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Completions Declining Faster Than Rig Count in Some Areas, Says Carbo CEO

Carbo Ceramics Inc.'s bottom line has been dinged significantly over the past year, and the proppant supplier has begun working with exploration and production (E&P) operators to optimize wells using new technologies, CEO Gary Kolstad said Thursday. However, in some areas, the completion rate is falling rapidly, he said.

The problem for Carbo today began long before the breakdown in the oil markets. In the past year it has been fought back against stiff, cheaper sand alternatives to its higher priced ceramic proppants, which are used to complete wells (see Shale DailySept. 22, 2014). More producers began experimenting with more fracturing (fracking) stages to improve the reserves volumes, which led to many opting to use sand instead of premium-priced ceramics. The decline in oil prices has curtailed demand even more, Kolstad said.

"Near-term, we think there will be a lot of pressure," he said. "Unless oil makes a directional price change upwards, we expect the E&P expenditures to contract rapidly and the business conditions to get worse. We expect the drilling rig declines to be very quick and those rig percentage drops to be toward the high-end of what all of you estimate, you know the 30-50% that other people have put out in literature."

In some parts of the United States, he said, completion activity is declining faster than the rig count.

"E&P operators are not fracking wells...The Bakken region is the best example of this, with the backlog of uncompleted wells growing. And of course a lot of that has to do with the challenging economics in that region."

Depressed commodity prices like those today "drive a focused effort to reduce well cost, oftentimes at the sacrifice of well production," he told analysts during a quarterly conference call. "While some drivers in this environment may be out of our control, we remain focused on those drivers we believe differentiate us and help us in this tough market.

"We will continue to work closely with our clients to deliver technologies that increase the net present value of their wells, and achieve the goal of reducing costs while optimizing production results."

Several E&Ps are renegotiating service contracts to achieve better prices. At Carbo, the company is offering "cost-neutral and production-neutral frack designs to a number of clients," said the CEO. "These frack designs substitute large amounts of sand volumes with smaller ceramic proppant volumes.

"In the case of the production-neutral frack design, total oil and gas production in both the ceramic and sand wells are modeled to be the same, yet overall completion costs are lower in the case of the ceramic proppant well. We believe this is an advantage for the E&P operator as it addresses their immediate concern of reducing cost while making the best wells possible."

Carbo also is pushing its production enhancement technology to reduce lease operating expenses.

What's most concerning, however, is the "lack of visibility into our business," said Kolstad. "The rig activity is declining rapidly and we have seen a shift in E&P behavior resulting in lower demand for ceramic proppant. As a result, we expect to see continued pricing pressure for ceramic proppant."

Carbo has cut its capital expenditures by less than half of what they were in 2014. The primary focus, said the CEO, is to retrofit one plant with new proppant technology. However, completing a second proppant manufacturing line at the Millen, GA facility has been deferred.

"We are reducing our cost base to better match anticipated activity in 2015. Just like our clients seek cost reductions from us, we are asking for power suppliers for cost reductions...Like others in the proppant industry, we have also slowed manufacturing to lessen inventory build."

There are a lot of negatives, but there are a few positives, said Kolstad.

"On the ceramic proppant competitive front we have advantages that include higher conductivity proppant, and we actually have proppant-delivered technology. We have I think the lowest cost and most efficient manufacturing in the industry. Our clients tell us we have the best distribution, which allows the best service for them, saving them money. And then finally, we'll introduce new technology..."

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