With Fracking It’s All About Water Management

By Aaron Levitt | April 05, 2013 AAA

The hydraulic fracking and horizontal drilling revolution sweeping the nation isn’t just benefiting producers and end-users of that bounty, but the vast suppliers of the equipment needed as well. The oil services sector is becoming a hot bed of activity and rising earnings as firms like Halliburton (NYSE:HAL) provide all the pumps, drill-bits and other gear necessary to tap shale rock.

Perhaps one of the biggest challenges- and potential opportunities for investors- lies within oilfield water management.

It takes sometimes millions of gallons to frack a well. All of which must be transported to and away from the drilling site. Not to mention be cleaned before being returned aquifers and waterways. For investors, the growth in onshore oil and gas drilling’s need for water could be one of the biggest plays out there.

SEE: Commodities Of The Future

150,000 Olympic-size Swimming Pools
Water management is quickly emerging as the “holy grail” for the oil services industry. The sheer amount of water used to properly fracture and stimulate a shale well is truly staggering. Drilling an average 6,000-foot well requires several hundred thousand gallons of water. After the initial drilling is completed, the E&P firm fractures the well by pumping a pressurized mixture of water and chemicals deep within the wellbore to crack the rock and release the trapped hydrocarbons. This process can occur anywhere from 10 to 50 times and typically requires 500,000 gallons of water per time.

Top producer, Chesapeake (NYSE:CHK) estimates that it takes on average of 4.5 million gallons of water to drill and frack a single horizontal well using the traditional fracking processes. However, that number can be higher- such as in the Eagle Ford formation where it takes about 13 million gallons.

All in all, analysts estimate that between 70 billion to 140 billion gallons of water are used each year in the 50,000 wells that dot the U.S. countryside. That’s enough to fill 150,000 Olympic-size swimming pools. That amount explodes upwards if you consider that the shale boom is also going on up north in Canada.

Then there is the flow-back to consider.

After a well is fracked, between 15% and 70% of the water used will flow-back to the surface. Some of this water can be partially treated on site for reinjection. However, some of it is untreatable and needs to be transported to a disposal well or be transported to a treatment plant and then returned to the well site.

SEE: 5 Biggest Risks Faced By Oil And Gas Companies

Profit Potential
All of this oil field water management is currently an $11 billion industry. However, given the growth projections for shale drilling, it’s easy to see this amount surging upwards in the future. Stephen Ellis, a senior stock analyst on Morningstar’s energy team stated that they believe the general water-management industry will double by 2018 - which means there’s plenty of ways for investors to profit.

One such potential play could lie within water utility Aqua America (NYSE:WTR). While the firm doesn’t treat spent fracturing liquid it does have its hand in the process. Last year, the company partnered with Penn Virginia (NYSE:PVA) to build a pipeline that will supply fresh water to energy firms’ drill sites in the Marcellus shale. Within two months, the pipeline had already eliminated more than 4,000 water truck trips over rural roadways.

More importantly, that’s helped Aqua America diversify its portfolio outside of the core business of regulated water services and beef up its dividend yield to 2.2%.

Then there is pump company Xylem (NYSE:XYL) to consider. Spun-off from ITT (NYSE:ITT), the firm is quickly making a name for itself in the oil and gas industry. Aside from its industrial sized pumps- which help move all this water around- Xylem has moved aggressively into fracking water testing and treatment. Those areas promise to growth elements as the several states and the Federal EPA begin drafting new rules related to water treatment. Also focusing on treatment is Veolia Environment (NYSE:VE). The water firm is one of the treatment plant operators really equipped to handle spent fracking liquid.

Finally, small-cap Heckmann (NYSE:HEK) could be an interesting buy on the theme. The oilfield-service company is the only pure play that sources, stores and transports fresh water to drilling sites. At the same time, the company also treats and disposes of used the flow back water and waste fluids. The company operates fleet of pump trucks, tank cars as well as associated clean water pipelines and disposal tanks. Heckmann has an active presence in select shale areas within the U.S. including Haynesville, Tuscaloosa, Eagle Ford, Marcellus, Utica, and Barnett.

Guide To Oil And Gas Plays: We've got your comprehensive guide to oil and gas shales in North America.

The Bottom Line
It takes an awfully large amount of water to frack an oil and gas well these days. Given the growth projections for production activity in the U.S. and Canada, water management could be one of the biggest plays in the energy industry for decades to come. For investors, betting on the firms in this sector will lead to big profits over the long term.

Related Analysis
  1. Is It A Breakout? See The Point-And-Figure Chart
    Chart Advisor

    Is It A Breakout? See The Point-And-Figure Chart

  2. Abenomics Finds Recession, Selloff - Ahead of Wall Street
    Stock Analysis

    Abenomics Finds Recession, Selloff - Ahead of Wall Street

  3. Bear of the Day: Carbo Ceramics (CRR) - Bear of the Day
    Stock Analysis

    Bear of the Day: Carbo Ceramics (CRR) - Bear of the Day

  4. These Stocks Offer Range-Trading Opportunities
    Chart Advisor

    These Stocks Offer Range-Trading Opportunities

  5. Short Sellers Are Liking Facebook And Twitter
    Stock Analysis

    Short Sellers Are Liking Facebook And Twitter

Trading Center