Halliburton Investors: Beware an EPA Report Coming in December 2012

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Federal inquiry into hydraulic fracturing has taken a back seat to more sensational topics in the press, but threatens to take investors by surprise over the holidays.  Indeed, Halliburton (NYSE: HAL) investors have become inured to the publicity and legal risks, which the 2010 Gulf of Mexico Oil Spill brought to the energy giant.  Beware: Regulations in the offing threaten to stunt the profitability of one of Halliburton's core business activities. 

Beneath fourteen pages elaborating the company's litigation risks, most of which stem from the Macondo well incident, Halliburton affords three brief paragraphs of its annual SEC filing to a serious risk.    Management warns that future regulations and initiatives underway "could have a material adverse effect on our liquidity, consolidated results of operations and consolidated financial condition." 

In April, the Department of Energy, the Department of the Interior and EPA issued a joint memorandum announcing their collaboration on a variety of issues including a congressionally mandated study on hydraulic fracturing.    Investors holding HAL stock should stay abreast of two key manifestations of this inter-agency effort: 

  1. Proposed Department of the Interior regulations which impact hydraulic fracturing, and
  2. An EPA roundtable study, scheduled for public release in December

The Department of the Interior released a proposed draft of regulations for public comment in May 2012.  If adopted, they would impact wells subject to federal oil and gas leases, 90% of which utilize hydraulic fracturing.  The rules would require water management controls, disclosure of chemicals usage and federal approval for individual projects.  Halliburton managers are rightfully concerned about the project delays and operational costs such rules would bring, but the good news with these regulations is that they are already on the table.  

More uncertainty looms regarding the EPA study.  A dedicated Scientific Advisory Board concluded roundtable discussions this Friday, November 16th.  Look for the results some time next month.  They will report and recommend on a very touchy subject: impacts to drinking water.  On that subject, they inquired into the entire lifecycle of the water used in the hydraulic fracturing process.  

The EPA's five fundamental research questions should cause investors to shudder:

  1. Water Acquisition: What are the potential impacts of large volume water withdrawals from ground and surface waters on drinking water resources?
  2. Chemical Mixing: What are the possible impacts of surface spills on or near well pads of    of hydraulic fracturing fluids on drinking water resources?
  3. Well Injection: What are the possible impacts of the injection and fracturing process on drinking water resources?
  4. Flowback and Produced Water: What are the possible impacts of surface spills on or near well pads of plowback and produced water on drinking water resources?
  5. Wastewater Treatment and Waste Disposal: What are the possible impacts of inadequate treatment of hydraulic fracturing wastewater's on drinking water resources?

The results of the EPA study are unknown and so is the potential impact to investors.  Saavy investors are always on the lookout for ways that federal regulation shapes markets.  If you are planning on holding HAL stock through the holidays, please don't be surprised by these new developments!


Fool contributor, John Monaghan, does not own shares in any of the companies mentioned in this entry. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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