It's hard out there for a hydraulic fracturing company. Tuesday's state and local elections dealt yet another blow to fracking after a series of defeats the industry has suffered on the public relations battleground. The impact of any single event is certainly debatable, but the fact remains that fracking companies are doing a terrible job of making the case for their service, and it could end up costing them more dearly than they realize.
And now, as if to compound the industry's glaring communications deficit, a new report is out today that finds a systematic, industrywide failure to adequately disclose fracking-related information that is material to investors. Disclosing the Facts: Transparency and Risk in Hydraulic Fracturing Operations, benchmarks 24 fracking companies against investor needs for risk disclosure and mitigation.
The thing is, fracking may really not be as awful as the campaigns make it appear, but the industry is going to have to rethink its strategy or risk condemnation in the court of public opinion.
Go frack somewhere else
On Tuesday, voters in several cities -- three in Colorado and one in Ohio -- banned or temporarily halted fracking within their territories, while another vote in Broomfield, Colorado was too close to call at the time of writing. Industry representatives dismiss the ballot measure outcomes as irrelevant, in that they cover areas with little or no natural gas production. In related news, the same executives collectively buried their heads in the sand.
Sure, the individual jurisdictions may not themselves be fountains of gas goodness, but they're pretty close to areas that are. Broomfield is a suburb of Denver. Reference the map below for the Denver Basin. Hard to ignore.
Seriously, these guys have got to step up their game if they want to survive. At last week's SRI Conference on Sustainable, Responsible, Impact Investing, I talked with countless fund managers, investors, financial advisors, and academics, all of whom agreed that while fracking is controversial from a sustainability perspective, the industry's ham-fisted approach to public engagement has been so feeble as to be pathetic.
Considering that fracking interests dumped close to a million dollars into the Colorado ballot measure fight and lost anyway, this may be a fair assessment. You know what activists spent in support of those measures? They splashed out a meager $26,000.
The difference here, at least in part, is that activists are using modern tools, including social media, search engine optimization (SEO), YouTube, and other types of interactive platforms. The industry, ossifying before our very eyes, launched a lame website that until a couple of weeks ago lacked any form of interactivity and was about as appealing as day-old gum. It has since been gussied up, but not in time to sway the outcome of Tuesday's votes.
Let the sun shine in
But there's more to it than that. The industry is failing to talk about things that actually matter. Their narrative is bristling with scientific facts and figures about fracking and its safety, and much of that information is even accurate, but it's beside the point. Companies need to talk openly about their own operations, the risks they identify, and the efforts they take to contain them.
The Disclosing the Facts report considers five broad disclosure categories that are material to investors:
- Toxic chemicals
- Water and waste management
- Air emissions
- Community impacts
- Management accountability, on a play-by-play basis
The authors found wide variation from company to company, although the industry as a whole does poorly. The top performer, Encana (NYSE:ECA), only scored 14 out of a possible 32. Apache (NYSE:APA) placed second with a score of 10. QEP Resources (NYSE:QEP) came in dead last with a score of just 1.
I interviewed Rich Liroff of the Investor Environmental Health Network -- one of the report co-authors -- at the SRI Conference. He highlighted some examples of positive practices among the evaluated companies. Encana, for instance, uses treated industrial effluent in the Haynesville Shale. Apache is conducting a comprehensive review of its chemical use, ambitiously aiming to switch entirely to safer alternatives as designated under EPA's "Design for the Environment" Program. Chesapeake (NYSE:CHK), which scored 5 on the assessment, reports its water use per well and its water intensity on a play-by-play basis. And Anadarko Petroleum (NYSE:APC), also scoring 5, uses "green completions" at wells to reduce methane emissions by 2 billion cubic feet annually.
While these are good initiatives, they are too disparate, and stand out as exceptions rather than the rule in this industry. Far more companies disclose almost as little as QEP Resources. This situation simply has to change, both because the companies have a far better story to tell than the public realizes, and because investors deserve to know more about an activity with such significant risk.
Companies have a lot to win from increasing their transparency here. It might just be the key to securing their future.