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By Warren Juall

Currently, there are 24 states that have wells that use hydraulic fracturing. Also known as fracking, hydraulic fracturing is a drilling technique that involves forcing millions of gallons of water, chemicals and sand underground to smash fissures in oil- or natural gas-soaked rock.

The Marcellus shale formation could be the second largest natural gas field in the world. In 2009 alone, an estimated $389 million in tax revenues were generated and 44,000 jobs were created from the Marcellus gas producers. This formation alone could provide a 20-year supply of natural gas to the U.S., generate $6 billion in local, state and federal tax revenue and provide jobs for 300,000 people by 2020. While the U.S. looks to decrease its dependency on foreign energy sources, many expect the U.S. to pass legislation that will stimulate the use of natural gas.

More than half of U.S. households use natural gas for heat. One quarter of U.S. electricity is generated from natural gas. Furthermore, according to the Massachusetts Institute of Technology, there are enough unconventional natural gas resources in the U.S. to meet the country's needs for the next 100 years at current consumption rates.

However, there are some major concerns about this technique. The Environmental Protection Agency (EPA) is currently studying whether the use of fracking has been detrimental to drinking water supplies. This study is expected to be completed towards the end of 2014.

The companies that will prosper from this new drilling technique are the ones that are leading the way in innovation and technology and most importantly, adhering to environmental concerns. If this doesn't prove to be a safe way to extract oil and natural gas, the government will likely put a stop to it all together.

Exxon Mobil Corp. (NYSE:XOM): Exxon has taken into consideration that environmental issues may eventually halt production. Hydraulic fracturing uses fresh water. Although it only uses about one-tenth of the water which is used to produce coal, concerns still remain. To combat these concerns, Exxon is using increased amounts of recycled water. This minimizes the burden on local water infrastructure. Exxon is also working on laying pipelines where economically and ecologically feasible, in order to reduce the need to store fresh water and to reduce truck traffic. There are concerns that the local drinking water will be potentially contaminated because of the additives in the fracturing fluids. Exxon's natural gas production operations uses the smallest portion of additives to be safe and yet effective. Fluids used in its operations contain about 99.5% water and sand. Only 0.5% is special purpose additives. Exxon states that these ingredients are necessary to reduce friction, prevent bacterial growth, and minimize scale formation that can corrode pipe.

For the first nine months of 2011, natural gas production of 12,988 million cubic feet per day (mcfd) increased by 1,684 mcfd from 2010. This was driven in part by additional U.S. unconventional gas volumes. Earnings from the first nine months of 2011 from U.S. Upstream operations were $3,912 million, which was an increase of $957 million from the year prior. Higher liquids and natural gas realizations increased by $3 billion. Finally, the overall third quarter earnings of 2011 were 41% higher than third quarter earnings in 2010 due to higher oil and natural gas realizations and improved refining margins. In addition to all of this, the 2010 acquisition of XTO Energy Inc. (XTO) helped position Exxon for future natural gas driven benefits. This merger combined strengths in order to further discover the growing natural gas potential in the United States, despite the hit the company took in Venezuela.

Chevron Corp. (NYSE:CVX): The International Energy Agency predicts that the demand for natural gas will grow by approximately 44% through 2035. How is Chevron positioned to thrive from this increase in demand? For starters, it is continuing to add shale gas acreage to its portfolio. It has recently purchased land in Pennsylvania, western Canada, and Eastern Europe. In fact, Chevron just recently broke into this market. It hadn't been a producer of natural gas from shale rock until its recent acquisition of Atlas Energy (NYSE:ATLS) in 2011. Now, Chevron is one of the largest leaseholders in Pennsylvania with more than 700,000 net acres of leases in the Marcellus Shale. These leases alone provide 850 billion cubic feet of proved natural gas reserves to its portfolio and potentially a recoverable amount enough to supply 100% of U.S. natural gas needs for about seven months. Additional acreage included in the Atlas deal in Michigan is currently being evaluated. In 2010, Chevron completed a pilot drilling program in Haynesville Shale that identified 2 trillion cubic feet of potentially recoverable natural gas. Chevron holds more than 70,000 net acres in the Haynesville beneath mature conventional oil and gas fields. The company is planning on further evaluating Haynesville and other rock layers in the area in a 3-D seismic survey. Results are expected this year.

BP p.l.c. (NYSE:BP): BP is also largely involved with the exploration and production of oil and natural gas. This includes hydraulic fracturing. As many know, BP has been dealing with a major oil spill in the Gulf of Mexico. It has recently incurred significant costs due to reparations. It has had to repair the Gulf of Mexico along with its name. BP has been channeling much of its resources into these damages when it needs to remain forward-looking in terms of diverse energy sources to remain a viable entity. Although BP has the lowest price to earnings of Chevron and Exxon, it may be for good reason. The majority possibly believe that BP will not be able to compete on the same level in the future. This can be displayed by its relatively high price to earnings to growth when compared to that of Chevron and Exxon. Despite the fact that BP is in a position to benefit from the fracking boom, there are too many variables in the near future for me to give this stock a buy recommendation.

Baker Hughes Inc. (NYSE:BHI): Baker Hughes creates technology and provides guidance to oil and companies that own acreage. The company has created fracturing technology that will assist in making the fracturing process much more cost effective. The FracPoint system eliminated the need for cement liner, coiled tubing operations, and wire line operations. At the same time, it significantly reduced the overall pumping time. It is using its technology and experience to help oil and gas companies generate a greater return on investment.

Baker Hughes has been selling at a bargain when compared to two of its main competitors, Schlumberger Limited (NYSE:SLB) and Weatherford International Ltd. (NYSE:WFT). While Baker Hughes has a price to earnings ratio of 12.06, Schlumberger and Weatherford are selling at 20.88 and 45.71 times earnings respectively. Over the past five years, Baker Hughes' price to earnings averaged 19.4 and was at a high of 41.1. It also has a very low PEG ratio of 0.35, which suggests that it may be selling at a bargain in terms of growth potential. When considering Baker Hughes' business plan, its potential to highly profit from the fracking boom, and its current price, I give this stock a buy recommendation.

Halliburton (NYSE:HAL): Halliburton also provides equipment and services to customers in energy markets. Halliburton recently introduced the new RapidFrac completion system. This is a horizontal sliding sleeve completion system that allows for enhanced reservoir contact. This allows operators to optimize completion design, lower operational risk, and materially reduce the time to first hydrocarbons. Halliburton also created the CleanWave treatment, which is addressing the fresh water issues. It enables operators to generate water for reuse in fracturing fluids among other processes. It minimizes fresh water consumption and the costs associated with procurement and disposal. Analysts are rather optimistic about the company. For the past four quarters, Halliburton has been showing double-digit year-over-year quarterly revenue growth. While 92.6% of analysts give Halliburton a buy recommendation, its top ten competitors average 73.2% buy vote recommendations.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: 5 Stocks Set To Benefit From The 'Fracking' Boom