If you were to make a list of the most important factors of an investment decision, chances are you'd point to things such as the balance sheet, cash flow, growth, moat, and the like. While all of these are important, another factor that can be easy to overlook and difficult to analyze is management. Do the individuals at the head of the company act like leaders? Or will their poor decisions end up in Sean Williams' CEO Gaffe of the Week series? Hopefully the former.
Analysts and investors have penciled in CARBO Ceramics (CRR +0.00%), the world's leading ceramic proppant manufacturer, for some above-average growth in the coming years. Proppants are tiny beads that are pumped into an oil or gas well to keep fractures "propped open" and hydrocarbons flowing. It's easy to see how companies such as CARBO can succeed by enabling the American energy industry during one of the biggest energy booms in history. Management may be a little more difficult to pin down, so let's take a closer look.
Industry ties
The company's management team has deep roots in the energy industry, specifically in oilfield services. President and CEO Gary Kolstad spent 21 years at Schlumberger (SLB +0.67%) before joining CARBO, while Don Conkle, vice president of marketing and sales, spent 26 years at the same firm. No wonder Schlumberger is one of the top two customers for this proppant manufacturer. Both served in various roles at the company and are well versed in the ebbs and flows of the energy industry, which should serve investors well through the rocky environment of falling natural gas drilling activity.
Insider transactions
Sometimes the incentives of management teams aren't aligned with those of investors. When managers views their company as an ATM rather than as a long-term investment, individual investors can find themselves in a toxic environment. Luckily, there isn't much to report here. Since November 2011, insiders have been net buyers of stock on the open market, although only slightly.
Focus on growth
Two quick and scary numbers for CARBO Ceramics:
- In 2011, fully 92.3% of total revenue came from proppant sales.
- Nearly half -- 49% -- of total sales were generated from just two customers in 2012: Schlumberger and Halliburton (HAL 0.62%).
It isn't a bad thing to have industry leaders such as Schlumberger and Halliburton as customers, but the dependence is scary. On one hand is the mutually beneficial relationship. Halliburton, the leader in fracking technology, needs CARBO's products to increase the yields of hydrocarbons at its wells across the country. On the other hand is the innovative nature of the industry. For instance, Schlumberger has developed a technology called HiWAY Flow-Channel Fracturing, which opens up larger seams in a proppant-filled well to further boost its productivity. Unfortunately, the technology reduces proppant usage by 40%!
Management is well aware of these figures and has focused on growing alternative businesses in recent years. The company owns environmental-services firm Falcon Technologies, which builds frac fluid holding structures for drilling companies. As the environmental conscience of energy companies grows, so, too, will Falcon, which grew 21% in 2011. CARBO also provides the industry's leading fracturing simulation software through its wholly owned subsidiary Applied Geomechanics, which grew 46% in 2011.
The company is also expanding its presence in resin-coated ceramics and resin-coated sand proppants. A 600 million pound-per-year resin-coated sand expansion at a facility in Wisconsin was started, though it was ultimately put on hold until market conditions improve. Perhaps most exciting is the development of a high-strength ceramic proppant for use in deepwater oil and gas wells. Such a product could significantly improve the economics of extracting hydrocarbons in deepwater energy reserves.
Foolish bottom line
I couldn't find any red flags surrounding CARBO's management team. When it comes to this company, investors will find that management treats shareholders with respect, responsibly manages its stock holdings, has a clear vision for growth and product development, and certainly understands the industry.
