Institutional Shareholder Services has included hydraulic fracturing in its 2012 draft policies for investors. The corporate proxy firm is using the new policy to clarify its support for shareholder proposals that are aimed at increasing disclosure of natural gas producers' fracking operations.

Growing concern
Shareholders began submitting proposals to fracking companies in 2010, requesting information on policies and practices. That year, they received 30.3% of shareholder support. This year, that number grew to 40.7%. In the meantime, media attention over fracking continues to grow.

ISS proposal
The ISS proposal aims to increase fracking companies' level of disclosure, including being transparent about the measures a company takes to protect drilling communities. ISS would recommend companies provide the following information:

  • Current level of disclosure of relevant policies and oversight mechanisms
  • Current level of disclosure compared with its peers
  • Relevant local, state, or federal regulatory developments
  • Controversies, fines, or litigation related to the companies' hydraulic fracturing operations

This information is crucial for shareholders. First, companies are all over the map about what they disclose and how they disclose it. Some companies use their own website, while others use regional or association websites.

On top of that, every state has its own laws and policies regarding fracking, some of which are still being worked out. The EPA announced just last week that it is delaying a specific rule on emissions standards for hydraulic fracturing by one month, pushing it back to April 2012.

Finally, this industry is rife with litigation. These lawsuits are not just targeted at gas companies; in some cases, citizens are suing other citizens over issues varying from mineral and land rights to pipeline opposition. The outcomes of such cases stand to have an effect on gas companies even if they are not directly involved. Of course, they are often directly involved.

Who does this affect?
Several companies are currently involved in lawsuits related to their fracturing practices, including Chesapeake Energy (NYSE: CHK), Cabot Oil & Gas, and Range Resources. There are plenty of other companies at risk, though. The U.S. is the No. 1 natural gas producer in the world; the top 10 producing companies are below:

Rank

Company

Q2 Production (MMcf/day)

Q1 Production (MMcf/day)

Year-Ago (MMcf/day)

1 ExxonMobil (NYSE: XOM) 3,842 3,904 3,909
2 Chesapeake Energy 2,575 2,703 2,497
3 Anadarko 2,326 2,412 2,324
4 Devon Energy (NYSE: DVN) 2,029 1,964 1,982
5 Encana (NYSE: ECA) 1,864 1,801 2,240
6 BP (NYSE: BP) 1,833 1,905 1,875
7 ConocoPhillips (NYSE: COP) 1,651 1,589 1,822
8 Southwestern Energy 1,347 1,277 1,077
9 Chevron 1,299 1,270 1,317
10 Williams (NYSE: WMB) 1,203 1,155 1,099

Source: Natural Gas Supply Association.

In other cases, lawsuits from state or local governments threaten to ban the practice altogether. Hydraulic fracturing is used in the majority of natural gas wells, so any company that produces natural gas in the U.S. is essentially at risk of losing business.

Foolish takeaway
ISS has extended its comment period until Nov. 7. Hydraulic fracturing is a hot-button issue right now and presents the perfect opportunity for shareholders to proactively protect their investments. Interested investors may also want to consider what Motley Fool analysts consider a brilliant alternative play on natural gas.