When it comes time to fill the 'ol gas tank' most Americans are more than happy to "top it off" but they just don't want the well that provided that gas to be in their back yard... Why Not? I mean it would be cheaper that way right? So what's the problem? Well, the problem is that it's a messy thing to pull crude oil out of the ground. But there's hope; I promise.
To understand where the money may be hiding and who is actually making an impact on cleaning up Fracking in a good way, we'll have to look at complimentary businesses that are emerging as industry hopefuls because they are starting to prove their methods in the growing industry of 'Clean Fracking'.
Most people don't know it, but the oil and gas industry is one of the most water-intensive industries in the world. It's both a large consumer of fresh water and a large producer of contaminated water. This water is toxic and there' s no easy way to get ride of these toxins until now and with such a large excess of contaminated water simply being considered waste, the potential for companies to step in and help remediate this "waste water" situation grows even more. Some of the growing players in the space include both small and large cap companies working to remediate waste-water.
Pentair Ltd (NYSE:PNR) offers a "portfolio of technology solutions with applications in purification system that require liquid/liquid, solid/liquid, gas/liquid, solid/gas or extraction separations." In an PR released this past week, PNR announced that it is showcasing its latest innovations and integrated solutions for the reuse, treatment and management of water at Singapore International Water Week. During the same week, on June 3 Pentair announced that it completed the change in the place of incorporation of the publicly traded parent company of Pentair from Switzerland to Ireland. Based on these two most recent developments, PNR seems to be headed toward an international focus which could open and entirely new market for increased sales.
PNR reported 1st qtr 2014 earnings of $0.73 per share on 4/22/14, which met the $0.73 consensus of the 18 analysts covering the company. Even with this, PNR's quarterly filing reveals a drop in many of the items on its balance sheet including net sales and gross income. Despite these results, PNR has outlined its 2014 operating objectives, which consist of continued integration of Pentair, Inc. & the Flow Control business and optimizing its technological capabilities to increasingly generate innovative new products. To this extent, PNR remains steadfast in building its through the year. A closer look at this filing would reveal that the potential drop may have been a direct result of "material and other cost inflation".
In any case, Pentair appears to be focused on global expansion and states that it will look to begin expanding its geographic reach internationally along with expanding presence in various channels to market by acquiring technologies and products. This could greatly broaden the businesses' capabilities and, in turn, increase the opportunity for realized profit.
Since the end of May, PNR has seen a strong increase in share price moving from a May 20th close of $73.02 to a high this week of $79.20 representing a 8.5% jump in price in less than 3 weeks. PNR has been relatively sideways since the end of April so with these latest announcements, it would seem that investor sentiment is favoring the company heading into June. I think that as long as PNR continues to update shareholders with new information on the 2014 objectives, positive movement may be the result. It has been a fairly cyclical trade since last year so I feel that after the most recent pull-back Pentair could continue on this uptrend
Another company in the industry focused on frack water remediation, Veolia Environment SA (VE), has had a strong rebound this year. After hitting 2014 lows of $15.60 in late January, VE rose 30% through April and hit a high of $20.31. Following a pull-back in May, Veolia has recovered nicely and even hit its 45 day high of $19.77 during Thursday's session; still up 27% from January making this one of the biggest movers in this report.
This France-based water specialist has grown to nearly $10 billion in market size and employs more than 200,000 people. Veolia Environnement SA recently yielded an attractive 5.4%.
Following the company's latest quarterly report, management reported some favorable results. In the Earnings Call, Philippe Gaston Henri Capron, the company's CFO, states not only was VE's EBITDA up 9.6% but also reaffirmed its key objective for 2015 of being "in a position to actually generate enough net earnings and enough cash to fully cover the dividends paid to the shareholders and to our minority partners."
In addition to that, VE's CFO reaffirmed its 2014 objectives, which he states, "comprise a return to revenue growth; a growth in our adjusted operating cash flow at constant exchange rates around 10%, and as you've seen, our Waste and Water business are on track to achieve this early this year; a reduction in our financial expenses; a significant growth in adjusted operating income; and significant growth in adjusted net income."
I believe that bulls like Veolia's $400 billion market, while bears worry that it can't grow briskly and that it may have overexpanded.
