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Fracking Stocks: The Top Growth Sector for

Investors in 2011
by: Keith Sc haefer

Dec em ber 20, 2010 | about: PDS / T OLWF.PK

Hydraulic frac turing, or “frac king”, c om panies are overtaking drilling c om panies as the largest subset of
the energy servic es sec tor – and researc h from two Canadian brokerage firm s suggests that investors c an
expec t frac king c om panies to c ontinue growing strong into 2011 and beyond.

All the data points to frac king stoc ks being the #1 plac e for investors to be, in the energy patc h, in 2011.
I think it’s the easiest (safest) m oney in the oilpatc h for the next 12 m onths at least.

(Frac king is when you send water and sand down a well at ultra-high pressure, and it blows out into the
surrounding roc k form ation, frac turing the roc k into m any sm all piec es and c reating pathways for the oil
and gas in the roc k to get to the well.)

T ric an Well Servic es (T OLWF.PK) is the largest frac king c om pany in Canada, and it had revenues for
the first nine m onths greater than $1 billion – up from $541 m illion in 2009.*

Prec ision Drilling (PDS) is Canada’s largest drilling c om pany, and it had nine m onth revenue of $994
m illion, but squeaked past T ric an for highest Q3 profits – $61.8 m illion vs. $53.74 m illion*.

Drilling c om panies have been the biggest single subset of the energy servic es sec tor FOREVER. But the
onset of horizontal drilling and m ulti-stage frac king has c hanged that. And even though the “new”
frac king industry is now 5-6 years old (from the tim e when the size of frac jobs went sky high – from a few
tonnes per well to m ore than a c ouple hundred tonnes) it is still struggling to keep up with soaring
industry dem and.

T his is good news for investors in frac king stoc ks. T he industry is being p-u-l-l-e-d into the lim elight.

T here are som e obvious reasons for this trend, suc h as the huge inc rease in the num ber of horizontal
wells over the last five years as the Global Shale Revolution intensifies – an inc reasing num ber of
horizontal wells is using an inc reasing num ber of frac s per well. See this c hart from sec urities firm
Raym ond Jam es Weekly Energy Bulletin (c lic k to enlarge):

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T his c hart shows that alm ost ALL the growth in drilling over the last year has been for horizontal wells, as
the Global Shale Revolution intensifies. I expec t the Global Shale Revolution to last 20 years – whic h
bakes suc c ess into the c ake right now for a lot of frac king c om panies.

But it gets better. Frac king is taking up m ore and m ore of the budget for these wells. First Energy, an oil
and gas boutique brokerage firm out of Calgary, wrote in a Dec em ber 13 report on energy servic es that
“frac turing c osts have c om e up the m ost am ong all servic es”, and that c ost inflation in the oilpatc h will
benefit the frac king c om panies the m ost:

“Like in 2010, we believe the m ajority of ec onom ic rent will go toward the c om pletions business. As a
result, w e see fracturing companies grabbing a higher percentage of the pie.” (Italic s m ine-KS)

Canada’s #2 brokerage firm , BM O Nesbitt Burns, outlined six reasons in a rec ent report why the frac king
sec tor will rem ain strong for investors:

1. Current Shortages: …a bac klog of roughly 3,000 wells in the U.S. alone that have
been drilled but not c om pleted… m ore horsepower is required sim ply to m eet c urrent
dem and.
2. Continued Increases in Frac Intensity: …horizontal lateral s getting longer and the
num ber of frac stages in m any plays c ontinuing to inc rease
3. Longer Lead Times:…new equipm ent ordered over the next c ouple of m onths as
part of 2011 program s will likely not be delivered as quic kly as m ost people think…lead
tim e is nine m onths to a year for new frac c rews… m ost of the 2011 equipm ent
c apac ity will not be deployed until around Q4/11
4. Higher Attrition Rates: With the proliferation of unc onventional resourc e plays, frac s
have inc reased not only in size but in pum ping rates as well…som e regions have gone
to 24-hour operations…. that useful lives of m any key c om ponents of a frac spread
have been reduc ed by as m uc h as 50%.
5. More redundancies: In an effort to c om bat the higher repairs and m aintenanc e
c osts m any pum pers have added m ore horsepower on loc ation than is ac tually needed
to c om plete the job. Essentially, this allows the wear-and-tear to be spread over m ore

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equipm ent…it requires m ore equipm ent to be deployed, thereby helping to absorb
m ore c apac ity.
6. 6) Equipment Aging: a larger than norm al c hunk of the equipm ent in the pum ping
industry will be ready for replac em ent over the 2011–2013 tim e period, whic h should
help delay the effec ts of the large am ount of horsepower c urrently under c onstruc tion.

