FRAK Analysis: Why Investors Should Focus On Hydraulic Fracturing And Oil Sands

| About: VanEck Vectors (FRAK)

It may not make me popular with Daryl Hannah or Robert Redford, but a very large chunk of my portfolio is focused on unconventional oil and oil sands producers. My exposure is most heavily weighted to the former which fully rely on hydraulic fracturing, but I also think there are several compelling opportunities in the oil sands.

It isn't that I don't care about the environment, it is just that I'm a realist. And realistically the world is going to need all the oil that it can get over the next fifty years in order to run our economies and feed our people. And since that is the case, I might as well make some money from it rather than suffer along with everyone else from increasingly higher oil prices.

I should also mention that I don't think the environmentalists understand hydraulic fracturing. If there is water contamination near a well that has been "fracked", it isn't because of hydraulic fracturing. Rather, it is because of a poor cement and lining job of the well as it passes the underground water zone. This has nothing to do with the fracturing which occurs thousands of feet below impenetrable rock, and is just as likely to occur in a conventional oil or gas well.

What fracturing has done is open up previously useless oil and gas deposits which has brought the oil and gas business closer to populations which have no experience with it. This is a big contributor to the overreaction and confusion amongst the general public.

Unconventional is the Way to Go

Over the past couple of years I've looked at a lot of oil and gas companies as potential investments. The conclusion I've come to is that my two favorites are those that are producing from unconventional tight oil or shale resources and those that produce from the oil sands.

There are a few reasons for this.

One is that I can observe that companies in these two areas that are virtually 100% focused on oil and aren't exposed to weak natural gas prices.

A second is that there is little if any exploration risk involved as these companies know that the oil is in place on their properties in massive amounts. The oil is there, the hard part has always been figuring out how to produce it economically.

The third is that I believe the stock market is greatly underestimating the amount of oil that these companies will produce from their resources over time. As technology improves, these holders of enormous amounts of oil in place will learn how to recover more and more of it.

This week I found an ETF that seems to share my appreciation for the unconventional portion of the oil business. The ETF is the Market Vectors Unconventional Oil & Gas ETF and it trades under the symbol (NYSEARCA:FRAK).

FRAK's mandate as detailed in its fact sheet is:

The Market Vectors Unconventional Oil & Gas ETF seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Market Vectors Unconventional Oil & Gas Index. The Index is a rules-based index intended to track the overall performance of the largest and most liquid companies involved in the exploration, development, extraction, production, and/or refining of unconventional oil and natural gas. Constituents must generate, or own properties that have the potential to generate, at least 50% of revenues from unconventional oil and gas. The unconventional segment is defined as: coalbed methane (CBM), coal seam gas (CSG), shale oil, shale gas, tight natural gas, tight oil and tight sands.

Shale sedimentary formations, such as the Marcellus and Bakken, have seen surging interest from E&P companies as "fracking" the hard rock has become commonplace. Using this drilling technique, the U.S. now has access to an abundance of natural gas and shale oil. Natural gas prices have fallen from a peak of around $15 per million BTUs in the early 2000s to today's $3.

While not as familiar to many investors, coal-bed methane refers to natural gas that has been absorbed into coal and is extracted much the same way as shale gas.

Oil-sands assets refers to Canada's vast fields of sand/clay that are mixed with petroleum. Companies either mine the soil or use a combination of horizontal drilling and steam injection to extract the hydrocarbons locked within.

The top twenty positions of FRAK as of February 15 were:




% of net assets


Occidental Petroleum Corp




Canadian Natural Resources Ltd




Eog Resources Inc




Devon Energy Corp




Hess Corp




Noble Energy Inc




Williams Cos Inc/The




Chesapeake Energy Corp




Encana Corp




Pioneer Natural Resources Co




Talisman Energy Inc




Crescent Point Energy Corp




Southwestern Energy Co




Concho Resources Inc/Midland Tx




Penn West Petroleum Ltd




Nexen Inc




Range Resources Corp




Consol Energy Inc




Eqt Corp




Denbury Resources Inc



Now I love the idea of this ETF and think it is on the right track to outperformance over the next ten years. However, I think it is way too heavily weighted to bigger producers many of which only have unconventional plays as a portion of their asset mix.

I own two of the above holdings, Chesapeake and Penn West. For the rest of my portfolio I am focused on much smaller companies that Mr. Market has greatly overlooked and that are pure plays on either unconventional light oil or oil sands. That does, however, make my portfolio pretty volatile, which is not for everyone. For a less volatile approach to the unconventional revolution that is going on in the oil business, this ETF might be worth a try.

Disclosure: I am long CHK, PWE.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here