CARBO Ceramics Inc. recently reported a GAAP net loss of $28.6 million, or a loss of $1.24 per share, on revenues of $73.7 million for the quarter ended March 31, 2015. This net loss includes $16.7 million, or $0.73 per share, in miscellaneous after-tax charges and $5.5 million, or $0.24 per share of after-tax costs associated with slowing and idling production. Of the $22.2 million in after-tax charges and other production costs, $15.2 million were non-cash related.

 

“Industry activity witnessed a significant and severe contraction during the first quarter of 2015,” said Gary Kolstad, CEO. “As previously discussed, we expected our ceramic sales volumes to be impacted greater than the decline in the U.S. rig count, which fell approximately 45% by the end of the first quarter compared to the average for the fourth quarter of 2014. With visibility limited as to the duration and magnitude of this down-cycle, we aggressively implemented a number of initiatives to preserve cash, lower costs and maintain financial flexibility. Many of these initiatives burdened the income statement; however, we believe they are prudent measures to take in this market environment.

 

“The cash preservation and cost reduction initiatives that we executed during the quarter included reducing our workforce across the organization, mothballing our plant in McIntyre, Ga., moving forward with mothballing our plant in Luoyang, China, slowing down and idling other domestic manufacturing facilities, limiting capital expenditures and reducing the dividend. In addition, we continued to work with our suppliers to reduce costs.

 

“All of these initiatives will help us manage through this down-cycle, while maintaining our long-term strategy of building the leading production enhancement technology company in the oil and gas services sector. Our management team has been through these down-cycles several times before; we know what needs to be done, and our execution on these initiatives is proceeding well.

 

“Down-cycles can overshadow bright spots that exist in our business. For example, we are very pleased with the growth in demand for KRYPTOSPHERE® proppant by E&P operators for their critical wells in the Gulf of Mexico. KRYPTOSPHERE protects their large investments by helping them build the best producing frac they can, with proppant that will last the life of the well. 

 

“Our multi-year development has led to our highest technology and the highest conductivity proppant ever made. We are also making significant progress in further advancing the KRYPTOSPHERE family of proppants with the development of a medium density KRYPTOSPHERE, as well as the introduction of KRYPTOSPHERE SCALEGUARD®, a scale inhibiting proppant.

 

“While it is a difficult time in the industry, our Design, Build, and Optimize the Frac® technology businesses, including FRACPRO® and STRATAGEN®, bring important value to E&P operators to increase well production and estimated ultimate recovery (EUR).We believe our technology offers E&P operators two clear value propositions in this lower oil and gas price environment. The first is lower finding and development (F&D) costs, due to building more efficient fracs that increase production and EUR; and the second is lower lease operating expenses (LOE), by incorporating our technologies such as SCALEGUARD, which reduces costly work-overs and lost production. Technology is what separates us from our competitors.”

 

The company has historically entered into natural gas contracts to supply its domestic manufacturing facilities. These contracts call for taking physical delivery of the natural gas as the contracts come to term. Given the mothballing, slowing and idling of its domestic facilities during the first quarter, the company was unable to consume all of the natural gas for which it was contracted. As a result, the relevant contracts will now be accounted for as derivative instruments and will be revalued on a periodic basis. 

 

Revenues for the first quarter of 2015 decreased 50%, or $74.8 million, compared to the first quarter of 2014. The decrease was mainly attributable to a decrease in ceramic proppant and resin-coated sand sales volumes, partially offset by an increase in Northern White Sand sales volumes.

 

Operating loss for the first quarter of 2015 was $42.5 million, compared to an operating profit of $27.4 million in the first quarter of 2014. The decrease was mainly attributable to the decrease in ceramic proppant sales volumes and a decrease in average proppant selling price. In addition, the company recorded a $12.5 million loss on derivative instruments, and based on manufacturing accounting guidelines, the company expensed $8.4 million in unabsorbed production costs as a result of low production levels and idled facilities. Operating loss was further impacted by $6.0 million in severance costs and a $4.4 million adjustment in cost of sales to reduce the value of certain inventory down to lower market prices. Net loss for the first quarter of 2015 was $28.6 million, compared to net income of $18.4 million in the first quarter of 2014.

 

“The industry will eventually recover; however, the timing and magnitude of this recovery is uncertain,” said Kolstad. “The typical cost-cutting reaction by E&P operators is underway, as evidenced by the sharp reduction in industry activity during the first quarter of 2015. We are seeing two cost reduction actions by E&P operators that negatively impact our business. First, some wells are drilled but not completed and second, some wells are completed with low-conductivity proppant.

 

“The impact on the entire ceramic proppant industry has been severe, leading other domestic proppant suppliers to make similar decisions to mothball and idle ceramic proppant manufacturing capacity. While imports have declined significantly compared to the fourth quarter of 2014, inventory levels of low-quality imported ceramic proppant still remain a factor in causing the intense price competition that we are currently experiencing. Our position as a low-cost, highest quality producer affords us an advantage over low-quality imported ceramic proppant. This advantage should aid us in our domestic ceramic proppant market share as we focus on sales volume.

 

“As a best-in-class, technology-oriented company, we have to look beyond these down-cycles and develop technologies that continue to differentiate CARBO. A number of field trials under our proppant-delivered platforms—production assurance, flow enhancement and fracture evaluation services—were completed in the first quarter with positive initial feedback from clients. We expect further field trials throughout the year, with the potential to commercialize some of these products as early as the second quarter of 2015. In addition, SCALEGUARD, a scale-inhibiting ceramic proppant, continues to see adoption by new clients as well as geographic growth across North America basins. 

 

“With respect to our KRYPTOSPHERE proppant technology, a large KRYPTOSPHERE HD job is scheduled to be pumped during the second quarter in a critical Lower Tertiary/Paleogene well in the Gulf of Mexico. This job will also incorporate KRYPTOSPHERE SCALEGUARD technology. We expect this work to be followed by other wells in the subsequent quarters.

 

“We are also excited about the development of our medium-density KRYPTOSPHERE. This meets client needs for a lower-density proppant than KRYPTOSPHERE HD, yet has the same technology and similar conductivity in these high stress wells. In the third quarter, we expect to complete the retrofit of an existing plant to the new KRYPTOSPHERE process to increase our manufacturing capacity of these products.

 

“FRACPRO and STRATAGEN continue to be important technology businesses for us, and are successfully navigating the downturn. Falcon Technologies, our environmental business, continues to make progress in becoming more of a product manufacturing business, as shown by growth in client base and sales. 

 

“Our production enhancement technologies, specifically KRYPTOSPHERE and our proppant-delivered products such as SCALEGUARD, will help differentiate CARBO within the industry as well as increase revenues derived from technology-based sales in the future. We expect growth of these technologies through this depressed period, as the improvement in well production and decrease in LOE for E&Ps can be significant. Despite current market conditions, we will not lose sight of our long-term strategy on developing superior production enhancement technologies.

 

“With the industry focus primarily on cost reduction, near-term visibility for ceramic proppant demand is limited. We will manage through this down-cycle with a focus on cash preservation and cost reduction to provide financial flexibility. This strategy includes idling capacity to further reduce inventory levels, and thus we expect further under-absorption and idling costs to impact our financials in the second quarter of 2015. In addition, we have begun conversations with our lender about possible adjustments to the covenants and other terms and conditions of our credit facility to give us additional flexibility during this down-cycle.

 

“Our focus on cash preservation has yielded positive results. The combination of initiatives we executed in the first quarter, along with the expectation for reduced capital expenditures for the balance of the year, gives us confidence that our balance sheet will remain strong.”

 

For more information, visit www.carboceramics.com.