The EPA And Fracking, How To Capitalize- Part 4

by: Michael Filloon

Prior installments of this topic cover several ways to profit from upcoming regulations of fraccing. Siemens (SI) is one of the largest providers of water treatment products focusing on oil and gas. The product I find most interesting is its mobile produced water treatment system. General Electric (NYSE:GE) is another large company with a competing model I mentioned in part 3 of this series. These systems solve several of the problems facing water treatment in oil and gas. Mobile treatment units are not to be confused with what Heckmann (HEK) does. Heckmann transports frac water from the well site to disposal well, either by truck or pipeline. Mobile water filtration is set on a trailer and pulled by a truck to the well site.

Environmentalists have been upset with fraccing in the United States. Of all the areas experiencing this, the Marcellus shale seems to be the most extreme. Using the Marcellus as an example, here are some statistics for a typical gas well:

  1. 80000 gallons of water needed to drill one well

  2. 3.8 million gallons of water to frac one well

  3. One million gallons of water returns to the surface

  4. 200 trucks needed to transport one million gallons of water

These numbers obviously differ greatly from one area to another, but gives a baseline. Currently, the one million gallons of water that is returned to the surface is kept at the well site in frac tanks or other technologies like Poseidon's (OTCPK:POOSF) systems. Treating frac water is not cheap, but will probably be required at some point. This "dirty" frac water is then trucked to a disposal well after the oil is separated.

Talk of new federal regulations could require the filtering of some or all frac water. Some states have already begun changing regulations. Oil producers have been scrambling to find how best to deal with possible new water treatment rules. I would guess many of these oil producers will rely on an outside source for this service.

The first and most important is politics. Water is a very difficult and negative topic in the media. Any mistakes made will be big news, and could potentially hurt a companies' reputation. The second is cost effectiveness. This will be an expensive process and it may not be profitable. Some oil companies will use the money they are currently paying to dispose of frac water to pay an oil service name to treat. This decreases the chance of increased costs as the outside company will be responsible for keeping its costs down.

If regulations are passed, a mobile treatment system will be placed at the well site. As the dirty frac water is returned to the surface, the mobile treatment system will use a combination of systems to remove the:

  1. Sand and grit

  2. Metals

  3. Bacteria

  4. Salts

The "clean" frac water will be collected and re-used on another well at the site. The money saved on transporting water could effectively be used to pay for water treatment services. Here are a few companies that produce equipment for mobile water treatment:

  1. General Electric: Frac Water Evaporators

  2. Siemens: FracTreat Mobile Produced Water Treatment

  3. Ecosphere (OTCQB:ESPH): Mobile Water Recycling Solutions

  4. Aqua Pure (OTC:AQPVF): Rover System

These mobile units are smaller versions of fixed water treatment systems that will be built on United States shale plays. Mobile units offer a quick solution, but larger fixed systems are more efficient and can treat and clean more water. Infrastructure will be built to remove "dirty" frac water from well sites. These pipelines will take time to build, but look for these plants to be the future of frac water recycling. These stations vary in size, so look for companies like GE (GE) and Cameron (NYSE:CAM) to profit from different systems. Most of the larger oil service companies focus on oil/water separation like Schlumberger's (NYSE:SLB) CYCLOTECH systems. Schlumberger focuses on smaller applications like its EPCON CFU Technology. Haliburton (NYSE:HAL) also provides its CleanWave water treatment system. Baker Hughes (NYSE:BHI) has H2pr0 water recycling. This system has been used in the Permian, where water is in limited supply. All of the major oil service companies are prepared to expand its clear water capabilities. Look for some of the smaller companies mentioned earlier to be take over candidates.

In summary, worries about the environment could lead from water disposal to recycling in unconventional oil and gas production. The media has focused on ground water contamination. I don't think that is the biggest problem as thousands of unconventional wells have been drilled with no pollution. In many areas of Texas and Oklahoma, there is a shortage of clean water to use in the fraccing process. The environment is only part of the equation, as re-use of water can be economic:

  1. Water supply challenges

  2. Reduce disposal challenges

  3. Improve safety

  4. Reduce trucking expense

  5. Reduce chemical exposure

Look for federal money and tax exemptions to aid in the start up of this industry. If done properly it could be very profitable.

Disclosure: I am long HEK.

Disclaimer: This is the fourth installment (parts I, II, III) in a series of articles on the possible new regulations on fraccing. It is not a buy recommendation.