Want to Invest in Fracking? Look at These Companies

By Motley Fool Staff Markets Fool.com

Fracking has taken off in the last few years, allowing the U.S. to produce meaningful amounts of oil and gas -- and the technology is only going to get more efficient with time.

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In this clip from Industry Focus: Energy, Motley Fool analysts Sean O'Reilly and Taylor Muckerman talk about some of the best companies that long-term investors might want to take a look at across the subsections of the fracking industry -- from giant companies that handle all the parts in the process to more specialized companies that focus on things like providing the necessary sand or parts to drillers and producers.

A full transcript follows the video.

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This video was recorded on April 20, 2017.

Taylor Muckerman:We're not going to talkabout the producers today,because those are some of the bigger names we mention all the time, because they're the folks that are mostdirectly impacted by the price of oil. But, yeah, you're calling companies, A, you can call acompany that can do pretty much everything, which isgoing to be aSchlumberger,Halliburton,Baker Hughes, orWeatherford-- those are theExxonMobilof the drilling and fracking world. They do everything.

Sean O'Reilly:Butthey do not own or produce or sell the oil.

Muckerman:They don't. Maybe there'ssome kind of way that they can negotiate acontract with royalties, but no, for the most part, you'rebuying a stock in these companies because they're going to do the dirty work.

O'Reilly:And then they get a day rate, and that's it.

Muckerman:They get a day rate for the rigs, and then for all the equipment they use, andrental prices and things like that, yeah.

O'Reilly:So all along,they were giving oil companies a break on these day rates and stuff. But now, they're like, "All right, now that oil is up, we need to ... "

Muckerman:They have to eat, too. So you get them toprovide some of the equipment to do the drilling,to do the fracking, to do the completing. And then once the oil starts flowing, they throw the wellhead on it,sometimes call it a Christmas treebecause that's what it looks likewhen it's sitting on top of the well. Then,once the oil is producing --

O'Reilly:On to the next one.

Muckerman:They clean their hands withsome of the orange automotive soap that really degreases everything,and then they move on to the next one. Another reason why we'reproducing and drilling so much moreefficiently is becausewe have what we call pad drilling now, where they basically put some of these rigs on tracks, andwithout disassembling them like they used to have to do,they used to have to take apart the drilling rigevery single time.

O'Reilly:I'mpicturing a crane.

Muckerman:It'slike a bulldozer or a tank. It'sbasically on a track. It's called pad drilling, where they can slide it over to the next well site. Disassembling these rigs was the bulk of the time thesecompanies were spending on actual drilling.

O'Reilly:You canimagine it's complex.

Muckerman:Yeah,exactly. And if one bolt is wrong, you're screwed.

O'Reilly:Let's talk a bit about water and sand.

Muckerman:Water and sand make up about 98%-99% of what you're forcing down there,and then you have some chemical additives that are used for --

O'Reilly:Likeslickwater solutions, whatever that is.

Muckerman:-- to reduce thegrowth of bacteria, whichcan be dangerous, releasing gases. Italso provides a bit more of a fluid environment. Yeah,predominantly waterand frack sand and some sort of proppant, depending on what kind of well you're drilling.

O'Reilly:There arecompanies likeU.S. SilicaandHi-Crush Partnersthatliterally just make the sand for these guys.

Muckerman:Yeah. U.S. Silica is not just sand.I don't even know if they do just strictly sand.

O'Reilly:Silicaimplies some kind of glass, too.

Muckerman:Yeah,they can actually create a very specific proppant for a specific well.

O'Reilly:Basedupon the geologic properties that are downstairs.

Muckerman:Yeah. Anda company likeCore Labscan tell you what kind of proppant might work best, because they're a core and fluid analysis company that'sused by pretty mucheverybody in the business.

O'Reilly:And you can send them a core to their lab andmake them tell you stuff.

Muckerman:You cansend it to them; they can come get it for you. We visited them a couple years ago, and they were telling us thatcompanies even as big as Exxon andChevronwere outsourcing their coresample analysis to Core Labs because they did itso much better than everybody else. But they've been hurt recentlybecause their future was very heavily reliant on deepwater, so once that comes around,maybe that's another company to look at. But you analyze the core sample, and then you can determine your water to sand, water to proppantchemical ratio that'sspecific for each individual well. Again, technologyhelping us produce more oil and natural gas per individual well.

O'Reilly:Allthis stuff, over the last five years,I assume they've been getting betteratwhat we just describedeven in just the last five years and that's kind of what we're talking about with these companies lowering their cost of production even since 2012.

Muckerman:But you look at these companies using much more sand -- so,not only the companies you mentioned, butCARBO Ceramicsas well, and a couple smaller ones,Fairmount Santrol HoldingsandEmerge Energy Services, allcompanies you can look at on the proppant side of the business -- as these companies use more and more proppants, demand should drive the price up, as long as they don't create too much supply too soon.

O'Reilly:Right. Beforewe finish up here, what's the flushing stage? It's just using water to flush out the well when you're done?

Muckerman:Basically, yeah. Clean up on aisle oil. But a lot of these companies now,the wells aren't being cleaned outas quickly because they're going back and usingcarbon dioxide to go back in andtry to force more oil out.

O'Reilly:Andthat's usually on really old wells,as I understand.

Muckerman:Yeah,really old wells. They're even going back and trying to fractureconventionally drilled wells --

O'Reilly:From 100 years ago, I hear, sometimes.

Muckerman:You'renot getting nearly100% of the oil and natural gas out of these wells. I would be surprised ifsome of these wells or even reaching 70% or 80%.

O'Reilly:The conventional wells?

Muckerman:Yeah. And fracking wells are leavingeven more, percentage-wise, in the ground than conventional. You'regoing back and trying to use carbon dioxide, more water flowing through these, and refracking things in different stages after they've exhausted the conventional resource. There'sa lot of activity going on -- not only those companies that we've mentioned, butNational Oilwell Varco, hugeequipment supplier. Ifyou're looking at the drilling rigs,Naborsis the largest land drilling rig provider in the United States.

O'Reilly:Distribution NOWgetsthese guys all the parts that they need when things happen.

Muckerman:Helmerich & Payneis a very widely respected rig operator and rigmanufacturer. Then,Patterson-UTIas well. Different stages. If you wantthe whole thing outside of the proppants, look at aHalliburton, Schlumberger, Baker Hughes, or Weatherford. Ifyou want to get more specific, you can go proppants with thecompanies we mentioned -- U.S. Silica, Hi-Crush Partners, CARBO Ceramics, and those other smaller ones. Then,if you want the rig providers andoperators, Helmerich & Payne, Patterson-UTI, and Nabors. They do other things, butthat's the bread and butter of those three companies, the rig and drilling side of it.

Sean O'Reilly has no position in any stocks mentioned. Taylor Muckerman owns shares of Core Laboratories and Halliburton. The Motley Fool owns shares of and recommends Core Laboratories, National Oilwell Varco, and NOW. The Motley Fool owns shares of ExxonMobil. The Motley Fool recommends Chevron. The Motley Fool has a disclosure policy.