How Cleaner Fracking Can Put Green in Your Pockets
Joseph is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Hydraulic fracturing, commonly known as fracking, is a controversial oil- and gas-producing practice. Much effort has been expended to address environmental concerns associated with fracking. The focus here will be on fracking water, one of fracking's more tangible problems. We'll examine three companies with longstanding and profitable operations that have joined the effort to make fracking cleaner.
The solution is the problem
The fracking procedure is fairly simple: water and proppant (usually sand or ceramic beads) are pumped under pressure into a wellbore. The pressure causes fractures to occur in the rock surrounding the wellbore, and the proppant is forced into these fractures to prop them open when pressure is released. A typical fracking project uses between one and eight million gallons of water. Approximately 90% of what is pumped into the well is water and about 9% is proppant.
The problem lies in the remaining 1% of the fluid, which is composed of a solution of chemical additives used to suspend the proppant in the water, reduce friction between the pressurized fluid and the wellbore, clean targeted areas and facilitate the fracturing process. Once pressure is released, however, the treated water returns to the surface as "flowback" and "produced water" -- as much as 100% of the injected fluid can return to the surface. The chemical additives, along with contaminants leached from the rock surrounding the wellbore, can render the water too toxic for general use. This water must be disposed of in such a way as to isolate it from uncontaminated water sources, and is treated as toxic waste.
A solution to the solution
Halliburton Company (NYSE: HAL), which is involved in all aspects of oil drilling, has worked to improve the quality of the chemical additives used in fracking. With regard to fracking fluids, Halliburton's Multi-Chem service specializes in developing safer additives, many of which are FDA-approved food-quality chemicals. In addition, Halliburton has developed treatment systems to enable the recycling of flowback and produced water for use in other fracking projects, reducing the need for additional water sources.
Financially, Halliburton has not suffered for its efforts at "greener" fracking: its 2012 revenues were $28.5 billion -- 14.8% higher than 2011, and the company has shown consistent revenue increase for the past several years. Its first quarter earnings for 2013 were down from 2012 (YOY), but this is mainly due to a $1 billion payment to its reserve fund for liabilities arising from the Deepwater Horizon accident. Its global revenues, however, secure its growth to the point that it has increased its annual dividend from $0.36 to $0.50 (projected).
Where chemistry meets water
Ecolab (NYSE: ECL) has been well established globally in the food-service, healthcare and hospitality industries for 90 years. Two recent mergers have expanded this company's influence into industrial and energy-related concerns: in 2011 it completed an $8 billion merger with Nalco, which has been developing biodegradable and non-bioaccumulative chemicals for reducing friction in fracking water; and it is completing a merger with Permian Mud Service, which, through its Champion Technologies subsidiary, has been developing improved flowback water treatment for reuse.
After the acquisition of Nalco, Ecolab's revenue grew 71.14%, to $11.8 billion from $6.8 billion. While its EBIT took a hit in 2011, dropping 6.34% from 2010, it rebounded well in 2012, increasing to $1.3 billion from $0.76 billion in 2011 -- growth of more than 70%. If history repeats itself, 2013 may see less revenue growth from the Permian merger, but expectations should be high for earnings in the long term. Ecolab's PE ratio -- a rather high 31.80 -- likely reflects those expectations. Ecolab currently pays a $0.92 dividend.
German Siemens AG (NYSE: SI) has developed several waste water treatment processes that are mounted on semi-trailers (FracTreat Mobile Treatment Systems), and designed to be used directly on site. A Mobile Pilot Unit containing small-scale versions of its processes is used to determine which one would be most effective for a given site. Once the determination is made, a full-size treatment unit is deployed. The use of mobile systems reduces costs associated with the transportation and treatment of waste water, as well as reducing the need to bring fresh water to the site -- waste water is treated immediately, so that it can be reused in the project.
While its revenue has fluctuated over the past three years, Siemens has been a consistently profitable performer, with net incomes from FY 2010 through FY 2012 of $5.31 billion (2010), $8.35 billion (2011) and $5.76 billion (2012). 2011 was a banner year even though its total sales for the year was less than $100 billion (compared to more than $100 billion each for 2010 and 2012) due to reduced costs per sale, administrative costs and nearly $1 billion in income from other sources. Its EPS has been strong, at $6.12 (2010), $9.56 (2011) and $6.57 (2012). The company has increased its dividends seven of the past eight years, currently paying approximately $2.85 annually (note that exact figures are dependent upon the current exchange rates.)
Socially responsible investing can be profitable, as long as you are careful about the company you choose. The three companies above have solid histories and have made the move to responsible fracking practices pay off, and any one of them would give your portfolio an impressive financial and environmental thumbs up. The companies come from different backgrounds, as it were, and take their own particular approach to the problem. You don't have to limit your investments to oil and gas companies to profit from cleaner fracking.
The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.
Joseph Porter has no position in any stocks mentioned. The Motley Fool recommends Halliburton. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!