Many thought that the OPEC-induced oil market downturn would send U.S. fracking to its grave. However, instead of killing fracking, the downturn made it stronger by significantly driving down costs. As a result, the industry is set to start growing again this year.
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While that trend certainly bodes well for shale producers, they aren't the only fracking stocks to consider buying. Investors should also take a close look at "pick-and-shovel" plays such as fracking equipment and service companies, producers of sand for fracking, and pipeline and processing companies.
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That said, investors shouldn't buy just any fracking stock, since there still are several companies across the spectrum that could struggle in the current environment due to their higher costs and weaker balance sheets. Because of that, the focus needs to be on the best fracking companies, which are those with strong balance sheets and the ability to thrive at lower oil prices. Here are six ideas across the fracking spectrum that fit the bill:
Here's what makes each one a top fracking stock to consider buying in 2017.
Top-tier shale producers
There are hundreds of companies that use the combination of horizontal drilling and hydraulic fracturing to produce oil and gas from tight shale rock formations. However, the cream of the crop, in my opinion, are EOG Resources on the oil side and Antero Resources for shale gas. EOG Resources was an early mover in leasing some of the best drillable acreage in the country, giving it a toehold in the core of the top oil-rich shale plays. The company built on that foundation by using a combination of technology and technical innovation to drive down costs and increase well productivity. The result is an impressive inventory of low-cost, high-return drilling locations, which EOG Resources sees fueling 15% to 25% annual oil production growth through 2020 within cash flow at $50 to $60 oil, respectively. In fact, its premium wells are still profitable at $40 oil, which along with its solid balance sheet gives it the strength to withstand almost any challenge the market throws its way.
Antero Resources, meanwhile, has similarly strong characteristics; the only difference is that its focus is on natural gas drilling. Thanks to its low costs and high returns, Antero Resources expects to grow its production by 20% to 25% this year, and is targeting 20% to 22% annual growth from 2018 to 2020 while living within cash flow around current commodity prices. That healthy growth should improve its already solid balance sheet in the years ahead, making Antero a reasonably safe shale gas stock to hold for the long term.
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With shale producers projecting healthy production growth over the next few years, the country will need more pipeline and processing infrastructure. This bodes well for MLPs Enterprise Products Partners and Plains All American Pipeline. The gas-focused Enterprise already has $7.1 billion of growth projects under construction, which should help keep U.S. production flowing and growing. These growth projects should provide an immediate return for the company's investors because they'll allow Enterprise to increase its already generous distribution, which currently yields nearly 6%. And with the best credit rating in its class, Enterprise has the financial strength to thrive even if market conditions don't meet the industry's lofty expectations.
Meanwhile, Plains All American Pipeline focuses primarily on the oil side and has $800 million of projects currently under construction. In addition, the company has completed several acquisitions and joint ventures this year, including investing more than $1.3 billion in deals in the red-hot Permian Basin, which should add incremental earnings in the near term while providing a platform for growth. These additions should help stabilize Plains' payout, which currently yields almost 7%, while future projects should put the company in the position to boost the distribution and strengthen its already solid balance sheet.
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Frack sand and oil-field services
Another way to invest in the fracking rebound is with service providers and suppliers. While there are several to choose from, two that have a compelling risk-reward profile are Halliburton and U.S. Silica. Halliburton is not only the world's second largest oil-field service company, but it's more shale-focused than its rivals. This means it has more upside in a drilling rebound. In fact, CEO David Lesar told investors on the company's most recent fourth-quarter call that "animal spirits have broken free and they are running. ... Customers are excited again and our conversations have changed from being only about cost control to how we can meet their incremental demand." Needless to say, that outlook suggests 2017 could be a big year for the fracking giant. It's important to note, as well, that, given its scale advantage and strong financials, Halliburton will easily survive even if the oil market recovery fizzles out.
Halliburton has already endured some challenges early on, due in part to rising costs for frack sand. In fact, the company will take a $50 million hit in the first quarter because it doesn't have enough sand under contract to meet demand. However, this bodes well for leading frack sand producer U.S. Silica. While the company has struggled to turn rising sand volumes into profits, that could change later this year should volumes and prices continue to head higher. Meanwhile, with low costs, an industry-leading position, and a logistical advantage, U.S. Silica has a firmer foundation than rivals, which should keep it on solid ground if the oil market recovery starts to crumble.
What sets these fracking stocks apart from their peers is that each has a combination of solid financials, a leading position in its focus area, and clearly visible growth prospects. That should enable these stocks to deliver solid risk-adjusted returns compared to their peers in 2017 and beyond as the fracking boom reaccelerates.
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Matt DiLallo owns shares of Enterprise Products Partners. The Motley Fool owns shares of EOG Resources. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.