It is a regular pencil, with lead and a built-in eraser. There is an anchor slightly above the eraser.
It fell off the Artist's boat into the water to SpongeBob and Patrick, who used it to make magic drawings that come to life. They created DoodleBob with it, along with some other creations. After the chaos DoodleBob caused, they threw it back into the boat, where the artist finds it, but the lead breaks. Two separate magic pencils later reappear in the video game Drawn to Life: SpongeBob SquarePants Edition.