Hydraulic fracturing, or fracking, involves pumping water, sand, and chemicals under high pressure down a wellbore to fracture rocks underneath the surface so oil and gas can more freely flow out the of well. The process has been around since 1947 when Haliburton performed the first fracking operation in Kansas. However, it grew in importance (and notoriety) once drillers combined it with horizontal drilling to form a game-changing combination that has helped the U.S. unlock its vast shale resources.
Drillers have gotten so good at fracking that they've unleashed a gusher of oil and gas production in recent years, which has flooded the market and pushed down prices. Because of that, shale drilling activities have slowed, which has hit fracking stocks hard. That said, those falling prices have fueled more demand for oil and gas, which when combined with tepid supply growth, has started pushing prices higher. This rebound should drive up drilling activity levels in the coming year, which would fuel higher profits for the companies that do the actual fracking, likely taking their stock prices with it (especially given how far they've fallen in the past few years). While there are plenty of fracking stocks, three top options to consider given their strong market positions are:
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The top-dog in fracking
Halliburton is the leading oilfield-service provider in North America. Last quarter, the company pulled in $3.2 billion in revenue from the continent, which accounted for 58% of its total sales and was up 14% versus the prior quarter, thanks in part to a 6% increase in drilling activities in the U.S. as measured by the rig count. That put it well ahead of oilfield-service giants Schlumberger (NYSE: SLB) and Baker Hughes (NYSE: BHGE), which pulled in $2.6 billion and $1 billion of revenue from North America, respectively, last quarter.
While Halliburton's revenue has been on the upswing, its stock price has been heading in the opposite direction. Shares have fallen a disappointing 25% this year, mainly because the company expects slower growth in the fourth quarter, with it warning that sales in its drilling and evaluation business would likely fall alongside the rig count. Rivals Schlumberger and Baker Hughes also sounded cautious about results in the near term. Schlumberger, for example, warned that profits in the fourth quarter might not meet analysts' expectations due to weakness in North America. Meanwhile, Baker Hughes called the current business environment "challenging." That said, oil prices have risen since that time, which could cause drillers to spend more money fracking wells next year. While all three companies would benefit from that boost, Halliburton would likely get the most lift since it holds the leading market position.
A pure play on fracking
While C&J Energy Services provides many of the same services as Halliburton, its sole focus is on fracking. Overall, the company is a top-ten fracturing company and holds the leading or second-best market position for several fracking-related services. Meanwhile, it recently bolstered its offerings by agreeing to acquire O-TEX Pumping, which is the fourth largest cementing service provider in the country. It provides a crucial service because cement helps create a strong barrier between a well and rock formations.
As a pure play on fracking, it can be feast or famine for C&J Energy Services. When activity levels dry up, it can have a dramatic impact on the company's bottom line. That was the case during the recent oil market downturn when C&J Energy Services declared bankruptcy. However, it recently reemerged and now has a much stronger financial position, which should enable it to withstand what could be a rocky recovery. That said, as oil producers frack more wells in the coming year, C&J Energy Services will be one of the companies benefiting from that uptick in activity. While it's a higher risk option than Halliburton because of its sole concentration on shale plays in the U.S., that focus gives it more upside as market conditions improve.
A bold bet on frack sand
One of the main ingredients Halliburton and C&J Energy Services use in fracking wells is sand, which the industry calls a proppant. That's because it helps prop open the tiny fractures in shale rocks, which allows oil and gas to flow out more freely. While several companies supply the industry with sand, one of the leaders is U.S. Silica, which currently operates eight oil and gas sand production plants.
Sales of sand dropped during the oil market downturn, though they've rebounded sharply this year. Last quarter, for example, U.S. Silica's oil and gas sand volume shot up 95% to 3.1 million tons, which helped drive revenue up 230% versus the prior year. The company expects demand to continue increasing, which is why it's building 9.5 million tons of incremental capacity, including two frack-sand mines in the red-hot Permian Basin. The most recently announced expansion will increase its sand capacity by 2.6 million tons per year, and it has already secured customer commitments for 1.2 million tons of sand from that plant, which should start up early next year.
While there's some concern that U.S. Silica and its peers are building too much capacity, the company noted on its third-quarter call that contract interest was at "an all-time high." Because of that, it expects record demand in 2018, which should drive up revenue and profits. In fact, the company is so confident in its outlook that it recently announced plans to buy back $100 million in stock. The company sees its shares as a bargain considering that they've plunged more than 40% this year despite the rebound in demand.
The beaten-down fracking stocks should blossom in 2018
Fracking stocks sold off in 2017 mainly because drillers in the U.S. slowed their pace after oil tumbled into the $40s a few months ago. That said, crude has come roaring back and was recently in the upper-$50s, which should drive drilling activities back up in 2018. That rebound should benefit fracking-focused companies by driving up their revenue and profits, which should eventually spur their stock prices. That's why investors might want to consider buying a top fracking company like Halliburton, C&J Energy Services, and U.S. Silica, since they should have the most upside if that forecast comes to fruition.
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