In 2012, the United States was the largest petroleum and gas fuels producer, in aggregate, in the world. On a petroleum-only basis, the U.S. places second behind Saudi Arabia, but, before the end of 2013, the U.S. is expected to take the top spot.
The big question some may ask here is why? Over the past several years, Americans have had to contend with $4/gallon gas prices on numerous occasions, so why now are we suddenly the big fish in oil and natural gas?
The fracking revolution
The answer to this boils down to a large and growing trend of hydraulic fracturing (aka fracking). Although the practice can be traced all the way back to 1947, there wasn't a commercial explosion in the business until two studies were released by the EPA, one in 2002 and the other in 2004, which concluded that fracking did not pose a significant environmental threat. A year later, the passage of the Energy Policy Act of 2005 effectively exempted fracking activities from regulation under the Safe Water Drinking Act.
Despite health and environmental concerns, the larger government initiative to drive toward energy independence will likely cause most opposition to fracking to fall on deaf ears. As such, it might not be a bad idea to look into companies that benefit from this trend.
As the largest producer of ceramic proppants (which is what fracking companies pour in between fractures to "prop" them open so that natural gas and oil can be siphoned out of the wells) in the world, CARBO Ceramics (NYSE:CRR) may be an attractive investment opportunity. Last year, the company posted sales of 1.712 billion pounds of ceramic proppant which, when combined with its sales of 129 million pounds of sand and miscellaneous products and services, amounted to revenue of $645.54 million.
In addition to being the big fish in the ceramic proppant market, CARBO Ceramics has attractive margins. With a five-year average return on equity of 15.6% and a net profit margin over the same time of 17.3% while carrying no debt, the company appears to be a rather attractive investment opportunity. When considering the fact that the forecasted proppant market is expected to increase from 60 billion pounds in 2011 to 100 billion pounds by 2017, there appears to be some room to run with this company.
Although we touched on a pure supplier perspective for the fracking market with CARBO Ceramics, we shouldn't forget to include the servicer. With a more than 20% market share in pumping services, Halliburton (NYSE:HAL), should be an interesting prospect. Although the company has been seeing its market share in the fracturing business decline in recent years, its core business has exploded, with revenue growing 55.9% from 2008 to 2012. In 2012 alone, the company posted a respectable net profit margin of 9.2%, a return on equity of 16.7% and a long-term debt/equity ratio of 0.31 as of its most recent fiscal quarter.
USA Compression Partners
The final company that we will be looking at is USA Compression Partners (NYSE:USAC), a provider of compression services involved in the storage and transportation of natural gas. With 968,178 horsepower of compression capacity and a 94% utilization rate as of its most recent fiscal quarter, USA Compression Partners has a large footprint in a still very small industry. It is one of the largest independent providers of compression services in the United States.
In addition to being one of the larger compression-only companies in the industry, USA Compression Partners has been growing its revenue 24.8% from $95.2 million in 2009 to $118.8 million in 2012. Currently, the company has a long-term debt to equity ratio of 0.67, which is reasonable, but its net profit margin has declined from 22.3% in 2009 to 3.8% in 2012 as selling, general and administrative (SG&A) and depreciation and amortization expenses have risen as a percentage of income.
Looking at the fracking industry and assessing the political and economic forces that are pushing it forward, it is fairly easy to imagine a future where the United States continues to profit off of these activities. As such, investments like the ones described above should attract enterprising investors who are looking to get into what could be a fast-growing industry that has only just begun to take off.
While each company above presents some appeal, it would appear that CARBO Ceramics and Halliburton will likely be safer opportunities, whereas USA Compression Partners will likely offer more of a double-edged sword approach to investing. However, if all three companies play their cards right by not making too many mistakes, it is highly likely that they will each be able to ride the fracking wave to a brighter, more profitable future.