Is Fracking Foolish?

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Everyone in the Northeast knows about certain governors' hopes that hydraulic fracking will be a panacea for remote parts of their states -- such as upstate New York and northeastern Pennsylvania. But can IPO investors make like Jed Clampett from the hot oil-drilling technology of the moment?

We're about to find out.  C&J Energy Services (NYS: CJES) launched a $29-per-share IPO in July, and FTS International and Platinum Energy Solutions have filed for deals that could happen as soon as this fall.  The picture they paint is one of strong growth, a short path from startup to profitability -- and the risk that high deal prices and Washington's to-and-fro over the budget could leave short-term investors holding the bag.

The first thing that jumps out from the prospectuses is how fast the three companies, all basically oilfield-services outfits that run drilling wells for oil-company clients, are growing. This parallels the explosive -- pardon my pun -- growth of hydraulic fracking itself.

C&J and FTS are putting up top-line growth that would make a computer nerd feel like he was reading a familiar manual. FTS, also known as Frac-Tech, has grown sales 56.5% a year since 2006, reaching $1.3 billion in sales last year.  Frac-Tech also makes a lot of money -- and is boosting profitability faster than sales. Its earnings before interest, taxes, and non-cash charges more than doubled last year, reaching $453.5 million just in the first half of this year. Growth above 50% and margins over 40% are numbers like Intel used to post in the old days. C&J, meanwhile, posted even wider operating margins in the first half of the year, raking in $309.4 million in sales, up fourfold from 2010.

These companies are growing two to three times faster than Exxon Mobil (NYS: XOM) or Chesapeake Energy (NYS: CHK) , yet C&J's price-to-earnings ratio of 5.8 times this year's estimates is lower than almost any energy player, save Valero (NYS: VLO) .

The problem is volatility, though. C&J's $29 IPO price moved as high as $32 and change and began moving down the week of the debt-ceiling standoff in Washington. It dropped almost $10 in the week following the ostensible Aug. 2 deadline for debt-ceiling talks, without any fresh company news, before bouncing up again and then trailing down last month. If anything, it has mirrored recent declines in the cost of natural gas, which reflect recession fears as well as increased supplies. It's now trading at less than 6 times this year's expected earnings -- comically low for its growth rate.

With oil still around $75 per barrel, Washington's follies really mean little for fracking's short-term future. Governors are pushing it hard in the Northeast, and in any case FTS and Platinum are banking on more traditional oil strongholds like Texas and Louisiana, while C&J has a foot in both old-school and emerging energy markets. And down south, we know that politicians like to drill, baby, drill.

At the time this article was published Fool contributorTim Mullaneydoesn't own any of the stocks mentioned here. The Motley Fool owns shares of and has bought calls on Intel.Motley Fool newsletter serviceshave recommended buying shares of Intel and Chesapeake Energy and creating a diagonal call position in Intel. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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