2 Stocks Set To Profit From Tougher Fracking Laws

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Includes: GRH, NESC
by: John Holt

Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.

A controversial ruling in Illinois is causing a riff between economics and environment - but these two "best buy" stocks are set to bring the new regulations straight to the bank.

Fracking's newest chapter just began in the state of Illinois.

On June 17th, 2013, Illinois Governor Pat Quinn signed into state law the Hydraulic Fracturing Regulatory Act, effective immediately.

It's now the nation's toughest set of regulations aimed at safeguarding the environment during oil and gas fracking activities. Some of the provisions include better protection of water quality, higher reporting transparency from companies, and greater public involvement.

On the political side, the Illinois government is confident that the new fracking laws will create thousands of new jobs while attracting more investment and ensuring the state's resources are protected.

So out of the environmentalists fighting for stricter rules and the drillers defending their practices, who actually gained the upper hand?

Well, with the law now firmly in place, both groups have little choice but to compromise. Drillers get to drill but the legislation gives the public the opportunity to appeal permits and launch lawsuits at anytime.

Indeed, the passing of the Illinois legislation sets a new standard for the industry. It's likely that other states will follow suit, taking a tougher stance against fracking.

And this is where I see opportunity for us investors...

You see, the use of hydraulic fracturing is the new normal for oil and gas exploration. It's largely to thank for the resurgence in American oil production and has seen enormous growth over the past five years. In fact, according to the US Department of the Interior, approximately 90 percent of wells currently drilled on Federal and Indian lands use fracking.

As evidenced by the new Illinois regulations, governments are making a strong push towards a clean energy future, with a great deal of resources now aimed at better minimizing environmental damage caused by modern drilling techniques.

One major environmental concern is the wastewater after the completion of a fracking stage.

During fracking, a mixture of water, sand and chemicals is injected into a horizontal wellbore at extremely high pressure to create fractures in shale rock. Because the mixture can only be used once, millions of gallons of water are often required for each well over its lifetime.

That means a great deal of wastewater is left over - a product that is toxic if untreated, much to the anger and dismay of environmental groups.

But a revolutionary remedy is quietly gaining support from both sides.

In fact, one of today's biggest beneficiaries to the wastewater issue has been companies whose business involves recycling and cleaning of post-frac water. With new technology, these companies are able to help drillers repeat the mixture application multiple times - saving money and conserving water usage.

Talk about a win-win situation.

The introduction of tougher fracking standards in states like Illinois is just the catalyst these service companies have been waiting for.

So what stocks do I think are the best stocks to buy now to take advantage of this?

One of the larger companies in the environmental solutions space is Nuverra (NES)

Formerly Heckman Corporation, Nuverra currently employs over 3,000 staff operating in more than 70 locations across 26 states.

They have operations strategically located in almost every major US shale regions, including: Marcellus/Utica, Eagle Ford, Bakken, Haynesville, Barnett, Permian, Mississippian Lime, and Tuscaloosa Marine Shale.

Their services range from fresh water acquisition to treatment and disposal of flowback from fracturing operations.

In Q1 2013, Nuverra saw their revenues triple to $160 million from a year ago. Not surprisingly, the bulk of the growth came from successfully expanding their operations into the prolific Bakken shale.

I see upside for Nuverra but a more enticing company I recommend taking a closer look at is: GreenHunter Resources (NYSEMKT:GRH).

Though it has a much smaller operational footprint than Nuverra, GreenHunter is well positioned in the highly productive Eagle Ford and Marcellus/Utica shale plays.

The company is also recently began operations in the Oklahoma/Mississippian Lime and has acquired properties in the Bakken to setup operations beginning in Q2 2013.

Like Nuverra, GreenHunter also offers total water management solutions and has experienced tremendous growth over the past year. In fact, in Q1 2013 the company saw their revenues grow by 279% from the same time last year. Likewise, barrels disposed of grew from 317,100 to 1,105,500 - a gain of 249%.

Although the company experienced a loss of $7.2 million for the quarter, I see this as a best stock to buy now for a couple reasons.

First, I don't foresee large losses in upcoming quarters. The company is seeing a strong pickup in activity in Appalachia-especially around both the Marcellus and the Utica Shale Plays where it is strategically positioned.

And second, GreenHunter recently unveiled its a proprietary technology called Frac-Cycle. With this technology, the company could soon corner a growing demand for water recycling services.

You see, fracking fluids typically contain 10% to 25% suspended solids content and are not suitable to dispose in salt water disposal wells. They must be solidified prior to disposal typically at a certified landfill.

Frac-Cycle uses innovative processes such as vibration separation and nano-filtration, which are able to capture suspended solids content for removal. The solids are then compressed into a dry filter-cake that eventually goes to a certified landfill in much smaller quantities compared to a typical processing procedure.

While other operators target a clean brine output (as it is called) as well, Frac-Cycle's flexible design allows the user to take in flowback or produced water and recycle to either clean brine or fresh water. This means the recycled water can be used for subsequent fracking activities, or in some cases, processed to the point where it can even be safe enough to be discharged into a stream.

The company commenced their first successful application of Frac-Cycle at an oilfield waste facility in southeastern Ohio in late June.

As the industry continues to move towards a more regulated system of fuel extraction, I believe Frac-Cycle could become a major profit generator for GreenHunter.

With two of my best stocks to buy now yours for consideration, I urge you to keep a close eye on fracking regulation in other states. If the legislation in Illinois sparks a flurry of action in other states, wastewater-processing stocks should take off.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.