CARBO Ceramics Inc. recently reported adjusted net income of $19.0 million, or $0.83 per share, excluding certain asset write downs of $5.2 million, net of tax, or $0.23 per share, on revenues of $155.4 million for the quarter ended September 30. Reported net income for the third quarter of 2014 was $13.7 million, or $0.60 per diluted share.
Revenues for the third quarter of 2014 decreased 23%, or $46.1 million, compared to the third quarter of 2013. The decrease is mainly attributable to a decrease in ceramic proppant sales volumes. Operating profit for the third quarter of 2014 decreased 57%, or $25.2 million, compared to the third quarter of 2013. The decrease is primarily the result of lower ceramic proppant sales volumes. The company recorded a $5 million impairment to adjust the carrying value to estimated net realizable value of certain long-lived assets. The company also recorded a $2.8 million adjustment in cost of sales to reduce the value of certain inventory in China down to lower market prices. Net income for the third quarter of 2014 decreased 54%, or $16.4 million, compared to the third quarter of 2013.
“The third quarter marked a period where a combination of events impacted the ceramic proppant market,” said Gary Kolstad, president and CEO. “A growing number of E&P operators are experimenting with the use of raw frac sand. In addition, some of our clients’ pad well completions were delayed. These events, along with an oversupplied ceramic proppant market, drove both domestic and international competitors to lower prices.
“Despite current market conditions, we will not lose sight of the opportunities ahead of us. Today, it is estimated that over 90% of the oil in a shale reservoir is left in the ground, providing significant potential to improve the estimated ultimate recovery (EUR) of these wells. Two key factors to optimize the production and EURs of the wells that are drilled in low-permeability reservoirs include: contact area and conductivity. It is important to have both, as the former focuses on near-term production while the latter creates greater long-term production results. The result of E&P operators experimenting with the use of more sand primarily addresses contact area, or the near-term production. Our STRATAGEN® consulting business is currently partnering with operators and helping them to understand the economic benefits of developing solutions to optimize contact area and conductivity.
“We have conducted studies to show the production, EUR, and economic benefits of optimizing both the contact area and conductivity in the reservoir. Results from these studies show that some of these wells, utilizing only low-conductivity sand, are underperforming offset wells within six months from completion. We believe the pendulum has swung too far in the direction of using large volumes of sand in wells that need more conductivity and durability than sand can provide. While the use of more sand may initially lower well costs, we expect it results in lost production, lower EURs, and potential costly re-fracs in the future.
“We are seeing some positive trends, with several new clients utilizing ceramic proppant. In one case, a large operator went back to ceramic proppant after experimenting with sand. In addition, STRATAGEN is receiving more requests from E&P operators to design cost-neutral frac designs, in which the frac cost using high conductivity ceramic proppant is designed to be similar to the frac cost using high volumes of sand. The higher volume of sand needed, combined with higher associated completion and logistical costs, offset the cost of ceramic proppant. The benefit of a high conductivity ceramic proppant frac is that the durable ceramic proppant will provide higher production over the long term. We have seen E&P operator interest shown in several basins to this approach and have ongoing execution of these designs.
“The fundamental technical reasons wells need fracture conductivity have not changed. As such, we are committed to moving forward with the technologies we have, and those in development, to increase EUR of wells. Work continued during the quarter to retrofit a plant to enable production of KRYPTOSPHERE® products and increase production of SCALEGUARD®, an innovative, patent-protected, method to treat scaling issues.”