For those looking for something a bit more affordable, I've looked at 2 more companies focused in oil & gas water remediation. Codexis, Inc (NASDAQ:CDXS) announced its earnings in early May on a company conference call with CEO John Nicols. SA Transcripts recorded the call and dictated its results via the following link: Codexis' (CDXS) CEO John Nicols on Q1 2014 Results - Earnings Call Transcript. Throughout the call, Mr. Nicols expressed several key developments for the company during the first quarter of 2014 and of note the company saw a decrease in cash burn of $300,000 which was a "very positive result [that] was helped in part by our announced sale on March 13 of our Hungarian subsidiary to Intrexon for $1.5 million." Traditional analysis of cash consumption tells us that the lower the burn rate, the better a company is self sustaining, and CDXS has managed to become more sustainable through sales of its subsidiaries such as with Intrexon.
However, all results weren't as favorable. SVP and CFO of Codexis, David O'Toole stated that in the quarter, the company reported total revenues of $7.1 million, a 38% decrease from $11.5 million in the first quarter of 2013. Product revenue for the first quarter was $3 million, a 67% decrease from $9.1 million in the first quarter of 2013. After plummeting to near 6-month lows late in May, Codexis has slowly begun to rebound and as of the close on Thursday, CDXS has come back more than 14% through June. The Second quarter is coming to a close this month, and the stock price for CDXS continues to slowly rise amidst these results my question now is, how will Q2 fair? My preliminary thought on Q2 is that CDXS may begin to find revenue potential from its Biocatalyst R&D and through the success it's found through the Company's product share arrangement with Exela Pharma Sciences. In the first quarter of 2014, R&D revenue was $2.1 million, an increase of 65%, compared with $1.3 million for the first quarter of 2013. Furthermore, revenuewith respect to the argatroban injectable drug was $1.9 million in the first quarter of 2014 which was an 86% increase from $1.0 million in the first quarter of 2013. For these two reasons, I think CDXS could be positioned for stronger Q2 results above what Q1 has already shown.
Finally, and most notably for me as a small cap reporter, OriginOil, Inc. (OOIL) has come across the radar for a viable OTC play in the space. This company has also developed a water cleanup technology for the oil & gas industry helping clean up produced water and recycle fracking water in order to reduce harm to the environment and lower costs. According to the company, OriginOil's Electro Water Separation™ technology can be utilized to continuously remove oils, suspended solids, insoluble organics and bacteria from produced or 'frack flowback' water. OOIL states that recycling frac flowback water and produced water for future fracking operations can save as much as $200,000 per frack job.
For this company, the market has been a bit of a bear but lately volume has continued to increase.
Over the past 10 days the company not only announced the successful demonstration of its CLEAN-FRAC 1000, it has also reported that the company will now ready the system for full-scale commercial applications. Though the stock has seen a recent decline during the later part of May and early June, it has recently begun to rally. At the close of the Thursday session, OOIL has run back as much as 49% from Monday when it hit a high of $0.195 Thursday afternoon, making this the highest moving stock on the list.
A quick glance at the company's most recent filing will show that OOIL has realized significant revenues with respect to the previous year's Q1. The company does point out that it had minimal revenues due to a major focus on product development and testing. In addition, OOIL management states that it is not focused on immediate sales of equipment but on licensing or private labeling type transactions, which it believes has the potential to yield stronger long-term revenue. I believe with a full commercialization strategy rolling out, there could be more to see from this company. Obviously, this is a small cap stock and may have more risk involved because of its price.
In natural gas operations, 3 to 5 million gallons of fresh water are used to frack a single well. The EPA estimates that around 35,000 wells are fracked every year in the United States. While fracking technology promises to unleash an abundant supply of inexpensive natural gas to power the modern world, water is quickly becoming serious limiting factor. Additionally, the water comes back out from the wells laced with contaminants that require rapid and efficient water treatment.
According to the U.S. Department of Energy, an average of 3 barrels of contaminated water is generated for each 1 barrel of oil produced. In the United States, the average is 7 barrels of water. Greentech Media reports "energy companies pay between $3 - $12 to dispose of each barrel of produced water, implying a potential world market value between $300 billion and $1 trillion per year."
Having found juggernauts like Exxon (NYSE:XOM), BP (NYSE:BP), and Chevron (NYSE:CVX) produce anywhere from 3.5-5.3 million barrels of oil per day, the obvious need for companies like these comes to the forefront and technology offered by remediation companies shows opportunity for new business to be created. The US is quickly becoming the leader for oil and natural gas production with water being a major resource for procuring the "payload". There's an open door for companies like these to come in and keep operations clean and streamlined while offering the investment community and ability to benefit from a complementing industry.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.