The EPA And Fracking: How To Capitalize - Part 3

Includes: CAM, FTK, GE, NES, POOSF
by: Michael Filloon

<< Begin with Part 1

In Part 2 of this series, I covered a few companies with ties to the up and coming industry of frac water. This industry is interesting, as new rules and regulations could create significant growth in companies transporting, storing, and treating the water used in fraccing. Cameron (NYSE:CAM) is a safe play focused on the oil and gas industry, and a large percentage of its business deals with the frac water industry. Heckmann (HEK) is a pure play on the transport and disposal of frac water, and is a name the could benefit greatly from upcoming water regulations in the oil and gas industry.

General Electric (NYSE:GE) is one of the most innovated companies when it comes to the frac water industry. This is a one-stop shop for unconventional natural gas frac water recycling. The first part of the equation are mobile plants. The second are central plants and lastly disposal filtration.

GE's mobile evaporator is a water treatment site with the ability to move from one location to another. Because the expense of trucking water can be has much as $10/Boe, these units not only come to the well site, but also provide recycled water that can be used on other wells in close vicinity. If a company has water infrastructure to pipe frac water from the site, a central water recycling facility can be used. If the water is already being transported by pipe, it can also be piped to a central location and then back to well sites for reuse. Disposal well treatment is also important. GE can supply chemicals and filtration to disposal wells. This reduces chances of plugging and lengthens times needed between cleaning. GE states it expects a 95% frac water recovery rate. It reduces community impact by up to 65% lower truck haul requirements. Most importantly, it meets the current federally proposed requirements.

If an investor was looking for a high risk/reward play, Poseidon Concepts (OTCPK:POOSF) may be a good pick. It specializes in fluids handling systems for onshore oil and gas applications. These modular systems come in different sizes and can accommodate up to 41000 barrels of frac water. Poseidon systems are set up in two truck loads versus 50 truck loads on a tank farm. Poseidon systems set up in four to six hours versus three to five days for a tank farm. Poseidon systems are less expensive by up to 70% in the winter.

Poseidon's systems can be used to replace lined pits. These pits have been criticized by environmentalists over worries linked to the leakage of fluids. Poseidon's systems have advantages:

  1. Faster to complete
  2. Lower environmental footprint
  3. No state permit needed
  4. Safer for wildlife

75% of Poseidon's systems are in the United States with the other 25% in Canada. Land owners have been critical over the use of lined pits, with pollution being the concern. The majority of problems with lined pits are environmental. I would like to make clear these pits have been safe with most not causing any problems. Poseidon's systems are green and perform better:

  1. Fewer fluids truck loads
  2. Requires less heat in the winter
  3. Offer indication of leaks
  4. Have had zero failures
  5. Lower remediation costs
  6. Lower environmental footprint because its above ground
  7. Less hazards for wildlife

Poseidon is an interesting way to play changes in water rules and regulations in the oil and gas industries. Its contracts allow for steady income, which translates into a very nice dividend for investors. Its products are in most of the biggest shale plays in the United States including the Bakken, Eagle Ford and Marcellus.

Flotek Industries (NYSE:FTK) also has a lot to gain from EPA regulations. Its business is composed of three divisions:

  1. Chemical Technologies
  2. Drilling Technologies
  3. Artificial Lift Technologies

For the purposes of this article, we will concentrate on its chemical products. Fraccing fluids have been an environmental concern. There have been little if any, documented cases of fluids used in fraccing contaminating ground water. Once the casing is cemented in place, the well and water no longer have contact. Because of this there is very little chance of fraccing fluids entering the groundwater. If the cement and/or casing fail there is a possibility these fluids will enter drinking water. Its a small chance, but I think the EPA will err on the side of caution. Fraccing fluids can contain several ingredients harmful to aquifers, including the often mentioned diesel fuel. Flotek offers complex nano-fluids (microemulsifiers) that increase production and are environmentally friendly. If there are regulations stopping the use of current fluids, Flotek's would see significant increases in sales of its technology.

Even if there are no new regulations on fraccing fluid, Flotek is still well placed. Last quarter's earnings were quite good as it not only beat earnings per share, but revenue and there was a fifth straight quarter of margins expansion.

In summary, these companies are all good ways to play the ever increasing role of water in oil and gas production. I am not a big fan of regulation, as it tends to stunt business growth, but the amounts of water being left below the ground after each frac is significant. If a large portion of this water is brought to the surface, it will need to be cleaned. Mobile treatment is the most cost effective as it removes trucking from the equation. Pipeline could be used to pump dirty water to a central location to be cleaned and then pumped back to the well location. Although there is not certainty, it seems only a matter of time until these technologies are brought to use.

Disclosure: I am long FTK, HEK.

Additional disclosure: This is the third installment of articles covering companies that are well positioned to grow from EPA regulations. This is not a buy recommendation.