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 Industries Ltd. (NYSE: NBR, Stock Forum) offered to pay US$900 million in cash for a company named Superior Well Services Inc. (NASDAQ: SWSI, Stock Forum), a 60% premium to its stock price on Friday.
Superior is a small-cap company that specializes in the hydraulic fracturing, or "fraccing," of natural gas wells. Fraccing 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, fraccing is the key to getting natural gas out of unconventional shale. A more recent twist is fraccing 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 fraccing 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 fraccing demand is going to grow and fraccing 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 fraccing.
You can also buy a Canadian company, Calfrac Well Services Ltd. (TSX: T.CFW, Stock Forum). This is a $982 million oil-service company that could be a buyout target for its fraccing 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 (NYSE: CRR, Stock Forum), 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 fraccing continues to grow.