The EPA And Fracking: How To Capitalize - Part 1

by: Michael Filloon

The technology of fracking has allowed for the recovery of resource once thought impossible. It has improved significantly and looks to be driving an oil renaissance in the United States. This process uses millions of gallons of water per well, and has environmentalists up in arms. Claims of ground water pollution have the EPA investigating. Although this is about oil, the bigger story may be water. Water covers a little over 70% of the earth's surface. Only 1.7% of this is found as groundwater. The Williston Basin has no shortage as the Missouri River and Lake Sakakawea easily meet demand. Areas like the Eagle Ford in Texas, are much dryer and have had difficulties. Problems in the Marcellus include regulations in the disposal of frac water. This decision created worry for oil companies and investors. If a state could regulate the industry it is possible that the federal government could add regulations of its own.

The majority of information from the media has been focused on the possible pollution of groundwater. Different types of chemicals are used in the drilling and completing of unconventional wells. Environmentalists are concerned these chemicals have found their way into drinking water. Oil and gas companies are already beginning to develop biodegradable fracking fluids like Flotek (NYSE:FTK). After Haliburton (NYSE:HAL) was pressured by the EPA to disclose chemicals used in its fracking fluid, it released many of these chemicals on its website. Haliburton also announced it had a green fracking fluid sourced completely from the food industry. Guar gum is used by many of the industry players, and has been a substitute for diesel fuel. In many of the colder areas (such as the Bakken) diesel fuel is still used.

The oil industry has been moving quickly to decrease the chances of ground water contamination. In June of 2009, the Safe Drinking Water Act was amended to appeal the exemption provided to the oil and gas industry. This amendment followed instances of possible ground water pollution, in which some thought oil companies were at fault. In May of 2011, Chesapeake (NYSE:CHK) was ordered to pay $900000 for contaminating 16 families' drinking water in Pennsylvania. Encana (NYSE:ECA) has been providing drinking water to 21 families in Pavillion Wyoming, after the EPA found chemicals in their aquifer. Cabot (NYSE:COG) recently halted delivery of water to residents in Pennsylvania, who accused the company of polluting the drinking water. These residents maintained their water was unfit to drink, but state environmental regulators disagreed.

Stories about possible frac contamination are plentiful. Fracking itself Is very safe. This process is straight forward, as seen in this video from Northern Oil and Gas' (NYSEMKT:NOG) website. In drilling, ground water does have contact with the drill bit, and drilling fluid. The casing and cement create a barrier between the well and ground water. If the casing and cement are not properly installed there could be contamination. There have been instances of the casing and cement failing. This could be a structural problem, or poor installation. A Denbury (NYSE:DNR) well near Killdeer, North Dakota reported leaking of its casing. The water system in this area was tested and deemed safe. In November of 2010, Whiting (NYSE:WLL) had a well near New Town, North Dakota that was shut down after a valve failed near the well head. Neither well caused environmental damage.

The story is the same no matter where researched. There are numerous articles written on the possibility of fracking polluting ground water. The problem with this is the word possibility. There is very little to prove this is happening. North Dakota, Texas, and Oklahoma, are the home of thousands of unconventional wells. If we look at all of these wells there is very little to prove the fracking process is environmentally unsound, if done properly. If this technology were flawed, there would be consistent reports of pollution.

I am unsure as to what types of rules and regulations are being proposed in other unconventional plays, but there are some interesting changes in the Williston Basin. These changes are being done by the state of North Dakota. These are not done by the EPA, and in my opinion should be at each state's discretion. The changes can be found here (pdf).

Upcoming water regulations in fracking are creating significant changes. The biggest question is how do we make some money from it? In my opinion, there are several ways to do this, including both bullish and bearish views. There are both big and small companies that will profit, with many off of the radar. I think it is very important to look into some industries that could see major changes in the way they do business. The industries I am bullish on are:

  1. Water filtration systems and parts.
  2. Mobile onsite water filtration
  3. Green frac fluid production
  4. Water Testing

The industries I am bearish on are:

  1. Oil Service
  2. Trucking Companies

In part two of this series I will begin covering the companies in these six industries, and specifically list those affected.

The recycling of frac water could become a big business. Companies like General Electric (NYSE:GE), Siemens (SI), Cameron (NYSE:CAM), Veolia (VE), and Heckmann (HEK) all produce products and services focused on water filtration. These businesses should see growth, as we are in the beginning stages of oil and gas water filtration and conservation. Oil production companies not only will see trucking costs decrease, but more importantly, these companies are able to get rid of the dirty water and its liability.

Disclosure: I am long FTK.

Disclaimer: This is an article on the growing business of recycling frac water. It is not a buy recommendation.

Continue to Part 2 >>