George Mitchell, the “father of fracking,” established a legacy that was both revolutionary and profitable.
Indeed, while hydraulic fracturing technology had been around since the 1950s, it was he who first applied the process to oil and gas drilling – making him an overnight billionaire.
Because of Mitchell’s ingenuity, U.S. oil and gas production is at its highest level in decades, topping 300 million barrels per day (bpd) last year. And it’s rising rapidly, as 90% of U.S. oil and gas wells are now fracked.
It’s not just the United States, either. Countries around the world – especially China – are seeking to duplicate the U.S. shale boom, plowing billions of dollars into investments.
But Mitchell has long since cashed out, and now it’s up to the industry heavyweights to build on his innovation.
And we’re going to look at some of the companies that are doing just that…
GasFrac Energy Services (GSFVF)
People are right to insist that fracking be done safely and that the chemicals used in the process don’t seep into the water supply.
Even better, how about eliminating the need to tap into water altogether?
GasFrac Energy Services completely sidesteps the issue by using a proprietary process involving a gelled liquefied petroleum gas (LPG) instead of water. Water-free fracking still remains an early-stage technology, with potentially higher initial costs than conventional fracking methods. But as lawmakers and oil regulators focus on the large quantity of water used for fracking wells, the concept is gaining popularity.
GasFrac has led the way, bringing its propane fracking operations to Texas.
As a buying opportunity, just keep in mind that GasFrac is a $120-million micro stock with operating cash flow of just $1 million. So it’s not for the faint of heart.
No doubt, volatility will kick in from time to time with roughly 100,000 shares trading on a daily basis. Still, the potential for growth is huge. Analysts recently upped price targets for the stock to $2.50, a 40% increase from previous estimates. It’s recently been trading around $1.90.
Take it slow, and your risk to reward should pay off.
General Electric (GE)
GE is working on all aspects of environmentally sound solutions. In three years, it’s gone from only dabbling in oil and gas, to investing a whopping $15 billion in the sector. And it has maintained an eye for diversity and new technology – not drilling and producing.
The bottom line is that hydraulic fracking has opened a number of new doors for GE, so much so that GE Oil & Gas has become the company’s fastest-growing department. A strategy to make fracking more manageable and to remove environmental concerns bodes well for capturing a major share of the fracking market.
GE’s new fracking portfolio hopes to actually complement its renewable energy and nuclear energy portfolios. GE’s business strategy seems to mirror that of the Obama Administration – and investors like it. Environmentalists also seem to like GE, and are particularly eyeing its newest investment plan to pour billions of dollars into a new research facility in Oklahoma that aims to dull some of the potentially harmful impacts of fracking.
Just like its products, GE was “built to last.” Having anchored the Dow Jones Industrials Index for 116 straight years, it lost its footing in 2009 and 2010 with double-digit sales losses. But it bounced back admirably, trading at four-year highs and up 18% year-to-date. Throw in a 13.5 forward P/E (not to mention a 3.1% yield), and we have a keeper for the long term.
Devon Energy (DVN)
You can’t talk about fracking without mentioning Devon Energy.
Remember, in 2002, George Mitchell sold his baby, Mitchell Energy and Development, to Devon for $3.5 billion. His shares of Devon accounted for most of his fortune. Another billionaire, T. Boones Pickens, has also been a long-time owner of this stock.
Devon produces about 2.6 billion cubic feet of natural gas each day – more than 3% of all the gas consumed in North America. Product sales were down 6% versus a year earlier, but there are potential growth opportunities – not only in natural gas, but also in the Canadian bitumen operations (where production is up almost 20% from its levels a year ago).
Like GE, this company wavered in the past few years, experiencing a 42% five-year loss. Oil production, or lack thereof, is largely to blame. However, Devon has been creeping back, as oil production at it Permian Basin grew in the first quarter 2013 by 24% year-over-year. This contributed to Devon’s 14% year-over-year increase in total oil production for the same period.
Finally, after talking about it for a few months, Devon announced that it’s planning to make midstream assets available to the public. This includes 6,500 miles of pipeline and eight processing plants. Sounds like more oil (and cash) for loyal investors.
U.S. Silica Holdings (SLCA)
Sand and water are the two biggest components in the hydraulic fracturing process. Each shale well requires about five million pounds of proppant – materials used to keep the fractures in the rock open. U.S. Silica Holdings mines, processes and sells commercial silica in the United States – and plenty of it.
Analysts expect big things from SLCA, and by the looks of it, it’s set to deliver. Second-quarter revenue reached $129.8 million, 24% higher than the prior year’s quarter. Around this time last year, shares traded for just $12. They’re going for nearly double that today. With a $1.1-billion market cap, there’s no doubt this small cap has marked its territory in the fracking world.
Bonus Play: Market Vectors Unconventional Oil & Gas ETF (FRAK)
For an even broader play into traditional hydraulic fracturing companies, this exchange-traded fund might be more attractive. It attempts to mirror the performance of the Market Vectors Unconventional Oil & Gas Index, which is made up of companies that derive at least half of their revenue from unconventional oil and gas.
Up a whopping 31% this year, none of its positions are worth more than 10% of its portfolio. 82% of its holdings are domestic, while the other 17% come across the border in Canada.
Bottom line: If you’re inclined to follow in the footsteps of the largest and most ingenious fracking companies, this is a good group to hang with over the short and long term.
Ahead of the tape,