow-moving acquisition for Carbo, but now sales are heating up.
Based on the strength of a 45% jump in fourth-quarter sales at Pinnacle, Carbo saw a 37% increase in total revenues. Also driving performance was a 24% increase in proppant sales volume and a 9% increase in prices instituted back in 2005. While the price hikes had a minimal effect on 2005's results, they were a big boost to profits in 2006. You can see all the raw data in my Fool by Numbers article.
North America was the key to Carbo's growth this quarter (and this year, really). Rig counts were up 16% year over year, and that led to a 22% increase in proppant sales in the hemisphere. Most other markets saw an uptick as well, but perhaps most surprising was the increase in sales in Russia.
In Russia, Carbo is in the process of building a new proppant manufacturing facility, which has been set back by delays and disputes with its local contractor. Carbo hopes the plant, originally forecast to go online early in 2007, will be in production by the fourth quarter, assuming all the necessary permits have been granted. That should boost profits for the services as well, since importing proppant into Russia is economically unfeasible because of high tariffs.
Yet sales in Russia showed surprising strength in the fourth quarter. While they were down for the full year, causing a 10% decline in all international sales, they jumped in Q4 to their highest levels since 2005. It bodes well for the future, when the manufacturing plant finally goes online.
Carbo Ceramics has been suffering lately, but the fourth quarter seems to suggest performance is no longer fractured. Software sales and services from Pinnacle are catching on, the Russian plant might actually one day produce proppant, and sales of its bread-and-butter proppants have jumped even as customers have to pay more for them. While still subject to the ebb and flow of the oil and gas industries' business cycle, Carbo is beginning to function like a well-oiled machine.
Slide into these related Foolish articles:
- Foolish Forecast: Carbo Ceramics Needs Propping Up
- Carbo Ceramics Under Pressure
- More Proppants, Please
- Cracks in Carbo Ceramics Can Be Repaired
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Fool contributor Rich Duprey owns shares of Carbo Ceramics but does not own any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
