The Little-Known Industry Fracking Relies On

Just like in the panicked Gold Rush that revolutionized the 1800s, fracking in the modern world has created successful business offshoots to support its operations.

Feb 25, 2014 at 10:21AM

Fracking has revolutionized the oil and gas industry. Innovative extraction methods like horizontal drilling and hydraulic fracturing have allowed for increased efficiency and revitalized oil production.

Just like in the panicked Gold Rush that revolutionized the 1800s, fracking in the modern world has created successful business offshoots to support its operations. Support businesses crop up in the birth of new resource booms – and often end up being the true success stories.

It may have been mining equipment and after-hours saloons during the Gold Rush, but today the successful support business thriving in the world of shale is that of proppants.

What exactly are proppants?
Proppants are used to reinforce the tiny cracks opened up by hydraulic fracturing in order to allow oil and gas to flow more smoothly and keep extraction costs to a minimum. Sand is the most common proppant used, holding over 80% market share, with the remainder being a ceramic substitute and resin-coated variety that can also be utilized. Global demand for proppants is currently around 35 million tons, which is expected to grow to 45 million by 2017 with an overall market value of $10 billion according to recent research report by the Freedonia Group.

This industry performed well alongside the market at large for 2013 – the average P/E for proppant stocks was around 22 while the S&P 500 logged just shy of 20. More specifically, oil and gas companies like Pioneer Natural Resources (NYSE:PXD) have experienced so much success with proppants that they are considering using more per job to improve efficiencies and expand margins.

The industry leader in proppants
The clear winner in the proppant industry is Hi-Crush Partners (NYSE:HCLP), a $542 million company that focuses on frac-sand, a crush resistant type of sand used in hydraulic fracturing. The stock is up 144% in the last year but still trades at a reasonable 15 times earnings. Earnings per share (EPS) growth this year was an astounding 30% giving it a PEG ratio of just 0.80. The company has an operating margin of 36% and reported quarterly revenue growth of 217.90% year over year. Hi-Crush pays an exceptionally high dividend with a yield of 5.10% as well. Fundamentally, the stock shows little reason why it wouldn't continue to outperform for 2014, especially with fracking becoming more mainstream.

Risks to consider
Shale mining and fracking are relatively new extraction methods with unknown long-term effects. While the proppant industry has outperformed for 2013, the sector may experience some profit-taking before climbing to new highs in 2014. Because of the unique nature of extraction, future growth rates are subject to change and may affect future EPS estimates.

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Daniel Cross has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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