Investing in Fracking Companies

The onset of horizontal drilling and multi-stage fracing has been a major driver of unconventional resource development. Fracking is a technique used to release oil and gas from reservoir rock formations by sending water and sand down a well at ultra-high pressure. The pressurized fluid fractures the formation rock creating pathways for trapped oil and gas to get to the well.

The fracking companies have become a large if not the largest part of the oilfield services sector. The shale revolution which started a few years ago has seen the horizontal rig count climb to record levels; more than 60% of wells drilled in the US and Canada are horizontal. Well laterals (horizontal legs) are also getting longer to maximize contact with the targeted formation which leads to more fracturing stages and greater revenue to fracking companies. It also leads to higher production volumes per well for E&P companies.

wcsb reservoir play summary

Fracking intensity per play

Hydraulic fracturing has evolved from being 10-15% of the well cost to between 30-50% of the well cost in many unconventional wells as fracking intensity (number of stages per well) has been increasing.

North American activity remains strong in liquid-rich plays requiring horizontal wells with multi-stage fracturing treatments. Fracking companies also provide investors with a safe call option on new play developments in the Duvernay, Nordegg, Slave Point, Beaverhill Lake and Muskwa. The following Canadian dividend paying fracking companies are an excellent way to gain exposure to the pressure pumping sector:

CALFRAC WELL SERVICES  CFW.TO $13.38 [-0.34]
Annual dividend $0.50/share
Clafrac is an international service provider with operations in Canada, United States, Russia, Mexico, Argentina and Colombia. The company enjoys a market cap in excess of $1 billion. Calfrac generates 92% of its company revenue from hydraulic fracturing, and the remaining 8% from Coiled tubing and cementing services.

CFW 2011 Revenue

CFW Revenue by geography

Trican Well Services TCW.TO $10.10 [-0.24]
Annual dividend: $0.30 per share
Trican is a large, world-wide, full service pressure pumping company. It is currently the largest pressure pumping service provider in Canada and a leading fracturing company in Russia, with growing operations the United States, Kazakhstan, Algeria and Australia. Its market capitalization of almost $2 billion makes it a favourite fracer among institutional investors.

TCW revenue breakdown

TCW revenue by geography

With 77% of the company’s revenue generated from fracing operations, it offers investors a more diversified exposure to the pressure pumping sector compared to CFW & FRC which derive 90% or more of their revenue from fracking.

Canyon Services Group FRC.TO $10.71 [-0.21]
Annual dividend: $0.60 (insiders own 10%)
FRC is a pure play Canadian fracer with no international operations. The company is the smallest in market cap at around $0.7 billion among its peers CFW and TCW.  FRC derives 90% of its company-wide revenue from fracturing operations. The company boasts the newest fleet of hydraulic pumping equipment in Canada and enjoys a healthy balance sheet with no debt.

All 3 fracking companies will benefit from growth in existing regions of operations as North American oil & gas production rises. However, growth opportunities in new international areas will be limited to TCW and CFW.  In the case of all 3, a significant portion of their equipment was built largely post 2008. This results in lower maintenance costs and an ability to work in the most horse-power intense unconventional resource plays.

While drilling has shifted from natural gas to liquids rich gas and oil plays, these fracking companies provide a call on a recovery of natural gas prices. In Canada, Kimitat’s LNG export facility could change the economics of the Horn River dry gas play by opening up the Asian natural gas market.  Horn River wells are the most frac intensive jobs with up to 30 stages per well. That’s tens of millions in fracking costs, manna for all 3 companies.

Finally, demand for frack equipment is still rising thanks to continued growth in the average number of frack density and the rise in liquids production from unconventional resource plays. Choosing the best stock for your portfolio comes down to evaluating your risk profile. Your decision will take into account balance sheet health, company revenue sources, geographic diversification as well as the outlook for commodity prices. All 3 companies pay a dividend which allows you to get paid while you wait if you believe you are buying in the cycle low.

 

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