Monday, September 10, 2012

6 Stocks that Could Profit from the Natural Gas Revolution

I've received quite a few emails recently from my Scarcity & Real Wealthsubscribers regarding hydraulic fracturing, or fracking. It's clear that many of them have been reading up on the subject. And they should. Because even with stricter regulatory burdens on the horizon, this could well be the most profitable and rewarding subsector of the entire energy universe. In order to understand why, let me take you back a few years in order to understand where we once stood on the natural gas landscape. "The era of inexpensive natural gas is over." Back in 2005, Hurricane Rita struck the Texas coast, Microsoft (Nasdaq: MSFT) released the Xbox 360 console, the Chicago White Sox won the World Series, and the United States seemed to be running out of natural gas. At least, that's what everybody thought. Gas supplies were dwindling, and the only hope for meeting the U.S.'s growing need appeared to be purchases from overseas. In fact, liquefied natural gas (LNG) imports had surged nearly 30% the prior year, and companies were investing heavily in new import terminals. In its annual report to shareholders, Chenier Energy (NYSE: LNG) boldly declared "the era of inexpensive North American gas is over." So investors and consumers braced for a day when domestic natural gas reserves ran dry and incoming tankers hauled in supplies from distant lands. That day never came. It turns out the United States isn't running out of natural gas -- it is actually swimming in it. It won't need to borrow from its neighbors. Quite the opposite. Stockpiles are overflowing with surplus supply that can be sold overseas. So those import terminals are now being converted to export facilities. That's an amazing 180-degree turnaround in a relatively short period of time. So what happened? Did somebody suddenly discover the largest gas reservoir this side of Qatar? Not exactly. The credit for the natural gas revolution belongs almost entirely to one of the most controversial -- yet indisputably successful -- drilling techniques ever devised: hydraulic fracturing. Whether you love it or hate it, one thing is for sure -- you better not ignore it. A 100-Year Supply of Fuel The Energy Information Agency (EIA) now believes there is a staggering 2,543 trillion cubic feet of recoverable gas in the United States. The country burns about 25 trillion cubic feet a year, give or take. So that inventory means we have ample supply on hand to last for the next century. Notice I emphasized the word "recoverable." Much of North America's oil and gas is locked within geologically challenging formations such as the Barnett Shale in Dallas, the Marcellus Shale in Pennsylvania, and the Eagle Ford Shale in south Texas, just to name a few. These aren't new discoveries. In most cases, geologists and energy producers have known about these fields for decades. But knowing the gas is there and actually recovering it from two or three miles below the surface are two very different things. That's particularly true when the gas is trapped inside dense rock and can't move. The productivity of a reservoir is determined largely by two factors: porosity and permeability. The more porous, the more empty space available to store oil and gas. And the more permeable, the easier fluid can flow through and be captured. Some prolific oil fields have porosities of 30%. But shales are a whole different ballgame. In North Dakota's Bakken play, porosity is just 5% (95% rock). So while there is plenty of oil, bringing it to the surface is a daunting task. Oil men have been hunting in this region as far back as 1951. Most had nothing but dry holes to show for their efforts. The same problem frustrated energy companies trying to tap into tight formations all around the country. Hydraulic fracturing proved to be the answer to this vexing problem. The facts on fracking Fracking involves pumping high-pressure fluids deep below ground to fracture the rock and prop it open. The procedure creates a network of tiny cracks that can stretch hundreds of feet, providing a pathway for oil and gas to flow into the well bore. In a nutshell, fracking helps artificially create the fissures and channels that Mother Nature put in conventional reservoirs. This technological breakthrough has made it possible to efficiently drain hydrocarbons from basins that were previously considered inaccessible and out of bounds. Fracking has technically been around since the 1940s. But like most technologies, it has improved dramatically over time. The practice really took off about a decade ago when pioneers paired it with horizontal drilling in the Barnett Shale. The results were nothing short of amazing. In just 10 years, Barnett production zoomed from nothing to five billion cubic feet (Bcf) of gas per day. Incidentally, it took just three years for fracking crews and producers to reach the same production milestone in Louisiana's Haynesville Shale -- so we continue to perfect the process. Investment opportunities abound Despite potential environmental drawbacks, there's no denying that hydraulic fracturing is a boon for the energy industry. Shale gas now accounts for one-third of the nation's overall gas production, a 30-fold increase since 2000. And don't forget about oil. Following the widespread introduction of fracking, the Bakken Shale produced 113 million barrels in 2010. That's more in one year than the cumulative total from the prior 55 years combined. That's what fracking can do. No wonder just about every unconventional gas well undergoes multi-stage fracking services these days. And it isn't cheap. By some estimates, fracking can account for up to 30% of the total drilling and completion cost of a well -- even more in busy shales. Yet companies still can't keep pace with demand. Just look at Frac-Tech, which is partially owned by Chesapeake Energy (NYSE: CHK). Last year, the company reported that every one of its service units had been deployed in the field, without a day off, since November 2009. And through the first half of 2011, revenue surged 143% from a year earlier to crack the $1 billion mark. And that's just in the United States. Don't think for a second that we're the only country with untapped shale resources. Bloomberg estimates that China holds 1,275 trillion cubic feet of shale gas reserves. And Canada holds vast supplies of oil and gas inside the Horn River basin and other spots. Fracking is the key that unlocks these geologic treasure chests. In the table below, I've listed a few prospects that warrant further research by investors.

Risks to Consider: As I mentioned previously, fracking has become a hot-button issue. Any regulatory actions being considered by the government should be monitored for their potential ramifications. Tips>> I see huge profit potential for the companies involved in fracking. And there are many -- the companies in the table above are simply stocks worth further research. They aren't necessarily "buy" recommendations at this time, but each is well-positioned and has a highly optimistic earnings growth forecast.

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