BURKENROAD REPORTS2003
John CullenStephen HaikYoshi Hisata
Matthew HollyfieldNikhil Patel
Leigh Ellen Smith
Company Description “Go With the Flow”
Carbo Ceramics, CRR, is the world’s largest producer and
supplier of ceramic proppants that are used in hydraulic fracturing.
Carbo is exploring opportunities outside of their current industry, mostnotably the foundry market which has grown 100% per year.
Based in Irving, Texas, Carbo has several plants nationwide: - McIntyre, GA- Eufala, AL- New Iberia, LA.
The company produced four types of proppants used in both off and onshore drilling of oil and natural gas:
- CARBOHSP2000 - CARBOPROP- CARBOLITE - CARBOECONOPROP
Distribution:• CARBO maintains a “Just-In-Time” distribution practice, and has
expanded its distribution centers to include Singapore, Adelaide, Dubai, and Grande Prairie.
Competitors:• Norton Proppants, a subsidiary of Compagnie de Saint-Gobain, a
large French glass and materials company (22% market share)• Brazilian company Mineraco Curimbaba (10% market share)
Top Customers (78% of the company’s revenues):• BJ Services• Halliburton • Schlumberger
Company Description “Go With the Flow”
Management Background William C. Morris, 64, Chairman of the Board
• In addition to acting as Chairman of the Board for Carbo Ceramics, Mr. Morris sits on the Boards of Tri-Continental Corporation, Seligman Group of Funds and serves as Director of Kerr-McGee Corporation.
Dr. C. Mark Pearson, 46, President and Chief Executive Officer• Appointed to Chief Executive Officer on April 10, 2001• Serves as adjunct professor of Petroleum Engineering at the Colorado School of Mines. • Received a Bachelor of Science and Ph.D at the Camborne School of Mines in England. • Began his career at Gulf Oil and then he joined ARCO (Atlantic Richfield Company) where he held
positions in both research as well as management and technical positions in engineering and operations. Prior to his appointment
• Served as Vice President of Marketing and Technology.
Paul G. Vitek, Senior Vice President, Finance & Administration and Chief Financial Officer
• Served as an employee in the treasurer’s office of both Diamond Shamrock and Maxus Energy Corporation.
• Served as Chief Financial Officer of Carbo Ceramics since 1988.• In January 2001, he was appointed to Senior Vice President of Finance and Administration in addition to
his position as Chief Financial Officer.
Industry Analysis
Products• CARBOHSP 2000• CARBO PROP• CARBOLITE• CARBOECONOPROP
Competition• Ceramic Proppants
- Norton Proppants- Curimbaba
• Resin Coated Sand- Numerous Manufacturers
Industry Analysis
Suppliers• Bauxite• Kaolin
Competitive Advantage• Quality Products• JIT Delivery• Technical Marketing• Patents
Drivers• Number of oil and gas wells drilled, completed, or recompleted• Number of oil and gas wells that are hydraulically fractured
Peer Group Analysis
Few direct competitors- Norton (USA)- Mineracao Curimbaba (Brazil)- Borovichi Refractories (Russia)
Ceramic proppant market share (2001):- 61% Carbo- 22% Norton- 10% Curimbaba- 7% Other
Risk Analysis
Business Risk – HIGH- Volatile oil & gas industry- Replace low-cost, sand proppants?- Few customers- 80% of 2002 revenues from 3 customers- Few products
Financial Risk – not low, but NONE!- No debt- Huge cash reserves
Easily covers current liabilities
Revenue Forecast (Revenue) = (Capacity) X (Selling average price) X (Utilization rate)
95% Revenue : Proppant business 5% Revenue : Foundry business <Stay> Capacity: 680 MM <Stay> Selling average price: $0.27 <Increasing> Utilization rate: 85% <Increasing>
Seasonally adjustment: for calculating quarterly revenue, use average ratio of 2001 and 2002
Cost of sales, SG&A: Fourth Quarter 2002 Conference Call information
Valuation
Model: Discounted Free Cash Flow
Free Cash Flow= Operating Cash Flow – Capital Expenditure
Terminal Value:= Cash Flow (1+g) Discount rate – g
Discount Rate:- Cost of Equity- CAPM Model
Target Price = 39.12
Investment Summary
Carbo Ceramics is Rated a BUY
• Somewhat Speculative Oil & Gas Industry Stock
• Large Potential Growth, Only 15% of Proppant Market
• Expect Lower Margins As Patents Expire
• Expect Market Share to Increase- Increased R&D- Technical Marketing “Go With The Flow”- Integrated Distribution Network
• Increased Production - Lower Production Costs- Proactively Increasing Production
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