The Little-Known Industry Fracking Relies On
Fracking has revolutionized the oil and gas industry. Innovative extraction methods like horizontal drilling and hydraulic fracturing have allowed for increased efficiency and revitalized oil production.
Just like in the panicked Gold Rush that revolutionized the 1800s, fracking in the modern world has created successful business offshoots to support its operations. Support businesses crop up in the birth of new resource booms - and often end up being the true success stories.
It may have been mining equipment and after-hours saloons during the Gold Rush, but today the successful support business thriving in the world of shale is that of proppants.
What exactly are proppants?
Proppants are used to reinforce the tiny cracks opened up by hydraulic fracturing in order to allow oil and gas to flow more smoothly and keep extraction costs to a minimum. Sand is the most common proppant used, holding over 80% market share, with the remainder being a ceramic substitute and resin-coated variety that can also be utilized. Global demand for proppants is currently around 35 million tons, which is expected to grow to 45 million by 2017 with an overall market value of $10 billion according to recent research report by the Freedonia Group.
This industry performed well alongside the market at large for 2013 - the average P/E for proppant stocks was around 22 while the S&P 500 logged just shy of 20. More specifically, oil and gas companies like Pioneer Natural Resources have experienced so much success with proppants that they are considering using more per job to improve efficiencies and expand margins.
The industry leader in proppants
The clear winner in the proppant industry is Hi-Crush Partners , a $542 million company that focuses on frac-sand, a crush resistant type of sand used in hydraulic fracturing. The stock is up 144% in the last year but still trades at a reasonable 15 times earnings. Earnings per share (EPS) growth this year was an astounding 30% giving it a PEG ratio of just 0.80. The company has an operating margin of 36% and reported quarterly revenue growth of 217.90% year over year. Hi-Crush pays an exceptionally high dividend with a yield of 5.10% as well. Fundamentally, the stock shows little reason why it wouldn't continue to outperform for 2014, especially with fracking becoming more mainstream.
Risks to consider
Shale mining and fracking are relatively new extraction methods with unknown long-term effects. While the proppant industry has outperformed for 2013, the sector may experience some profit-taking before climbing to new highs in 2014. Because of the unique nature of extraction, future growth rates are subject to change and may affect future EPS estimates.
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The article The Little-Known Industry Fracking Relies On originally appeared on Fool.com.
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