Bloomberg reports that U.S. “Energy Department researchers so far have found ‘nothing of concern’” in a Fracking contamination study. If the final report is as positive, the U.S. oil and natural gas drilling industry will get a boost. Consider Ultra Petroleum Corp. (NYSE:UPL), Hi-Crush Partners LP (NYSE:HCLP), and pipeline giant Kinder Morgan Energy Partners LP (NYSE:KMP).
Fracking is a new drilling technique. Its proponents say that it has the potential to make The United States energy independent. Those opposed to fracking claim it contaminates drinking water and endangers lives. There’s anecdotal evidence that fracking lives up to its opponent’s claims.
The process requires water, sand, and chemicals to be forced underground to release oil and gas. The soup being pushed underground is largely a secret, but certainly unhealthy. However, if the U.S. Energy Department’s research shows that suspected contamination wasn’t an inherent result of fracking, the industry will receive a huge boost.
A Cheap Driller
Ultra Petroleum Corp. (NYSE:UPL) is a driller to watch if fracking gets a clean bill of health. It owns oil and gas lands in southwest Wyoming and Pennsylvania. Ultra Petroleum Corp. (NYSE:UPL)’s top and bottom lines jump around a lot because it operates in a commodity business, but 2012 was a particularly brutal year for the bottom line.
A large asset write down led to a loss of over $14 a share. According to the 2012 10k, however, low gas prices in 2012 “required [the company] to record a $2.9 billion non-cash, ceiling test write-down” of its oil and gas properties. That write down is likely to be reversed in the future as natural gas prices recover, as they have started to recently. The company made about a dime a share in the first quarter.
The reason to like Ultra Petroleum Corp. (NYSE:UPL), however, is that it’s among the cheapest drillers in the country. The company’s costs are about $3 per thousand cubic feet (Mcf) of natural gas, while the industry average is closer to $7 per Mcf. With natural gas trading around the $3.50 to $4 mark, Ultra Petroleum Corp. (NYSE:UPL) is going to make money a lot quicker than many of its competitors. And if fracking gets a clean bill of health, any social stigma Ultra Petroleum Corp. (NYSE:UPL) faces will be gone.
Picks and Axes
Another way to play the space is to buy a company that supplies the materials used in fracking. Hi-Crush Partners sells the proppants, called “frac sand”, to “enhance the recovery rates of hydrocarbons from oil and natural gas wells.” Basically, it’s selling the picks and axes that drillers need to use the hydraulic fracturing technique.
The company is structures as a limited partnership, so its yield is notable at around 8.3%. However that comes along with tax consequences, and benefits, and the units aren’t appropriate for tax advantaged accounts. In addition, the company has only been public for about a year, so there isn’t much financial history to go on.