Investing In Fracking Water Solution Providers

by: Alex B. Gray

Hydraulic fracturing (or fracking) is not a new technology and has been used in the oil and gas industry since the 1940s. However, in recent years there has been a tremendous amount of scrutiny put on the process of fracking. This new focus resulted from the need to unlock vast reserves of oil and natural gas trapped in shale formations deep beneath the earth's surface. However, to unlock these deep shale reserves, water usage in the drilling process has increased dramatically.

According to Chesapeake Energy Corporation (NYSE:CHK) it takes on average 4.5 million gallons of water to drill a single horizontal deep shale oil or natural gas well using the traditional fracking process. All of that water must be hauled to the drill site and then the flowback, which is generally 20%, but can be as high as 50%, must be either treated on site or hauled away to be treated elsewhere. In addition to the usage of water, concerns regarding the chemicals mixed with the water and whether or not that is tainting drinking water have also become a heated topic of conversation.

The water handling business is very fragmented and is generally done by smaller local companies. However, one company that has become a pure play when it comes to providing water services in some of the nation's most prolific shale plays is Heckmann Corporation (HEK). HEK provides a turnkey water solution for the fracking industry including sourcing, transport, storage, flowback and produced water treatment, disposal and well testing services. To support these services HEK owns and operates approximately 450 trucks and 425 trailers with an additional 300 new trucks on order. The company also owns 1,100 frac tanks that are available for lease, 24 permitted disposal wells, a disposal pipeline that will be 70 miles long when completed, a 40-mile-long fresh water pipeline and 200 miles of temporary piping. The company claims it has the largest LNG fleet in the United States and has 200 LNG-powered trucks hitting the road over the next several months.

While it is the handling of the fresh and flowback water that presents the immediate profit opportunity for HEK, it is the produced water over the life of the well that will keep a steady stream of revenue rolling into the company. This brine water is produced over the life of the well as it produces oil and gas and should provide a predictable and stable flow.

While Heckmann is the all in one solution, other companies are more specialized plays in the same market. Canadian company, Poseidon Concepts (OTCPK:POOSF), provides a fleet of modular tank systems on a lease basis to the oil and gas industry. The company leases the tank systems and also provides for the transport, set-up and teardown of the systems. The modular tank systems offer advantages over steel tanks and digging pits. The systems are much quicker to set up and use fewer truck loads than the steel tank systems and are more environmentally friendly and less invasive than the traditional digging of pits.

Poseidon is a focused on building its business in the unconventional oil and liquids-rich natural gas plays in the United States and Canada. This focus should help it avoid the impending decline in dry natural gas exploration. While Poseidon is currently a play on the onsite handling of fluids, management fully intends to continue expanding the company and become a more turnkey provider in the fracking fluids solutions and services industry. As an added bonus, the company currently pays a monthly dividend of $.09 per share giving the stock a yield of nearly 7%. The stock is up nearly 25% just since the beginning of the year and 44% from the middle of December.

With Poseidon providing the water storage, there is still a need to treat both the flowback and produced water at the well. Otherwise the water will need to be loaded in tankers and hauled away. One company that aims to solve this issue is Ecosphere Technologies, Inc. (OTCPK:ESPH). The company has a portfolio of patents and it is the company's patent for its Ozonix® Technology that may be the big winner.

In 2011 the company's wholly owned subsidiary, Ecosphere Energy Services, LLC, (NYSEARCA:EES) signed a 16 unit $45 million contract with Hydrozonix, LLC. This contract transitioned EES from an oil and gas services company to a manufacturer of equipment and a licensor of the Ozonix® technology. The parent company expects to report revenue in excess of $20 million for 2011 and is continuing its effort to reduce outstanding debt. While the company has a very promising technology, the stock is not for the faint of heart. The company is not well capitalized and the technology, while in operation, is still in the early stages.

Getting the water to and from the drill site is still a major issue for many in the oil and gas industry as demand for tankers and those who drive them is outstripping the current supply in some areas. Struggling trucking company, Frozen Food Express Industries, Inc. (NASDAQ:FFEX) is hoping not only to fill this gap, but turnaround its own fate. Since late July of last year, the stock has plummeted 65% due to continued losses. The company has been working to streamline operations and reduce the average age of its fleet. Furthermore, in November 2011, the company announced that it would expand its presence in the lucrative frac water transportation business by increasing the total number of tank trailers to 40. The company estimates this expansion may add as much as $30 to $35 million in revenue and provide a significant margin contribution.

With a continued focus on streamlining and the addition of these high utilization services, prospects for the company and its stock price may just be headed higher. However, it is important to keep in mind that FFEX is still primarily a temperature-controlled, and to a lesser extent, a dry freight trucking company with total revenue approaching $400 million. Therefore, the addition of the tanker business should bring a welcomed boost. It will still need to execute on the primary business to please investors.

With the EPA now breathing down the industry's neck regarding water usage and contamination, alternative technologies such as the one used by GasFrac Energy Services Inc. (OTC:GSFVF) could greatly reduce the water requirement that the above companies currently service. GasFrac has developed a proprietary technology they have termed the Vantage™ LPG Fracturing Process (Vantage). Instead of using the typical fracturing fluids such as a mixture of water, sand and chemicals, the Vantage process uses gelled liquefied petroleum gas (NYSE:LPG).

GasFrac believes its process has significant benefits over traditional hydraulic fracturing. One major advantage is the process requires no water, which results in less clean up and eliminates the waste water treatment issue of the flowback water. Also, while up to nearly half of the conventional fracking fluids can remain in the reservoir nearly 100% of the LPG can be recovered allowing the well to function more efficiently. Of course all good things come with some drawbacks. The cost of the Vantage process is more expensive up front on a per well basis than traditional fracking methods. However, the company claims those additional costs are offset on the back-end through increased production from the well. In addition, there are issues concerning the safe handling of a flammable substance like LPG. The company has addressed the safety issue through strict safety standards and the use of isolation systems to help prevent combustion in the case of a leak.

The technology using LPG in the fracking process is still relatively new, but seems to be gaining traction as the oil and gas industry is faced with increased scrutiny for the use of traditional fracking methods. The company's stock was punished in 2011 due in part to unfavorable spring drilling conditions. However, the signing of a new contract with Husky Energy, Inc. (OTCPK:HUSKF), a larger fleet and an increased presence in the United States may be just what the company needs to help it minimize the impact of the Canadian spring thaw going forward.

The recent decline in natural gas prices may put some pressure on these stocks as drillers start to back away from dry natural gas projects. However, in many cases, the capital is just being redirected to liquids-rich plays that also use hydraulic fracturing. As long as pricing for oil and natural gas liquids remains strong, any reduction in the use of fracking services due to low natural gas prices should be temporary.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in OTC:GSFVF, HEK over the next 72 hours.