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How to Invest in America's Biggest Energy Trend

By Matt Badiali, editor, S&A Resource Report
Wednesday, August 11, 2010

This week, a huge trend I've been highlighting recently got a shot in the arm.
 
The trend is the mushrooming growth of the unconventional gas drilling industry in the United States.
 
Two days ago, giant drilling company Nabors offered to pay $900 million in cash for a company named Superior Well Services... a 60% premium to its stock price on Friday.
 
Superior is a small-cap company that specializes in the hydraulic fracturing, or "fracking," of natural gas wells. Fracking is the practice of causing millions of tiny fractures in hydrocarbon-rich rock layers in order to help oil and gas flow. Superior is one of the companies participating in the drilling boom I described after my most recent visit to the huge Eagle Ford shale field in Texas.
 
Along with horizontal drilling, fracking is the key to getting natural gas out of unconventional shale. A more recent twist is fracking liquid-rich shales like the Bakken in North Dakota, the Piceance in Colorado, and the Eagle Ford. These rocks are yielding thousands of barrels of crude oil to the same technique we use for natural gas.
 
Oil and gas explorers now frac nearly every well. Service companies like Superior can't keep up with demand. Wells in Texas will often sit for days after drilling, waiting for the service company to show up and frac them.
 
That's why Nabors ponied up $900 million in cash for Superior. And that's why oil-service giant Baker Hughes shelled out $5.5 billion for fracking specialist BJ Services back in April 2010.
 
While there are some environmental concerns that must be dealt with, the U.S. government is encouraging the rapid expansion of our onshore domestic energy supply... so fracking demand is going to grow... and fracking is going to get more expensive.
 
There are two ways to play this technology. You can buy an oil- service company – Halliburton, Baker Hughes, and Schlumberger. But while these are excellent companies, they have many other operations in the energy business besides well fracking.
 
You can also buy a Canadian company, Calfrac (CFW on the Toronto Exchange). This is a $982 million oil-service company that could be a buyout target for its fracking service. Based on Nabors' purchase of Superior, Calfrac would be worth about $2.7 billion.
 
However, my favorite play on hydraulic fracturing is "proppants." Proppant is the material used in the frac job to prop open the rocks. You can't frac a well without it.
 
My S&A Resource Report readers are up 25% on Carbo Ceramics (CRR), the world's largest producer of ceramic proppant. Ceramic proppant is the toughest material available. It can stand up to high pressure and temperature, making it perfect for shale fractures.
 
I expect supply shortages will increase the price of proppant over the next few years. As Nabor's buyout of Superior shows, there's a lot of money being thrown at this industry right now.
 
At the same time, Carbo Ceramics is expanding, building out new production in Georgia and Tennessee. That means it will increase sales even as its profit margin increases. Carbo Ceramics looks like a huge winner as fracking continues to grow.
 
Good investing,
 
Matt Badiali




In The Daily Crux
Market Notes
Bernanke says low rates are here to stay... stocks yawn and decline 0.5%.
 
10-year Treasury yield sinks below 2.8%.
 
Huge hard-drive maker Western Digital continues awful bear market... down 40% in last three months to a new low.
 
Marlboro maker Altria continues huge uptrend... at fresh 52-week high.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1089.47 -2.8% +9.6%
Oil 34.74 -3.2% -5.8%
Gold 117.34 -0.3% +26.5%
Silver 17.53 -2.5% +24.4%
US-Dollar 82.45 +2.0% +4.2%
Euro 1.28 -2.6% -9.3%
Volatility 25.39 +13.5% -2.3%
Gold Stocks 450.22 -2.3% +28.4%
10-Year Yield 2.68 -3.6% -27.4%

World ETFs
Symbol Price
Change
52-Wk
USA 109.30 -2.7% +9.6%
Canada 25.90 -3.5% +11.7%
Russia 18.38 -3.3% +5.0%
India 31.82 -2.5% +12.8%
Israel 14.50 -2.7% +13.1%
Japan 9.48 -3.4% -4.3%
Singapore 11.90 -3.3% +18.2%
Taiwan 12.44 -2.5% +14.2%
S. Korea 48.08 -4.1% +18.0%
S. Africa 59.17 -3.3% +20.7%
China 40.15 -2.8% -3.0%
Lat.America 45.45 -3.3% +17.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 103.26 -3.4% +1.7%
Big Pharma 61.40 -2.5% -2.0%
Internet 54.49 -3.1% +19.1%
Semis 12.24 -3.9% +3.9%
Utilities 30.65 -2.0% +5.7%
Defense 16.61 -4.0% +11.9%
Nanotech 8.51 -5.4% -14.1%
Alt. Energy 8.81 -5.5% -14.9%
Water 15.32 -4.4% -2.8%
Insurance 14.66 -3.5% +11.4%
Biotech 18.22 -3.3% +13.9%
Retail 16.00 -3.7% +4.2%
Software 20.51 -3.5% +12.8%
Big Tech 45.40 -2.7% +15.6%
Construction 11.38 -4.6% -5.3%
Media 11.71 -3.9% +20.5%
Consumer Svcs 56.62 -2.6% +15.7%
Financials 51.17 -3.4% +4.5%
Health Care 60.04 -2.5% +5.4%
Industrials 54.68 -3.6% +17.2%
Basic Mat 58.97 -3.4% +16.7%
Real Estate 51.13 -2.4% +29.7%
Transportation 77.13 -4.1% +15.9%
Telecom 19.99 -2.6% +13.7%

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