There's awave of wealth sweeping rural areas across North
America.
Sleepy, rundown towns are bustling withcommerce and activity as
the new-foundmoney breathes life into theeconomy . Poor farmers and
other landowners of once near-worthless properties are swimming in
capital from this new way to exploit a natural resource.
This new method of extracting natural resources isn't really so
new, though. It originated in the 1940s, but it wasn't until 1998
that it was perfected enough to be an economically viable,
widespread technique.
If you haven't guessed it yet, I am talking about hydraulic
fracking, or simply fracking for short.
Simplyput , fracking is the process of extracting natural gas
from shale rock formations deep underground. We have known about
this resource for many years, but only recently has it become
economically sensible to drill for natural gas.
Fracking involves forcing a high-pressure mixture of water, sand
and lubricants sideways into small cracks in the shale, opening up
a natural pipeline for the natural gas to escape into the vertical
well to be captured and transported to the final user.
The fracking process
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U.S. energy independence is no longer a dream
Fracking is definitely a positive step on the path to U.S. energy
independence. It accounts for about one-third of all U.S. natural
gas production. The Energy Information Agency estimates the United
States has enough natural gas to last for the next 100 years,
creating the potential for energy independence a powerful
assumption. In fact, Andy Obermueller, chief strategist of
Stocks ,
says the United States "will run on natural gas" in the next
few decades. (He's actually putting the finishing touches on a
special report on this topic right now, including the names
andticker symbols of the companies that are set toprofit from this
trend.)
Let's not forget that natural gas is the only practical clean
energy source discovered so far. Alternative energy sources such as
wind and solar still require tremendous government support to make
them cost-effective and viable sources. One day, we will hopefully
be able to depend on these clean sources for energy independence,
but right now natural gas remains the cleanest, practical fuel
available in sufficient quantities.
[See also "
How to Profit from "America's Natural Gas
Highway
"]
It's not just lucky landowners profiting from the natural gas
boom. Here are two ways investors can ride along with the explosive
growth of this natural resource...
1.Market VectorsUnconventional Oil & GasETF (
FRAK
)
With 45 energy-related stocks, thisexchange-traded fund (ETF)
follows the Market Vectorsindex of the same name. Its top holdings
are
Anadarko Petroleum (
APC
)
,
Occidental Petroleum (
OXY
)
,
EOG Resources (
EOG
)
and
Canadian Natural Resources (
CNQ
)
.
Because of falling prices, the energy sector was down in 2012 as
reflected by the
SPDR Energy Select (XLE)
falling just a little more than 4% on the year. However, FRAK was
down nearly 11% during the same period. It's important tonote that
FRAK was just launched in February 2012 and has only been able to
attract about $16 million in total assets.
The ETF is also lightly traded at only about 4,700shares daily.
The record-low prices for natural gas and dropping petroleum prices
have likely shifted attention away from this fledging ETF. Because
it's so dependent on natural gas prices, I'm keeping it on my watch
list for now.
2. C&J Energy Services (CJES)
This company provides hydraulic fracking, coiled tubing and
pressure-pumping services to fracking firms. It specializes in the
Texas, Louisiana and Oklahoma regions of the United
States.
More than 70% of itsrevenue comes directly from fracking. What I
like best about thisstock is that there is very limitedcommodity
risk. Unlike FRAK, this company has term contracts with the energy
companies that are paid regardless of the price of natural gas or
oil.
As such, I like to think about this stock as an energy play, but
with the insurance of the term contracts secured by the big energy
companies themselves. Having said that, massive commodity risk
resides in direct energy plays as demonstrated by the FRAK ETF's
losses in the past year. The company boasts amarket cap of just
more than $1 billion and a return onequity close to
46%.Debt-to-equity ratio is just 0.36% pointing toward a
solidbalance sheet .
Technically, shares have been uptrending since Nov. 15, 2012,
but have hit resistance in the mid $22 range. There is a massive
double-top formation at this level on the daily chart. This creates
a daily breakout close opportunity. Entering a long trade when
price closes above $23 makes technical sense. My 12-month target is
$33 if price can break out above the $23 level.
Risks to Consider:
Despite the success of fracking, the industry faces heavy
headwinds from dropping natural gas prices. It's almost like a
catch-22 situation. The more efficient fracking becomes, the more
supply is available, hence the lower the price, thereby hurting the
companies themselves. In addition, pressure from environmental
activists remains a sticking point in the industry, since
lubricants are mixed into the water to facilitate the fracking of
the shale. In fact, it's illegal in some states due to the
environmental concerns.
Action to Take -->
I like C&J Energy Services on a breakout above $23, but would
avoid FRAK due to the heavy commodity risk. However, when natural
gas starts to climb, the ETF should reflect this optimism. As such,
FRAK is on my watch list.