Frack Baby Frack

by: Michael Shulman

You may have heard of the sophisticated political mantra “drill baby drill.” Something quaint from the past. Today, that mantra is fast becoming “frack baby frack.” Fracking is the cracking open, with new technologies and processes, shale formations that otherwise were resistant to exploitation until the very end of the last century. It is now the process du jour making North Dakota the second-largest oil producing state in the U.S., enabling Pennsylvania to forget it was once part of the Rust Belt and Texans to, yet again take credit from something under their feet.

There are many so-called fracking plays – an entire cottage industry of MLPs looking to waste your money has emerged – and you need to avoid those dry wells, go for companies benefiting from the boom.

C&J Energy Services (NYSE:CJES): This company and stock have ridden the shale boom and the geniuses on Wall Street are saying the great growth days are over. Not so. CJES has been an oil filed presence for many years, it has seen great growth due to fracking and I believe in all kinds of oil fields, not just shale, the company and the stock have legs. It is seen as a near pure play on shale; it is really a play on a mixed business serving traditional and fracked sites.

USA Compression Partners (NYSE:USAC): This outfit is a one-stop shop for the compression equipment and services needed at shale gas fields. It is focused on shale, went public in January, and even though it seemingly has a ridiculous P/E it will quickly grow into that valuation. Going public does not mean it is a new or speculative company – USAC had $118 million in revenue in 2012. The company leases out its equipment – and fracking is equipment intensive, it entails drilling a lot of wells that run out of value far more quickly than a traditional well – and measures its capacity in a way unlike anything else I have seen – available horsepower. Appropriate for a Texas-based company.

Nuverra Environmental Solutions (NES): This is a solid company being treated on Wall Street as if it were a speculative outfit and stock. Nuverra used to be called Heckman but as it plunged into the energy sector it changed its name. Why energy and fracking? The single most difficult production and environmental problem facing frackers is water – fracking consumes and has the potential to pollute massive amounts of water. Nuverra is developing a 100% solution – pardon the pun – that would clean and recycle wastewater from fracking. The company has a large business in other sectors – top line revenues are forecast by the company at between $750 and $825 million in 2013. If it can get shale right it is dirt cheap at just under three bucks a share.

US SiIica Holdings (NYSE:SLCA): This used to be everyone’s favorite fracking stock, now it is just a stock – but it is a great fracking stock nonetheless. The company’s name says it all – it provides the sand used in fracking and other oil and gas extraction operations. Sand, you ask? It is injected with water and chemicals to split open otherwise too-tight shale formations. Sales went from $296 million in 2011, to $442 million in 2012, with profits rising to $79 million. Despite this the stock is valued at a multiple lower than the S+P 500.

Suburban Propane (NYSE:SPH): Suburban Propane is the nation’’s largest retail distributor of propane and is a great beneficiary of the increasing flow of natural gas liquids [NGL] from fracked fields, specifically from northern Pennsylvania. The company does what it says – distribute propane, an NGL – and very high quality NGLs are already flowing from that area of the country through refineries to consumers. So much so the Carlyle Group (NASDAQ:CG) has invested in a refinery outside Philadelphia and it is upgrading to process NGLs. SPH will benefit from increasing supplies, that in turn create their own demand.