BM O Nesbitt Burns added that there was c onc ern am ongst their buy-side c lients (the m utual/pension
funds) that there would be too m uc h c apac ity built in 2011, too m uc h new horsepower (frac king
c om panies are often ranked in size by their horsepower), but they did not c onsider that a c onc ern in
2011.

Another final note for investors to understand is that the tec hnology in this sec tor is still evolving, and it’s
not just m ore/better tec hnology. Som e of it is out of the box innovative tec hnology that is leapfrogging
industry expec tations in term s of produc tion and c ash flow frac king c an produc e.

Disclosure: I have no positions in any stoc ks m entioned, and no plans to initiate any positions within the
next 72 hours.

Comments on this article

Add a c om m ent

User 174433

What about the environm ental c onc erns over frac king? NY's m oritorium is all about the potential
environm ental liabilities of frac king. Don't you see this as a potential downside for this industry?

Stone Fox Capital

its a m ajor downside potential, but it still doesn't m ake sense when c onsidering the option is using
c oal. Now thats a better option. lol

CdnTrader

When an individual drills a water well on their land it would be m aybe 200 ft deep, at the m ost.
M ost horinzontal frac s are 5,000 to 8,000 feet. It is diffic ult to i m agine c ontam ination through a
m ile of roc k. When you see people lighting their well water on fire they have m ost likely hit shallow
gas. It is not unc om m on when you c onsider the water drillers are a bunc h of farm ers running around
with an auger on the bac k of their truc k. T he real c ontam ination risk from drilling c om es from a poor
c em ent job. How bad c an a c em ent job be? M ac ondo bad.

Robert Kientz

I have done researc h on frac king, water table, and the c hem ic als used. T here are som e c onc erns
(Sublette, Wyom ing). However the environm ental c onc erns are less, im o, for gas frac king than in
other types of m ining.

I do strongly advoc ate for transparenc y of c hem ic als used and oversight of drilling well integrity to
prevent water table c ontam ination.

nishtu

New York is c razy with this frac king. Its so c alled environm entalists, RiverKeeper etc that are stirring

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up fear for no reason. Pa got it right, but NY seem s to be stuc k in the old sc hool despite the fac t that
frac king has been going on in the state for 75 years. Albeit lower pressures. T he bad part about NY
is inc om ing Gov. Cuom o, who like his Dad has this irrational fear about Nuc lear and frakking. T his
m ay bypass NY, but the rest of the World i s on board and rightly so.

prairiedog555

Are there any US c om panies that are good c hoic es in this industry?

j ohn s. gordon

top growth.
well, m aybe.
people still have objec tions to sec ret form ulations of toxic (?) c hem ic als in their well water.
rem em ber - you m ust tread with c aution if you do deep-well injec tion of anything in
earthquake-prone areas.
have all the known & potential geologic faults been m apped?
> jac k

utilitus

Just so, Jac k G. But there is som e evidenc e that new tec hniques are being developed involving
extrac ting the propane c om ponent from the gas and using it as a frac king m edium that c an then be
m ostly rec overed. Don't know about any ec ologic al im pac t, whic h is key, along with the ec onom ic s.

Bill Costello

T he US has m any very good plays though som e big frac c om panies are piec es of m uc h larger
entities (HAL, BHI, & SLB). But RES is a pretty pure play and CPX is a well run larger pressure
pum per.

cyclingscholar

No m ention of Carbo Ceram ic s, whic h m akes the c eram ic proppants espec ially suited for shales
with dense hydroc arbons as well as the gases? Its not on the bargain c ounter perhaps!

User 490703

Hydro fac ing is old tec hnology, Petro frac ing is the new tec hnology.
And only 1 c om pany holds the patents.
Water is a hot topic these days, you don't need it when using liquid gas to frac .

steeny

I didn't see the need for Cdn T rader to denigrate farm ers and water well drillers to m ake his point.
T hese voc ations are honourable and involve signific ant am ounts of c apital. As for frac ing I think
investors need to understand the tec hnology in light of the alternatives in eac h partic ular geology
of the globe. As a farm er who has m et the stringent c riteria to have two 490 feet 2.5 Kw turbines
erec ted on m y property, rec ent loc al politic al pressures has spurred a c oalition of m unic ipalities to

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c onsider restric tive bylaws to address c onstant low level noise and roadway weight restric tions to
'm oritorium ' this green energy endeavour in Ontario.

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