Buy, Sell or Hold: CARBO Ceramics, Inc.(NYSE: CRR) Are the Glory Days Over?

CARBO Ceramics, Inc. (NYSE: CRR) is one of those companies quietly making a killing in today's economy.

Thanks in large part to the natural gas boom, CRR is up over 328% off of the 2009 lows.

However, how long it can maintain its status as a high-flier is another matter entirely.

In fact, I expect that CARBO's entire business model is about to come under attack, which is why now is a good time to sell.

Here's why.

CARBO is one of the world's biggest suppliers of proppant. It's one of the key ingredients in the shale oil and gas boom that is turning places like Williston, ND, into boomtowns.

The Risks Behind Horizontal Fracking

But there is risk behind these boom towns...

A horde of upset environmentalists claim the fracking process responsible for the boom can affect the shallow water aquifers and harm the water supply.

What's more, the process also has been linked to an outbreak of small-to-moderate earthquakes, since the highly pressurized water provides a lubricant to faults underground.

This focus on fracking has caused some ironic situations.

For instance, in Youngstown, OH, a $650 million steel mill is coming to life thanks to the natural-gas drilling boom.

The mill is going to produce steel for rolling into the pipes used in the fracking and completion of new wells.

However, the irony is that the new mill is just two miles from an injection well for disposing fracking wastewater that was closed after 11 earthquakes shook the Youngstown area last year.

The net result is that while cheap energy is good enough to build a new steel factory in the heart of the Rust Belt, the same location is not good for disposing of the wastewater from a fracked well.

Nonetheless, Aubrey K. McClendon, chief executive officer of Chesapeake Energy Corp. (NYSE: CHK) believes, "This will be the biggest thing to hit the state of Ohio economically since maybe the plow."

A Glut of Natural Gas

As the nation sees its natural gas production increase to glut-like conditions, calls for a moratorium on drilling and hydrofracking will increase.

What's more, the price of natural gas hit $2.65 per MCF recently compared to the days when it used to trade in the double digits.

As I discussed in my natural gas forecast in yesterday's (Monday's) edition, most of the un-hedged natural gas producers are going to be feeling acute production cost issues by this spring and summer.

As a result, the demand for fracking supplies, either via market demand or via a government-issued moratorium, will impact the oil service providers.

That puts CARBO Ceramics directly in the crosshairs, since a growing audience is nervous about the possible side effects to the environment caused by the fracking process.

It's time to "SELL" CARBO Ceramics, Inc. (**).

Key Points on CARBO

You see, the key points to understand about CARBO Ceramics, Inc. are:

  • It's the largest private-sector fracking company.
  • A moratorium on fracking in the U.S. will impact it directly.
  • And there is competition in the growth cycle

CARBO Ceramics has been the poster child for success in the fracking industry. But while CRR has grown quickly over the last few years, driven by the unlocking of multistage fracking of horizontal laterals, there are risks.

It's the combining of these two technologies that's driven the shale revolution, and CARBO will certainly be one of the most affected companies if a movement to stop fracking wells takes hold.

In fact, the U.S. news cycle is full of articles portending a fracking moratorium. In the last week both an organization of doctors and elected government officials have called for an end to fracking.

"We need to understand fully all of the chemicals that are shot into the ground that could impact the water that children drink," said Rep. Ed Markey, D-MA.

There is also a growing demand by special interest groups to introduce moratoriums on hydrofracking.

The reasons may vary, but the implications to CARBO are definitely negative.

Additionally, oil and gas companies like EOG Resources Inc. (NYSE: EOG ) have started to mine their own fracking material in today's competitive world. The era of proprietary materials provided by third-party vendors is going to change.

So while the fracking itself may survive, the companies developing the wells are starting to look at ways to save on expenses like CARBO's fracking materials.

History & Background

CARBO was founded in 1987 and is headquartered in Houston, TX. The company has just over 800 employees and a market capitalization of $2.85 billion.

The company has an enterprise value of $2.85 billion, when net debt and cash is taken into consideration. In this case, the company has no net debt, and a small cash balance as of the last reported results through Sept. 30, 2011.

Action to Take : "Sell" CARBO Ceramics, Inc. (NYSE: CRR) (**). The glory days of providing fracking solutions to the oil & gas sector are ending, as the largest O&G companies bring this specialized process in-house to keep their margins fatter.

Let's look to book any gains we have in CARBO Ceramics and redeploy that capital elsewhere. The stock is ripe for a market pullback in my opinion. When you add in its attempts to extract information about anyone who is interested in researching public information about the company, you have to wonder how long it will be before something negative comes to light.

Let's use limit orders at or near the current market prices to exit this stock and look for more friendly locations to seek risk.

(**) Special Note of Disclosure : Jack Barnes has no interest in CARBO Ceramics, Inc. (NYSE: CRR).

About the Writer: Columnist Jack Barnes started his career at Franklin Templeton in 1997. He started out in the company's fund-information department - just as the Asian contagion infected the Asian tiger countries.

Barnes launched his own shop, RIA, in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008.

Barnes retired to the beach in the summer of 2009, and continues to write from there. He's now the author of the popular blog, "Confessions of a Macro Contrarian," and his "Buy, Sell or Hold" column appears in Money Morning on Mondays. In his BSH column last week, Barnes analyzed Research In Motion Limited (NYSE: RIMM).

News and Related Story Links: