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Michael Filloon, Split Rock (390 clicks)
Oil & gas, small-cap, research analyst, growth at reasonable price
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Fracking is a lucrative business. With the oil supply and demand becoming heavier on the demand side, companies such as Brigham (BEXP), EOG Resources (EOG), and Continental (CLR) are drilling horizontals faster than you can say frack. This article covers reasons to be bullish on entities producing these fluids.

I have compiled a list of companies that produce "green" fracking fluids on the premise its use will increase.

Flotek (FTK) may be the best known of this group. This company has three business segments:

  • Chemicals and Logistics
  • Drilling Products
  • Artificial Lift

Flotek offers many different specialty chemicals to the oil and gas industry. Examples of specific uses are drilling, cementing, stimulation and production. These chemicals can be made to fit a specific need. If an oil and gas company needs a chemical for a specific function, Flotek is able to differ the make up of the chemical for defined needs. The product receiving much attention is complex nano-fluids (microemulsifiers). These are environmentally friendly, and are picking up interest for oil and gas exploration and production companies. Flotek contends these fluids improve production and reservoir integrity. Flotek has several catalysts to growth in nano-fluids:

  • Increased domestic unconventional resource plays
  • Increased international unconventional resource plays
  • New products
  • Marketing penetration in new areas
  • Possible regulations for fracking companies

Flotek is currently researching the positive effects of its chemicals. Areas such as the Barnett shale and Green River Basin have had positive results. Research in slickwater fracs are also positive.

On March 28th, Flotek's shares jumped on regaining full compliance with the New York Stock Exchange listing standards. This was after company earnings that had shown marked improvements through all three of Flotek's business segments.

In summary, Flotek shares could offer significant upside if regulations are implemented. These regulations could make companies fully disclose the ingredients of fluids used in the fracking process. If so, Flotek's patents could prove significant in the short term.

Tetra Technologies (TTI) produces fluids used in oil and gas completions. Tetra has three segments of business:

  • Completion Services (Fluids)
  • Late Life Services
  • Production Enhancement Services

Tetra's leverage to completion fluids in offshore oil and gas services, is now being focused onshore. This company's fluids are used extensively in offshore projects. Tetra believes it can increase sales as more complex wells are drilled offshore. Its fluids also can be used in fracturing. Tetra believes it can increase revenues on shore.

Tetra has stated its fluids can directly complete with Halliburton (HAL), Schlumberger (SLB), and Baker Hughes (BHI). Tetra's revenues track the rig count in the Gulf of Mexico. Due to permitting issues, that count has lowered, but Tetra believes this is improving. Tetra also contends new wells are deeper, and on average sells ten times the fluid on a deep well as opposed to shallow. It is difficult to know how much improvement will be seen in the Gulf, but Tetra states it can obtain significant growth in onshore shale plays.

In summary, Tetra should maintain sales of completion fluids to shallow and deep water Gulf of Mexico completions. It plans to initiate sales of heavy completion fluids to Petrobras (PBR). 2011 growth expectations are centered around Marcellus, Haynesville, and Eagle Ford shales plays. Efficiency improvements are expected at the El Dorado plant. Fluids is the second largest revenue producer for the company at $265 million in 2010.

Newpark Resources (NR) may be the best play with respect to leverage to drilling fluids. Newpark Drilling Fluids and Environmental Services accounts for 83% of company revenues. This segment of Newpark specializes in demanding wells in harsh conditions. Its DeepdrillTM water-based drilling fluids is an alternative to oil-based mud systems. This is environmentally friendly system that is safer and easier to use. Newpark states that it is willing to change or alter any of these systems to fit the needs of its customers.

Newpark has a large percentage of the fluids market. In 2010, this was an $8.3 billion industry. The completion fluids market breaks down as follows:

  • Schlumberger 37.2%
  • Halliburton 22.8%
  • Baker Hughes 10.1%
  • Newpark Resources 7.2%
  • Others 22.7%

Over the past decade, Newpark has seen growth. In 1999, it had just 3.4% of the market. The market downturn was difficult on all companies in this space, but Newpark seems destined to return to its 7.6% share it had in 2008. The company has three fluid choices:

  • High Performance Water Based Systems
  • HIgh Performance Synthetic Based Systems
  • Traditional Oil Based Systems

The product that seems most significant is Newpark's new water based system, EvolutionTM. This product is currently being used successfully in U.S. shale plays. Newpark claims this product increases rate of penetration and reduces operating expense. It won the 2010 World Oil Magazine innovation for best drilling, completions and production fluid. 2010 revenue was $27 million. It was used in over 100 wells, and had 800000 feet drilled. Plans for 2011 have it being used in several other U.S. shale plays. It was recently used in the Bakken and Marcellus shales. Currently Newpark has 16% of total U.S. shale business. This breaks down as follows:

  • 21% Haynesville
  • 20% Woodford
  • 17% Eagle Ford
  • 16% Bakken
  • 14% Barnett
  • 13% Fayetteville
  • 9% Marcellus

Newpark estimates it will be able to increase its international footprint. 29% of Newpark revenues are outside North America. Middle East opportunities have long term possibilities. Newpark will continue to market to liquids based shale plays as this seems to be a high growth arena. Newpark's fluids revenue for 2010 was approximately $716 million, up from $490 million the year prior.

Halliburton has also developed its own water-based shale specific fluid, SHALEDRILTM. It should be noted it was a 2010 finalist of the 9th Annual World Oil Awards for the best drilling, completions and production fluids (Newpark won the award). SHALEDRIL has proven successful in the Fayetteville shale.

Schlumberger has a large selection of water-based systems. This company has water-based systems compatible with tar sands (SAGDRIL) to difficult shale plays (K-MAG). Schlumberger's suite of products also cover oil and synthetic-based systems.

Baker Hughes also has a selection of eco-friendly water-based systems. The differences in the water-based systems can vary in temperature or other variables in drilling. Baker Hughes also has a large selection, like Halliburton and Schlumberger, of fluids already completed that would best serve a company. These fluids specialize in deep water, conventional land, and unconventional land plays.

I have read several articles on completion fluids made from the same materials in processed foods. This may be true, but a simplistic view would focus on water-based systems. This drilling fluid leaves the smallest environmental footprint when compared to oil-based and synthetic-based fluids. It seems politicians are not focused on what the fluid is made of, rather if it pollutes. When looking at a well, horizontal or vertical, if done properly it would have no contact with the ground water or soil. The only contact made should be portions thousands of feet below the surface. It is terrible that communities have had individuals become sick from drinking water close to drill sites. Politicians might want to look at the mechanics moreso than the chemicals.

If these fluids are regulated in the future, it could mean companies with smaller footprint chemicals will benefit significantly. Many oil and gas exploration and production companies use oil-based formulations, and would in turn need to find a company that produces a green fracking fluid. This would not only increase demand, but also allow for price increases. This change may be seen anyway, as oil companies will not want to risk bad press. Flotek has grown considerably over the short term, but Newpark sells for a forward PE of 11.74, and could be a play on growth and valuation.


Disclosure: I am long FTK.

Additional disclosure: Spears and Associates-Oilfield Market Report Jan 2011Source: Baker Hughes Rig CountThis article is to be used as a list to find companies to invest in after self study. I am not making a buy recommendation. I currently own Flotek (FTK) and may buy Newpark (NR) in the near future.

Source: In Search of Green Fracking Fluids: Flotek, Tetra Technologies, Newpark