What Is Fracking?

If you’ve turned on a TV or read a newspaper in the past five years, you’ve probably heard of fracking. Oilmen love it, environmentalists hate it, but for better or worse it’s transformed the United States’ energy position and created a revolution in hydrocarbon extraction.

But what exactly is fracking? There are enough myths spread about fracking to fill a textbook, and understanding the process is key, whether you’re an investor or just enjoy winning arguments against your friends. Fracking, or hydraulic fracturing to use the full term, is the process of injecting fluids into an oil or gas well to create tiny fractures in the surrounding rock. After these cracks are created, sand or other proppants mixed in with the fracking fluid hold them open, allowing hydrocarbons to flow into the well.

The process has made it possible for oil and gas producers to exploit rock formations with low permeability that would otherwise be uneconomical to drill, drastically enhancing production in the U.S. Though the technology has existed since around 1950, only in the last decade has it made an impact, after producers began pairing it with horizontal drilling and exploring new applications in shale rock formations. Now, thanks to fracking, the U.S. is on the cusp of energy independence and is even debating crude oil exports, which have been banned since the 1970s. For other countries with large shale reserves, their own energy revolutions could be just around the corner.

Investing in Fracking

So how can investors get a piece of the action? The good news is that there a number of opportunities to invest in publicly traded companies throughout the fracking value chain. The most direct way is to invest in independent U.S. exploration and production companies, such as Chesapeake Energy or EOG Resources. This gives you direct exposure to production from shale plays, but could leave you vulnerable to changes in oil and gas prices, future production declines, and the high costs associated with finding, drilling, and operating wells.

Another way to play the fracking boom is to invest in oil and gas equipment and services companies – a “pick-and-shovel” investment. Halliburton (NYSE: HAL), Schlumberger (NYSE: SLB), and Baker Hughes (NYSE: BHI) are examples of firms that provide technology, equipment, and consulting in order to facilitate and increase production from shale. Similarly, buying proppant suppliers like Carbo Ceramics (NYSE: CRR) provides exposure to fracking without taking on all the risks of a producer.