Bloomberg reports that U.S. “Energy Department researchers so far have found ‘nothing of concern’” in a Fracking contamination study. If the final report is as positive, the U.S. oil and natural gas drilling industry will get a boost. Consider Ultra Petroleum Corp. (NYSE:UPL), Hi-Crush Partners LP (NYSE:HCLP), and pipeline giant Kinder Morgan Energy Partners LP (NYSE:KMP).
The process requires water, sand, and chemicals to be forced underground to release oil and gas. The soup being pushed underground is largely a secret, but certainly unhealthy. However, if the U.S. Energy Department’s research shows that suspected contamination wasn’t an inherent result of fracking, the industry will receive a huge boost.
A Cheap Driller
Ultra Petroleum Corp. (NYSE:UPL) is a driller to watch if fracking gets a clean bill of health. It owns oil and gas lands in southwest Wyoming and Pennsylvania. Ultra Petroleum Corp. (NYSE:UPL)’s top and bottom lines jump around a lot because it operates in a commodity business, but 2012 was a particularly brutal year for the bottom line.
A large asset write down led to a loss of over $14 a share. According to the 2012 10k, however, low gas prices in 2012 “required [the company] to record a $2.9 billion non-cash, ceiling test write-down” of its oil and gas properties. That write down is likely to be reversed in the future as natural gas prices recover, as they have started to recently. The company made about a dime a share in the first quarter.
The reason to like Ultra Petroleum Corp. (NYSE:UPL), however, is that it’s among the cheapest drillers in the country. The company’s costs are about $3 per thousand cubic feet (Mcf) of natural gas, while the industry average is closer to $7 per Mcf. With natural gas trading around the $3.50 to $4 mark, Ultra Petroleum Corp. (NYSE:UPL) is going to make money a lot quicker than many of its competitors. And if fracking gets a clean bill of health, any social stigma Ultra Petroleum Corp. (NYSE:UPL) faces will be gone.
Picks and Axes
Another way to play the space is to buy a company that supplies the materials used in fracking. Hi-Crush Partners sells the proppants, called “frac sand”, to “enhance the recovery rates of hydrocarbons from oil and natural gas wells.” Basically, it’s selling the picks and axes that drillers need to use the hydraulic fracturing technique.
The company is structures as a limited partnership, so its yield is notable at around 8.3%. However that comes along with tax consequences, and benefits, and the units aren’t appropriate for tax advantaged accounts. In addition, the company has only been public for about a year, so there isn’t much financial history to go on.
What Hi-Crush Partners LP (NYSE:HCLP) offers investors is a direct play on the fracking technique. If fracking gets a clean bill of health, Hi-Crush Partners LP (NYSE:HCLP)’s business will continue to expand. If fracking is shut down, so, too, is Hi-Crush Partners LP (NYSE:HCLP). Investors willing to bet that technological advances win out should take a look at Hi-Crush Partners LP (NYSE:HCLP). Note, that it recently bought a competitor, D&I Silica, so it not only offers a large yield, but it’s growing its business, too.
A Lower Risk Profile
Kinder Morgan Energy Partners LP (NYSE:KMP) is one of the largest oil and gas infrastructure limited partnerships in the country. It basically takes the oil and gas from where it’s drilled to where it’s needed. That’s a toll taker business with a lot less risk than either drilling or selling frac sand. If Kinder’s pipelines are being used, it’s getting paid.
Clearly, if fracking stops the flow of oil and natural gas slows down. That would hurt Kinder’s business. However, it has such a massive scale, that it would be able to regroup easily enough. Like Hi-Crush Partners LP (NYSE:HCLP), Kinder Morgan is a limited partnership. Its yield is about 6.1%. Unlike Hi-Crush, Kinder has been around for a long time and has an impressive history of regular dividend increases. In 2003 it was paying $2.58 per unit annually, last year it paid $4.85.
Kinder’s yield is higher than similarly situated Enterprise Products Partners (4.3% yield) because it has a more complex corporate structure, including a General Partner (GP), two LPs, and a share class that pays its distribution in units instead of cash so it can be owned in a retirement account. Investors should take advantage of that discount and pick up the extra yield. And, for those looking to buy Kinder in an IRA, consider the Kinder Morgan Management version of the company.
Rough Start
Fracking has gotten off to a rough start. That’s to be expected of new technology. However, if the technique passes muster with the U.S. government, Ultra Petroleum, Hi-Crush Partners, and Kinder Morgan would all see their fortunes improve. The highest risk and most direct plays are Ultra and Hi-Crush.
The article U.S. Energy Department Says Fracking Not A Problem originally appeared on Fool.com and is written by Reuben Brewer.
Reuben Brewer has positions in Enterprise Products Partners and Kinder Morgan Energy Partners. The Motley Fool recommends Ultra Petroleum. The Motley Fool owns shares of HI-CRUSH PARTNERS LP (NYSE:HCLP) UNIT LTD PARTNER INTS and Ultra Petroleum and has the following options: long January 2014 $30 calls on Ultra Petroleum, long January 2014 $40 calls on Ultra Petroleum, and long January 2014 $50 calls on Ultra Petroleum. Reuben is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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