Is Fracking Foolish?

Everyone in the Northeast knows about certain governors' hopes that hydraulic fracking will be a panacea for remote parts of their states -- such as upstate New York and northeastern Pennsylvania. But can IPO investors make like Jed Clampett from the hot oil-drilling technology of the moment?

We're about to find out.  C&J Energy Services (NYSE: CJES  ) launched a $29-per-share IPO in July, and FTS International and Platinum Energy Solutions have filed for deals that could happen as soon as this fall.  The picture they paint is one of strong growth, a short path from startup to profitability -- and the risk that high deal prices and Washington's to-and-fro over the budget could leave short-term investors holding the bag.

The first thing that jumps out from the prospectuses is how fast the three companies, all basically oilfield-services outfits that run drilling wells for oil-company clients, are growing. This parallels the explosive -- pardon my pun -- growth of hydraulic fracking itself.

C&J and FTS are putting up top-line growth that would make a computer nerd feel like he was reading a familiar manual. FTS, also known as Frac-Tech, has grown sales 56.5% a year since 2006, reaching $1.3 billion in sales last year.  Frac-Tech also makes a lot of money -- and is boosting profitability faster than sales. Its earnings before interest, taxes, and non-cash charges more than doubled last year, reaching $453.5 million just in the first half of this year. Growth above 50% and margins over 40% are numbers like Intel used to post in the old days. C&J, meanwhile, posted even wider operating margins in the first half of the year, raking in $309.4 million in sales, up fourfold from 2010.

These companies are growing two to three times faster than Exxon Mobil (NYSE: XOM  ) or Chesapeake Energy (NYSE: CHK  ) , yet C&J's price-to-earnings ratio of 5.8 times this year's estimates is lower than almost any energy player, save Valero (NYSE: VLO  ) .

The problem is volatility, though. C&J's $29 IPO price moved as high as $32 and change and began moving down the week of the debt-ceiling standoff in Washington. It dropped almost $10 in the week following the ostensible Aug. 2 deadline for debt-ceiling talks, without any fresh company news, before bouncing up again and then trailing down last month. If anything, it has mirrored recent declines in the cost of natural gas, which reflect recession fears as well as increased supplies. It's now trading at less than 6 times this year's expected earnings -- comically low for its growth rate.

With oil still around $75 per barrel, Washington's follies really mean little for fracking's short-term future. Governors are pushing it hard in the Northeast, and in any case FTS and Platinum are banking on more traditional oil strongholds like Texas and Louisiana, while C&J has a foot in both old-school and emerging energy markets. And down south, we know that politicians like to drill, baby, drill.

Fool contributor Tim Mullaney doesn't own any of the stocks mentioned here. The Motley Fool owns shares of and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Intel and Chesapeake Energy and creating a diagonal call position in Intel. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insightsmakes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 07, 2011, at 5:23 AM, MichaelDSimms wrote:

    Natural gas burns more cleanly than other Hydrocarbon fuels, such as oil and coal, and produces less carbon dioxide per unit of energy released. For an equivalent amount of heat, burning natural gas produces about 30% less carbon dioxide than burning petroleum and about 45% less than burning coal. And we have the 5th largest reserves in the world, question is why aren't we exploiting it.

    That's Fracking interesting.

  • Report this Comment On October 07, 2011, at 10:01 AM, SgtWHood wrote:

    To Simms: There are many reserves for NG, true. Does burning a gallon of oil and an equivalent gallon of NG produce the same heat, a resounding NO. Does it produce the same amount of energy, again a resounding NO. (Coal obviously is the worst fossil fuel when it comes to efficiency but it is the cheapest, least regulated and easiest to transport.)

    NG and Petroleum are equally expensive to drill for but the profit margins on the NG wells are much lower. If much research is done, you will find that NG wells, once they are determined to be NG, are shut in and plugged off until NG becomes profitable enough to collect it. It is a simple numbers game and the bottom line is really the only number.

