How to Play Newly Fracking-Friendly Britain

by Aaron Levitt | December 19, 2012 9:39 am

At this point, we all know about the hydraulic fracturing revolution that has swept across both the United States and Canada — and that the resulting abundance of natural gas and other fuels has started to transform North America’s economies, proving it could be the U.S.’s ticket to energy independence[1].

Other nations have caught the fracking bug, too. A variety of nations in Latin America and Africa have expanded the use of the technique, while Eastern European countries like Poland, Ukraine and Lithuania are now more open to the opportunities shale gas could bring — both on the jobs front and to easing their dependence on Russian-based gas.

Now, the energy industry can add the United Kingdom to that list.

The U.K. has given the green light to fracking, reversing a previous ban on the drilling technique. And while it might be a while before the endeavors pan out, investors do have a few options to play Britain’s place in the fracking lexicon.

Western Europe’s Bellwether for Fracking

The U.K. originally had just called for more stringent controls on fracking based on the various environmental concerns — including the risk of water pollution — that come along with the drilling technique. However, after a series of small earthquakes[2] in northwestern England, where E&P firm Cuadrilla Resources was exploring for shale gas, the government completely banned fracking from within the U.K.’s borders.

Yet, with the British economy plodding along in much the same way as the United States, government officials have been under pressure to ignite growth once more. Like here in the U.S., Britain is looking to shale gas extraction as a means to create jobs and generate tax revenues, ultimately reducing its reliance on imported gas.

Those imports have been growing as natural gas production in the U.K. has continued to fall during the past few years. Monthly production from its conventional wells has declined from around 350 billion cubic feet (Bcf) in 2000 to under 200 Bcf in 2011. Mature fields account for the bulk of current production, and imports now make up more than 50% of current supplies in the nation. Those piped imports have driven up energy costs exponentially and have made a bad economy worse.

Bowing to the pressure, the U.K. parliament lifted the year-old ban[3].

There’s certainly plenty of opportunity to use the technique in the region. Although only a few seismic studies have been performed countrywide, reserves in the U.K. are estimated to be quite large. The British Geological Survey previously estimated total reserves to be around 5.3 trillion cubic feet (Tcf). However, that number was taken several years ago, before advances in the technology occurred; the BGS is expected to update its reserve numbers in 2013. Based on its own seismic studies, Cuadrilla Resources pegs that number as high as 200 Tcf.

The United Kingdom uses about 3 trillion cubic feet of gas a year.

More importantly, the U.K.’s recent decision to lift the ban could help bring shale gas and fracking to the rest of Western Europe. Both Germany and France have also banned the practice, while a host of other nations have considered doing the same. If the U.K. proves successful, these nations could reverse their own bans[4].

Two Ways to Play the Ban Reversal

With fracking now coming to the U.K., investors might want to jump into the opportunity. However, most firms that are involved in the U.K. (as of right now) aren’t traded on U.S. exchanges or are private enterprises, as is the case with Cuadrilla Resources.

Still, there are two big ways to play the recent tidal change:

The first is energy industry stalwart Exxon Mobil (NYSE:XOM[5]). Less than a day after the ban was lifted, the world’s largest publicly traded oil company began eying stakes in the U.K.’s shale gas revolution[6]. According to The Sunday Times, the major giant is in talks to buy into a drilling operation in northwest England from energy company IGas.

Exxon has been on the hunt lately to expand its drilling programs[7] as it deals with production and reserves. Unlike the location of some of the most recent large exploration finds, England is seen as a politically friendly nation with the rule of law. That’s a big plus. At the same time, Exxon will be able to apply its leadership in the unconventional sector to the U.K. — the move makes sense for the firm as well as investors.

As for supplying that fracking equipment, Halliburton (NYSE:HAL[8]) might be the oil service kingpin of North America, but Schlumberger (NYSE:SLB[9]) supplies the world and is the dominant player overseas. That includes equipment that lessens the environmental impact and smaller operational footprints — factors that are very important to most Europeans. That puts SLB in the driving position when it comes to supplying equipment in England.

More importantly, as historically low natural gas prices[10] have hurt fracking margins in the U.S., the U.K.’s higher gas prices give Schlumberger more wiggle room on pricing. That will help boost earnings at the global firm more easily than rivals.

England’s shale gas revolution still is in its nascent stages. Both Exxon and Schlumberger could give U.S. investors a chance to participate.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

Endnotes:
  1. energy independence: http://investorplace.com/hot-topics/energy-independence/
  2. a series of small earthquakes: http://www.cnn.com/2012/12/13/business/uk-fracking/
  3. U.K. parliament lifted the year-old ban: http://www.cnn.com/2012/12/13/business/uk-fracking/
  4. own bans: http://investorplace.com/2012/07/for-europe-shale-gas-is-no-panacea/
  5. XOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=XOM
  6. began eying stakes in the U.K.’s shale gas revolution: http://www.thesundaytimes.co.uk/sto/business/Industry/article1177436.ece
  7. expand its drilling programs: http://investorplace.com/2012/11/whats-next-for-exxon-after-rosnefts-buy/
  8. HAL: http://studio-5.financialcontent.com/investplace/quote?Symbol=HAL
  9. SLB: http://studio-5.financialcontent.com/investplace/quote?Symbol=SLB
  10. historically low natural gas prices: http://investorplace.com/2012/11/whats-up-with-natural-gas-heading-down/

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