Fracking helps boost Balchem Corp.

NEW HAMPTON — Balchem Corp. is known for its encapsulation business. It makes the face-puckering "sand" on Sour Patch Kids candy and tiny grains of copper for vitamins.

Another industry Balchem has dipped its toes into with the usual lucrative results? Fracking, including of the Marcellus shale in Ohio and Pennsylvania.

About 16 percent of Balchem's total revenue in 2011 or about $40 million — came from selling clay stabilizers used in drilling shale formations for natural gas.

The stabilizers, made from a type of B vitamin called choline chloride, prevent the clay in the shale from swelling and blocking the flow of natural gas, said Balchem CEO Dino Rossi. Balchem is the world's largest choline producer, holding 26 percent of the market share, Rossi added.

Before choline chloride, Balchem sold other clay stabilizers to the industry. But, when environmental concerns about fracking became prominent, Balchem discovered that choline chloride alleviated some of those issues. The company was already manufacturing choline chloride for agricultural uses. It helps chickens grow more quickly, for instance.

The fracking application of choline chloride has been a growing part of Balchem's business for the past two to three years, Rossi said.

Balchem, which employs 110 people locally at its headquarters in New Hampton and a plant in Slate Hill, has reported record profits and sales consistently through the economic downturn.

But, for some investors, the fourth quarter of 2011 wasn't so rosy. Balchem missed analyst estimates, reporting $69.7 million in net sales for the quarter. In its Animal Nutrition & Health division — where it groups choline chloride for fracking — profit fell to $6 million for the quarter, compared to $6.8 million from the same time period in 2010.

On Feb. 24, the day Balchem released fourth-quarter results, its stock dove almost 19 percent to $29 per share. The stock (Nasdaq: BCPC) closed Friday at $28.74.

"Investors are used to double-digit growth," Rossi said, adding that the events Feb. 24 were a bit of an "overreaction."

The market response did not bother fund manager and longtime Balchem investor Lawrence Goldstein.

"If they have a flat spell, it's just a buying opportunity," Goldstein said.

Increasing oil prices had a two-pronged effect on Balchem's business late last year. First, choline chloride is made from petrochemical derivatives, and as oil commands a higher price, choline chloride becomes more expensive to make, Rossi said.

Second, because oil is more valuable, riggers are drilling for it, rather than for more plentiful and cheaper natural gas.

Overseas competitors, particularly from China, also exerted some downward pressure. Like Balchem, Chinese companies have been making choline chloride for chickens. Chicken production has been increasing 10 percent per year in China, Rossi said.

But, when Balchem was swamped with choline chloride orders for fracking last year, the company had to ration it to clients. That gave competitors an opportunity to get a foothold in the market, Rossi said.

"In typical Chinese fashion, they dropped the price and decided to play," Rossi said.

At the time, Balchem was working on expanding its Missouri and Louisiana plants to accommodate demand. But, those spaces only became available in the third quarter last year — just as the natural gas market slowed, Rossi said. As a result, the company has only used some of the new capacity. The company also has plants in Italy, South Carolina and Utah.

To compete, Balchem may open a factory in China this year. Rossi has visited the country a few times to scope out potential sites and is working with business development groups there.

Balchem scientists are also developing stabilizers for oil fracking, which could help the company decrease its exposure to fluctuations in energy markets.

jdinapoli@th-record.com