    Frack THAT! ;-)

  • Report this Comment On October 07, 2011, at 10:44 AM, jwhaley1210 wrote:

    I'm an engineering consultant in the industry specializing in fracturing and have directly worked with every service company out there. I do not know much about the management of either C&J or Frac Tech but on a quality of service basis C&J is world class. Outperforming the majors such as Halliburton, Baker Hughes, and Schlumberger. Frac Tech isn't on par with C&J's quality of service but are decent in themselves. Again, I don't know anything about their management just relaying my experiences working with them in the field.

    Frac'ing is essential to oil and gas development. Most of the wells being drilled onshore in the US would not be profitable if it were not for frac'ing. Also, frac'ng is just starting to catch on overseas. As the reservoirs overseas start to deplete many operators will turn to fracturing to revitalize their wells...this doesn't even take into account the unconventional plays internationally that have to be frac'd to be economical. Pending some sort of idiotic goverment regulation or moratorium, frac companies have a long ways to go especially the smaller ones such as C&J.

    Side not frac is short for fracturing...there is no K in fracturing. Sorry but all these protesters in the Northeast drive me nuts with "stop the fracking signs"

  • Report this Comment On October 07, 2011, at 10:49 AM, jwhaley1210 wrote:

    Sgt Hood, it is true that many NG wells are shut in. However, many of them are shut in because they come online too hard and the surface infrastructure is not in place to handle the amount of gas these wells are producing. Not to mention storing natural gas is much more difficult than oil. You have to drill storage wells and pump the gas back into a more permeable formation for storage.

  • Report this Comment On October 07, 2011, at 10:54 AM, jwhaley1210 wrote:

    I'm frac'ing currently as I type this with a canadian service company called Trican Well Services that may be worth a look as well. They aren't traded on the NYSE yet but they are working on getting there. They are currently traded in the Canadian markets. They too have a good reputation for quality of service.

  • Report this Comment On October 07, 2011, at 8:32 PM, klip1 wrote:

    A big part of the controversy surrounding fraccing is the tremendous amount of water required-- millions of gallons per well-- and what to do with the waste water that returns to the surface that must be treated and/or disposed of.

    Latitude Solutions (LATI.ob) has a proprietary treatment system that appears to be head and shoulders above the competition when it comes to results and volume treated. As in many sectors, the play is not always the companies at the center but those on the periphery providing services the main players desperately need to continue their operations.

    Frac water treatment is becoming a huge problem and a high-profile one. Latitude Solutions (LATI.ob) is a company that could be a real game changer in the O&G frac arena. It's technology is also garnering a lot of interest in the mining and maritime (bilge water) sectors.

  • Report this Comment On October 08, 2011, at 8:03 AM, jwhaley1210 wrote:

    klip very good comment. I'm currently frac'ing in the Pennsylvania and the companies that hire me as a consultant have tremendous water "issues" as you stated earlier. They are resorting to reusing water on multiple wells. While this alleviates the problem of disposing the water, it creates other problems operationally for the fracturing operations. On the well we are currently frac'ing, the water is so "bad" that we are experiening increased treatment pressures due to the water causing the jobs to be drawn out and use more water. I do not know who they use for their water treatment but when the water is treated properly it is advantageous to operations. With water consumption a huge issue in the Northeast, I think you may be on to something with Lattitude Solutions.

  • Report this Comment On October 08, 2011, at 8:08 AM, jwhaley1210 wrote:

    Just to put it in perspective, the well I'm on right now we are using approximately 336,000 gals per stage. There are 6 wells on this pad with a total of 78 stages equating to 26,208,000 gals of water being used on this pad. Thats a lot of water that needs treating after the job is finished.

  • Report this Comment On October 09, 2011, at 1:40 PM, marsconi1234 wrote:

    To jwhaley and klip: very interesting posts. There is a small Houston company called Planet Resource Recovery (PRRY) that has a line of products called Petroluxus that is/are used for increasing oil well production and environmental clean up. It is/they are very environmentally friendly and can be used for cleaning up fracing water. You might want to check out Petroluxus as a very cheap solution to fracing water clean up (as well as increasing well production!)

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