Hydraulic fracturing, or fracking, has become tremendously popular in the United States and Canada over the past couple of years. By pumping pressurized fluid into a wellbore the process enables companies to extract previously inaccessible hydrocarbons. The result has been a natural gas bonanza in many parts of the U.S., particularly in shale regions like the Barnett Shale Basin in Texas and the Bakken Formation in North Dakota, as well as in parts of Canada [for more fracking news and analysis subscribe to our free newsletter].
Below, we outline 10 ways to invest in fracking technology to help prepare your portfolio for what many feel is the next big thing in the energy world.
- Market Vectors Unconventional Oil & Gas ETF (FRAK): An exchange-traded fund targeting the unconventional oil and gas industry, including coal-bed methane (CBM), coal seam gas (CSG), shale oil, shale gas, tight natural gas, tight oil and tight sands. After starting in February 2012, the fund has attracted some $15.4 million in assets under management, with 75% of its positions in the U.S. and 24.7% of them in Canada in 88.3% large cap securities. With a net expense ratio of 0.54% and no positions worth more than 10% of its portfolio, the ETF represents a relatively cheap and diversified way to play the sector using a single security.
- C&J Energy Services Inc (CJES): The premier provider of hydraulic fracturing, coiled tubing and pressure pumping services to the fracking industry. Covering everything from equipment manufacturing to technically demanding well completions, C&J offers investors exposure to the industry’s growth with some 73% of its revenues coming from hydraulic fracturing services. But unlike many oil and gas plays, there is no direct crude oil or natural gas commodity risk associated with its business, while term contracts provide relatively stable long-term revenues streams for many of its operations.
- Halliburton Company (HAL): Halliburton is a pioneer of fracking technologies and a leading provider of pressure pumps and other services to the industry. While it doesn’t generate quite as much of its revenues from fracking as CJES, HAL is a far larger player in the oilfield services industry, and the company has been around since 1919, which may offer greater diversification and a margin of safety. The company is also geographically diversified outside of North America, and has a three-year agreement with Chevron to develop natural gas assets in Poland and Thailand. Meanwhile, the company has posted strong growth rates and a 21% return on equity; however, investors should pay attention to the amount of debt HAL holds.
- KBR Inc. (KBR): A spin-off of Halliburton that’s focused on engineering construction and related services for the energy markets, with a focus on natural gas projects. KBR provides a full range of engineering, procurement and construction services for large and complex upstream and downstream projects, including LNG and GTL facilities. As of 2011, gas monetization accounted for the majority of KBR’s revenues, which increased 8% year-over-year to over $3 billion. Investors looking to play the infrastructure part of the fracking boom may want to consider this company, with its modest 19.5-times price-earnings ratio [see also Time To Buy Oil?].
- Exxon Mobil Corporation (XOM): One of the largest and safest energy companies in the world for investors. In 2009, the company purchased XTO for $31 billion and became the largest producer of natural gas in the U.S. In fact, approximately half of the company’s production and half of its reserves now come from the burgeoning commodity, which has contributed to its near-record profits projected for 2012 – second only to 2008. With a market capitalization of nearly $400 billion, a dividend yield of 2.64% and a price-earnings ratio of 9.13-times, the stock offers investors perhaps the safest bet on the rapidly growing industry.
- CARBO Ceramics Inc. (CRR): The world’s largest supplier of ceramic proppant used in the fracking of deep oil and gas wells. Whereas CJES and HAL provide the equipment, CRR is a leading provider of the chemicals used by the equipment to complete the process. The company also provides resin-coated sand, which is a cheaper option than the ceramic proppant used in the industry. Last year, the company generated over $625.7 million in sales and had a net income of around $130 million, or $5.62 per share; just over 20% of the company’s sales were to international markets, although competition in the United States has recently taken a toll on the stock.
- Kinder Morgan Inc. (KMI): The best-positioned pipeline operator providing transportation solutions to the fracking industry. With about 37,000 miles of pipeline and 180 terminals, the company was already one of the largest pipeline operators in the U.S. before buying El Paso Corporation (NYSE: EP) for $38 billion. El Paso is the largest natural gas midstream operator in North America with 67,000 miles of pipeline. Meanwhile, new pipeline coming online to service the major shale plays will likely need to interface with the company’s network, enabling it to capitalize on the fracking boom in many ways [see also MLPs Are Getting Crushed].
- Cheniere Energy Inc. (LNG): A premier play on liquid natural gas (LNG) and a potentially important player in LNG exporting. With LNG increasing at a 6% annual rate and the U.S. positioned as a key exporter, the company is well-positioned to benefit with its 89.3% ownership interest in the Sabine Pass LNG receiving terminal in Louisiana and the Creole Trail Pipeline that connects with it. So far, the firm hasn’t generated a profit with the terminal being used for imports, but exports are slated to begin by 2015 and could generate significant revenues, particularly as the government has limited the number of export permits issued.
- Heckmann Corporation (HEK): A total water solution provider for shale or unconventional oil and gas exploration, capitalizing on the wastewater generated by fracking activity. The company’s suite of services includes water delivery, disposal, trucking, fluids handling, treatment, and temporary and permanent pipeline facilities, as well as water infrastructure services. With a market capitalization of more than $500 million, HEK offers investors a strong play on the water management services for the fracking industry, although it reported a net loss of around $23 million in 2011.
- Canyon Services Group Inc. (TSE: FRC): A Canadian company providing specialized stimulation services to oil and gas companies in the Western Canadian Sedimentary Basin. The company’s capacity has already grown from 38,000 hydraulic horsepower in 2010 to 225,000 hydraulic horsepower planned by the end of 2012. Investors looking for an investment outside of U.S. borders may want to consider this $600 million Canadian fracking company, with its modest 7-times price-earnings ratio and 6% dividend yield.
Disclosure: No positions at time of writing.