Carbo Ceramics Is In Cash Preservation Mode, These Analysts Say

In a report published Thursday, IBERIA Capital Partners analysts maintained an Underperform rating on

, with a price target of $17, saying that the company is in "cash preservation mode," with demand declining rapidly in 1Q and costs remaining at elevated levels. The key points in the report were: 1. Completion Activity Declining Dramatically • Decline in well completions in North Dakota, a major source of demand for the company, from 183 in December to 47 in January. • Customers continue to drill wells without completing, while crude prices remain subdued • Increase in the number of wells waiting to be completed in North Dakota by 75 to 825 in January. Recent trends indicate that this number could be closer to 1,000. "We believe there could be a bump in completion activity in the summer as a result of drillers having to complete wells within a year and a 6.5% oil extraction tax exemption that may trigger in June if WTI averages <$55.09/bbl for five consecutive months," the analysts said, while adding, "That being said, we expect customers to have plenty of access to ceramic already in inventory or, more likely, to gravitate ever more to raw sand in an effort to keep costs lower." 2. Costs Remain Elevated • The company's margins may have contracted in 1H15, since fixed costs represent a substantial portion of COGS. • There are existing contracts for the purchase of natural gas for operating existing plants. Carbo is compelled to sell this contracted supply at a substantial loss over the course of this year. • The company may incur "other significant, potentially recurring costs" through this year as "activity is reined in and measures are taken to trim expenses." 3. Cash Preservation • Carbo announced a cut in its quarterly dividend from $0.33 per share to $0.10 per share. The cash savings from this could be $21 mm on an annual basis, the analysts commented. • The company has also indicated a cut in its capex. • "With ~$25 mm drawn down on the $100 mm revolver as of 12/31/14, management has recently indicated it intends to draw down the remainder of the revolver in 1H15 in order to maintain current liquidity and to have the cash available for the near term. " 4. Estimates Reduced The EPS estimates for 2015 and 2016 have been reduced from $0.37 to a loss of ($2.41) and from $1.57 to a loss of ($0.33).