Wednesday, April 20, 2011
"We paid $100,000 per stage in 2009. We just got a quote for $400,000 per stage..."
I was on the phone with a good friend this week. He's an independent oil & gas producer who has been in the business for more than 30 years... and he's paying a lot more for frac jobs than he used to...
"Fracking" (hydraulic fracturing) is the process used to crack open vast underground rock formations to release the oil and gas inside.
It's a controversial subject in some areas (read my colleague Frank Curzio's recent essay for details), but there's no question it's a game-changing new technology. Just a few years ago, you couldn't get the oil and gas out of rocks that produce thousands of barrels and millions of dollars in cash flow today.
All that fracking is putting a huge tailwind behind one energy sector right now...
My friend drills horizontal wells in the Eagle Ford Shale of Southeast Texas. The horizontal portion of the wells is divided into sections or stages. Each stage is blocked off and fracked.
Back in 2009, his company paid less per stage and had fewer stages. But as the engineers figured out the best combination of fractures, they began adding stages. A frac job in 2009 cost about $1 million to $1.5 million. Today, it costs about $8 million and includes twice the number of stages.
Giant oil service company Halliburton, which does a booming frac business, just put out its first-quarter results. Its numbers confirm just how profitable the fracking business is.
The company's fracking division raked in $3.2 billion in revenues in the first three months of 2011. That's $1.2 billion more than the same period in 2010. Income grew 177% ($477 million) in that same period.
The company attributed much of this growth to the popularity of fracking and "improved pricing" in the U.S. (That's part of the 300% jump in costs my friend mentions above.)
Halliburton isn't the only one in the oil services sector enjoying a cash boom. Take a look...
This chart of the Philadelphia Oil Service Sector Index shows the result as clearly as Halliburton's astonishing quarterly results. For now, big service companies like Halliburton and Schlumberger can escalate prices practically at will.
And they're not as vulnerable to a drop in sky-high oil prices as you might think...
Low gas prices and rising oil prices combined to spur investment in horizontal drilling and fracking of "oily" shales like the Giant Bakken Shale of North Dakota, the Niobrara Formation of Colorado, and parts of the Eagle Ford Shale of Texas. That investment unlocked countless new shales that are economic at much lower oil prices than we see today.
So even if oil prices drop, drilling and services will continue to generate big cash flows... which will continue to drive a long-term bull market in these stocks. I wouldn't chase the sector at these levels... but on a healthy correction, I'll look to get into these stocks.
The fracking boom has turned some of Matt's recommendations into huge winners. Last summer, he wrote two essays on companies that could benefit from the new technology. Find them here: How to Invest in America's Biggest Energy Trend and Drilling Is Just Getting Started at the Next Big U.S. Oil Play. (His recommendations included one triple-digit gainer... and three more up 80%-plus.)
And in November, he revealed three more companies worth checking out. Those stocks have gone up an average of 32%... so far. Read more here: The Largest U.S. Oil Discovery Since Prudhoe Bay.
Silver prices explode to new multi-decade high... up more than 55% in just three months.
Casino giant Wynn Resorts surges to three-year high... up 20% in a month.
Clothing retailers push to 52-week highs, including Ralph Lauren, Lululemon, Under Armour, and Gildan.
Earnings today… Apple, Altria (big tobacco), American Express, AT&T.