There’s little question that fracking has been a boon for the United States, with billions of additional barrel equivalents of oil and gas now recoverable. In fact, the Energy Information Agency (EIA) recently projected that the U.S. would grow to become the largest producer of oil by 2020, a net exporter of oil around 2030, and nearly self-sufficient in energy by 2035. And, the “energy renaissance” has already dramatically improved the prospects of many U.S. energy companies, with the Market Vectors Fracking ETF (NYSE:FRAK) trading up nearly 20% since June 2012.
Unfortunately, many investors believe the upside may already be priced into many of these stocks, particularly as new gas supplies drive down prices. Many companies operating in the space have suffered from record low natural gas prices and oil supply gluts in the key-trading hub of Cushing, Oklahoma. While oil prices are likely to remain near the level that fracking makes sense economically, margins are likely to be squeezed moving into 2013, as developed markets remain in slow growth and emerging market demand (primarily from China) cools.
Identifying Opportunities in the Space
So, where do investors put their money?
Fracking companies themselves may be poised for a struggle with operating margins, but companies servicing the growing fracking industry may represent an opportunity. In particular, the fracking process has garnered a lot of negative press for its impact on the environment. Most of the wastewater generated from the fracking process – which involves pushing clean water with chemicals underground to coax out oil and gas – is simply pumped deep underground and is at risk of seeping into public water reserves.
Many companies already hire specialists to transport wastewater away from oil and gas sites, but the adoption of recycling technologies has slowed due to their high cost. But, with the millions of new wells projected to come online by 2035, the issue of recycling water will transition from an environment issue to a strategic issue due to the lack of freshwater. According to one Environmental Protection Agency (EPA) report, it takes between 70 billion and 140 billion gallons of water to frack 35,000 wells per year, which is the same amount of water that’s consumed each year by Chicago or Houston.
Companies involved in fracking that require such water recycling services range from giants like Exxon Mobil (NYSE:XOM) – after its purchase of XTO in 2009 that helped it enter the fracking space – to smaller E&P players like Rosetta Resources (NASDAQ:ROSE), EXCO Resources (NYSE:EXO) or Gran Tierra Energy (NYSE:GTE). These companies represent billions of dollars in market capitalization with a need for a resource that continues to spike in price – as demonstrated by the 20% 52-week performance of the PowerShares Water Resource Portfolio (NYSE:PHO).
Finding a Cheaper and Eco-Friendly Immediate Solution
BioLargo Inc. (BLGO) is a promising small company working on a cheaper immediate solution that uses all-natural compounds to purify wastewater. Using what it calls Nature’s Best Solution™ – free iodine that is combined with filtration technology to generate what they call an Advanced Oxidation System that provides a non-toxic and all-natural way to purify water before it’s returned back to the environment or reused. Iodine is known to kill many of the most common pathogens present in natural freshwater sources and when combined with other complementary processes, the post-treatment water eliminates the threats that watersheds, wells and groundwater in the areas surrounding fracking activity pose. For reuse, in many cases, simple filtration followed by iodine to remove bacteria is sufficient.
The company has already begun to introduce its technology to the oil industry via its founding membership position in Canada’s Natural Sciences and Engineering Research Council’s (NSERC) “Industrial Research Chair in Oil Sands Tailings Water Treatment”. Other members of the board include Canadian National Resources Ltd. (NYSE:CNQ) and Suncor Energy Inc. (NYSE:SU), illustrating the scope of the problem in the oil sands industry alone. Presumably, this expertise could be translated directly to much the same problems faced by the fracking industry, namely contaminated water.
And when it comes to a timetable, BioLargo has already begun commercializing its proprietary CupriDyne® technology in other end markets like wound care and companion animal markets, demonstrating that it is commercially viable and that its technology is safe for consumers. These activities are also generating early stage revenues and show the promise of positive cash flow as they ramp up, which is necessary to continue developing its product lines for the oil and gas industry as well as other potential end markets.