Fracking is only going to grow, despite all the political opposition, and that means there’s opportunity in this burgeoning energy source. Two fracking service providers and an exchange-traded fund are especially good ways to invest in the practice.
Short for hydraulic fracturing, fracking is the extraction of natural gas and oil from hard-to-exploit shale rock formations deep in the earth. Energy companies pump high-pressure fluid into the rock, releasing the trapped oil and gas. This is not a new technology, as the first fracked well was drilled in 1947. In recent years, though, the techniques have vastly improved, resulting in a natural gas and oil boom in the U.S.
The potential is so enormous and the growth so profound that proposed government bans on fracking will have difficulty passing. For investors, politics brings a huge unknown factor. However, I believe there will be no stopping this train of resource development.
In Europe, the nations with the biggest shale-gas reserves, France and Bulgaria, enacted bans. In the U.S., Vermont prohibits it. But the economic boon of fracking thwarts attempts to outlaw fracking in most other places. The state of New York, for instance, is eying lifting a five-year ban on the practice. In March, the New York Assembly voted to extend fracking, yet the state Senate is unlikely to go along.
Concern is rampant about drinking water pollution from the chemicals used to break up the rock, despite the safety measures taken to prevent accidental leakage. In environmentally conscious California, some question if it will ever be politically feasible to drill. Bills to bar the practice are proposed in the state legislature. Still, the oil and gas industry is a large employer there, with 100,000 people working in it. A University of Southern California study says fracking could add 2.8 million more jobs to the state by 2020, and produce huge tax revenues.
These shale formations are a huge resource for the U.S., and energy companies now can tap into them at reasonable cost. In California, the Monterey shale formation runs from San Francisco all the way down to south Los Angeles. It has an estimated 15.42 billion barrels of recoverable oil, which is 64% of the total U.S. shale oil reserves at this point. That is far more, almost double, the amount of the North Dakota Bakken Shale and Texas Eagle Ford Shale formation combined.
In 2007, the U.S. extracted about 10% of the consumed natural gas from fracking; by 2010, it was 30%. The U.S. imported natural gas from Canada for 20 years until 2006, when everything changed.
With massive new supplies coming on line, natural gas prices plummeted 85% from over $12 per million BTU in 2006 to a quarter of that now. Many industries are taking advantage of this cheap energy source, especially electric utilities as they try to move away from coal to natural gas. Both fuels spew pollutants into the air, but coal is far dirtier then gas.
For investors, below are the choicest fracking stocks.
C&J Energy Services Inc (NYSE:CJES) provides hydraulic fracturing and coiled tubing services – small piping used to pump chemicals down a fracking well — in Texas, Louisiana, New Mexico and Oklahoma. They are a $1 billion (revenue) company, growing sales at 30% to 40% per quarter. The price/earnings ratio is a very affordable 6, based on trailing earnings. They have strong sales growth and a very impressive return on equity of 30%.
Credit: C&J Energy Services Inc (NYSE:CJES)
While fracking has momentum, it’s also true that tighter controls of its environmental impact are coming, too. Heckmann Corporation (NYSE:HEK) is in the right place for this: it treats and disposes of wastewater that fracking produces.
The company is about the same size as C&J Energy Services Inc (NYSE:CJES), but Heckmann’s sales growth exceeded 100% every quarter for the last two years. Earnings, however, are harder to come by due to heavy capital spending, especially on acquisitions. In 2012, it got out of the red and eked out a small $2.5 million net income. Analysts project they will make 19 cents a share next year, and at a recent $4.10 gives them a forward P/E of 21.
Heckmann Corporation (NYSE:HEK) will be more volatile, but with management owning 10% of the shares you at least have a dedicated force running the company. The stock has traded as high at $10 and as low as $2 per share since 2008 when it became public.
If these two fracking-centric companies seem too speculative for your tastes, consider Market Vectors Unconventional Oil & Gas. This new ETF only went public last year, and focuses on companies that exploit tight formation of natural gas and oil.
Three quarters of the ETF’s positions are in the U.S., and the balance is in Canada. Over 85% of the companies are large cap, providing some stability to the portfolio. But the fund is volatile. At its March 2012 IPO, it was $25, then fell to $19 and trades today at $25 again.
Long term, shale resources will be thoroughly developed. The fracking technology is here to stay.
The article How to Ride the Fracking Boom originally appeared on Fool.com and is written by Steve Peasley.
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