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Fracking’s Ripple Effect Creating Profit Opportunities

Horizontal drilling and hydraulic fracturing (fracking) have created a wave of profit opportunities for investors.

But for every transformational technology that goes mainstream, thousands of equally profitable innovations and improvements follow in its wake.

After all, telecommunications development didn’t simply stop with the first phone. There’s been ongoing development that’s seen rotary dials replaced with touch screens and answering machines supplanted by voicemail.

The same is true of fracking – a relatively new technology that’s costly, time-consuming and even wasteful.

For example, one of the major problems with fracking is the cost of getting the gas out of the earth. Estimates range from $4 per thousand cubic feet (mcf) to $6 per mcf extracted. Yet natural gas is selling for about $3.50 per mcf, so the economics of fracking don’t make much sense right now.

Part of the problem is that it’s energy intensive. Today, a single frac uses about 33,000 gallons of diesel fuel.

In fact, last year alone, the industry used more than 700 million gallons of diesel fuel, according to Apache Corp. (APA). At $3.40 per gallon for diesel, that comes out to about $2.5 billion in fuel costs.

That’s a huge inefficiency gap, and the company that fills it will unlock huge profits.

And that’s precisely what Caterpillar (CAT) and Halliburton (HAL) are trying to do. They’ve figured out a way to use the energy from the wells themselves to power the fracking equipment. Their systems run on natural gas and have the potential to reduce costs by more than 70%.

Halliburton has invented a system that connects the gas to the pumping engines. It’s made up of a simple gas line that connects the natural gas source to an engine that uses a “quick connect” jumper to link the gas line between trucks. This is critical because the pumps move from site to site when they frac.

Right now, less than 1% of the fracking wells in use are powered by natural gas. But if more companies were to adopt the process, the added benefit would be a cleaner-burning fuel and the elimination of transportation costs.

Make no mistake, fracking isn’t a cheap process. And while the industry and investors are rightly excited about the prospects, that excitement is contingent upon much higher natural gas prices.

The industry is now selling or storing the gas below its cost of production, and that situation can’t last long. Natural gas prices, while up more than 60% year-over-year, are still well below levels that make the industry profitable.

Yet, if you look at futures prices, it’s plain to see that the pricing environment will continue to be unfavorable for some time to come. So solutions like the use of field gas to power equipment are where the future profits will come from.

If the industry doesn’t increase efficiency and lower costs, the hopes for fracking for natural gas will rest on the hope for higher prices. Hopes are good to have, but they won’t pay the bills today.

And “the chase” continues,

Karim Rahemtulla