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Investing in the fracking explosion

Posted By Dick Sterling
December 19, 2013

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Investors know that horizontal multi-stage fracking has resulted in a massive upsurge in US oil and gas production. Speculators benefited by taking positions in the E&P companies which accumulated solid land packages in the Eagle Ford and Bakken formations early-on. Vendors also benefited, and so Wall Street began to focus on the drillers. Big profits were realized.

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The stocks of other input-vendors started heating up. Hydraulic fracking requires water, but also a cocktail of other ingredients including sand which keeps the fractures from closing. The drills also need a special type of mud --- often composed of clay and minerals such as barite. The mud is important, but let's focus on the sand.

US Silica (SLCA) and Hi-Crush Partners (HCLP) have both doubled in the past year+. So has Emerge Energy (EMES). The easy profits have been made. Are there other opportunities?

The industry is expected to go through more than 50 billion pounds of sand this year. Demand is increasing. The sand required by drillers is a special type. It needs to be screened to meet certain standards for size, roundness, and hardness. Much of the sand comes from Wisconsin which has some of the best mines for frack sand, but there are other sources too. Railroads are transporting the material all over the country. Each well requires a couple of dozen railcars of sand. Railway companies are benefiting.

There are no cheap railway stocks. CNI (Canadian National) and other major railroad companies are already cashing-in on the booming demand for sand. CN's frac sand market has grown to more than 50,000 carloads per year, generating close to $300mm annually from this niche. Market cap is more than $45 billion and the share price is in the mid fifties. It's looking to grow, and now is the right time.

Are there any acquisition targets? Kansas City Southern (KSU) could be one. At $120 per share, they're already up 50% this year. Still, their market cap is "only" $13 billion. I see it as an expensive stock. But as an 18-month speculation it has merit. Eventually Mexico's vast shale oil & gas resources will open up (recent news on that) generating enormous demand for frac sand. KSU is uniquely positioned to fulfill that. For that, and several other reasons which are another post altogether, larger companies could be prepping to acquire KSU, and Canadian National could end up being the successful suitor.Posted by: Dick Sterling, Editor   contact here


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