Energy investors looking for a pure play on the growth of hydraulic fracturing might want to look at Frac Tech Services, a private operator that just filed for an initial public offering. (To learn more, see IPO Basics Tutorial.)

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Hydraulic fracturing is performed on shale and other unconventional wells to help stimulate production of oil and gas. Frac Tech Services owns 22 hydraulic fracturing units and the associated equipment used to perform these services on wells. The company reported a total of 875,500 horsepower as of December 2010.

Frac Tech Services estimates that exploration and production companies spent $16 billion on hydraulic fracturing operations in 2008 and $10.5 billion in 2009. The company expects 2010 spending to exceed the amount spent in 2008, and is looking for further increases in 2011.

The company is also vertically integrated and provided much of the proppant that the company uses in its operations.

Revenues and IPO
Frac Tech Services reported revenues of $806.1 million in the nine months ending 9/30/2010. The company has quadrupled its horsepower since 2006 and plans further increases in 2011. Frac Tech Services is adding 14 new fleets with aggregate horsepower of 455,000 by the end of 2011.

Frac Tech Services filed an S-1 on December 14, 2010 and intends to raise up to $690 million in the offering. The pricing of the IPO has not been set yet.

Large Customers
Since the large independent exploration and production companies tend to dominate land drilling in the United States, Frac Tech Services is dependent on several large customers for a significant part of its revenue. In the nine months ending September 30, 2010, Petrohawk Energy (NYSE:HK) accounted for 18.8% of total revenues. XTO Energy, which was bought by Exxon Mobil (NYSE:XOM), accounted for 13.4% of total revenues.

Frac Tech Services is partially owned by a subsidiary of Chesapeake Energy (NYSE:CHK). The company holds 25.8% of Frac Tech Services as of the filing date.

Competition
There are dozens of companies, both private and public, that offer hydraulic fracturing services to the exploration and production industry. In the public space, the three largest players in this business are Schlumberger (NYSE:SLB), Halliburton (NYSE:HAL) and Baker Hughes (NYSE:BHI).

Frac Tech Services is major player in the high growth business of hydraulic fracturing, which is used to enable the potential of shale and other unconventional oil and gas formations. The company is heading to a public offering in 2011.

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