Fracking Sand Company Sees Its Stock Almost Halve On Big Customer Loss

The oil patch has become so depressed that a company that supplies frac sand saw its stock drop almost in half Nov. 11, after it said it may not be able to continue as a "going concern."

Carbo Ceramics CRR, a Houston-based manufacturer of proppants, the industry name for frac sand, said in its third-quarter earnings that its largest frac sand client "intends to discontinue purchase of frac sand under our current contract," Carbo President and CEO Gary Kolstad said in a conference call with investors. The identity of the buyer was not revealed. 

"We are in discussions with this client to determine if there's an agreeable alternative to this matter," Kolstad said, according to a transcript of the earnings call supplied by Seeking Alpha.

The problem for the company is not only the loss of the revenue stream from the client, Kolstad said. It is also that the contract with the buyer "covered significant fixed costs associated with our distribution facility and railcar leases." 

It was in the company's press release about the earnings that the issue of Carbo remaining a "going concern" was raised. A "going concern" notice posted by a company's auditor in its financial statements is one that is issued only for a company in fairly dire straits. 

"Given the existing North American oilfield market headwinds, expectations for these headwinds to continue into 2020 and the loss of revenues associated with this sand contract, there is an elevated risk associated with the company meeting its existing financial forecast, and the company may ultimately conclude it is unable to continue as a going concern in a future period," Carbo said in its earnings release.

In his closing remarks on the earnings call, Kolstad noted how tough the market has become for companies supplying frac sand. It's a market that has seen the North American land rig count, according to Baker Hughes, drop to 793 in the most recent weekly report from 1,057 a year ago.

"The U.S. onshore oilfield market is very tough," Kolstad said in what could be viewed as a warning to everyone in the frac sand supply chain. "A low-quality reservoir rock combined with low oil and gas commodity prices has resulted in little or no returns for the industry. And that means activity pricing and the use of technology products is likely lower."

The cuts the company is implementing are not just coming from halting operations. They also involve reducing railcar and distribution facility leases and other stops in the proppant supply chain. "In particular, the cost of distribution assets, which includes rail car leases and distribution facility leases … we have to lower those," Kolstad said.

The end result of the announcement was that the stock of Carbo dropped roughly 48% on Nov. 11 to 82 cents per share. It's down almost 85% in the last 52 weeks. 

In the call and in the company's earnings release, Kolstad and Carbo said it would look at asset divestitures and overhead reductions — SG&A — of 20% in the coming year. Its loss for the quarter was $1.03 per share, down from a loss of 62 cents per share in the third quarter of 2018. More ominously, its balance sheet showed a drop in cash on hand to $39.8 million from $72.7 million a year earlier. 

Oil and gas is not the company's only business. On the same day it announced the loss of its customer and its earnings, it also said it had signed a new significant deal in the agriculture sector. 

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