When James Marshall found gold at Sutter’s Mill, it sparked a craze that sent hordes of people out West seeking their own fame and fortune…
Of course, few found these things.
More than 300,000 people flooded to the Western United States in ten years’ time, and approximately one out of every 90 people in the U.S. was living in California.
Contrary to popular belief, both James and his employer John Sutter didn’t profit much from the California Gold Rush. The former was nearly bankrupt after becoming a partner in a mine, and the latter was in financial trouble only three years after the first gold discovery.
Now, I don’t bring this up to highlight the misfortunes of these two individuals — but there’s an extremely important lesson that investors stand to learn from this chapter in our country’s history.
You see, there was a group of investors that made money hand over fist during the Gold Rush: the folks selling the picks, shovels, gold panning equipment, and other supplies to hopeful gold-seekers.
While these merchants probably never mined for an ounce themselves, they profited heavily from the Gold Rush, pocketing returns that would make any modern investor envious.
Today we find ourselves witnessing a similar opportunity, once again unfolding right here in the United States…
Only this time, the rush is for oil.
A Modern-Day [Black] Gold Rush
There’s a feverish rush in the U.S. to develop our unconventional oil resources.
Instead of individuals dropping everything to move out West, companies of all sizes are jockeying for control.
And that’s where hydraulic fracturing enters the fray.
Earlier this week, I showed you the focal point of our onshore oil boom, and particularly how a group of service companies are outperforming major oil companies.
Let’s take a step back for a second and look at the whole picture…
At last count, there were 1,769 oil and gas rigs operating in the United States.
The first telltale sign of shale activity is the direction in which companies are drilling. After all, wells must be drilled before companies can employ hydraulic fracturing to extract the resources.
This technology is exactly what it sounds like: First, the company will drill straight down to a certain depth. The drill is then turned so that it runs parallel into the targeted formation.
The formation can then undergo fracture stimulation to allow the oil and/or gas to flow more freely.
Simply put, the more horizontal drilling you see, the more hydraulic fracturing will take place.
Six out of every ten rigs in the U.S. today are utilizing horizontal drilling methods.
Thanks to its continued success, hydraulic fracturing technology will be around for a long time.
(And if you have doubts, you can find the concrete numbers on a weekly basis right here.)
3 Picks-and-Shovels Plays
As I said, the real investment opportunity in the development of these resources may very well come from the picks-and-shovels plays in the sector.
When I talk about the “picks and shovels” of hydraulic fracturing, I’m referring to investing in companies that deal with the two biggest components in the process: sand and water.
Keep in mind that each shale well requires about five million pounds of proppant. Proppants are materials used to keep the fractures in the rock open. For the most part, we’re talking about sand or ceramic material.
One play that warrants a second look from investors is U.S. Silica Holdings (NYSE: SLCA), which mines, processes, and sells commercial silica in the United States.
In other words, they’re selling frac sand to the oil and gas industry.
And as far as performance is concerned, this pick would have doubled your money within the last 12 months:
Now, having grown up in Pennsylvania, I’ve seen both sides of the Marcellus Shale boom. And as with every other boom in U.S. history, there are always issues to deal with.
One of the most controversial issues when it comes to fracking is water — from the sheer volume needed for the process to how to deal with the resulting wastewater.
That’s why my second and third plays deal directly with water.
Maybe you recall a startling figure I’ve mentioned many times in these pages: Since 2006, more than 450 billion barrels of water have been used in the Barnett Shale.
A few of you may have heard or even seen the wastewater ponds associated with hydraulic fracturing operations.
I’ll be the first to tell you it isn’t a pretty sight…
If you’re looking for the next lucrative breakout in the U.S. oil and gas industry, it’ll be from the technology dealing with the water issues plaguing hydraulic fracturing operations.
Interesting players in this group include GasFrac Energy Services (TSX: GFS), a company using a waterless fracturing technology.
More traditional water plays include Nuverra Environmental Solutions (NYSE: NES), which offers a variety services for shale drillers, including the hauling and treatment of water used for frac jobs.
There’s no question in my mind that water is the holy grail in shale investments right now…
It all boils down to finding the company that can deliver the best and most cost-effective solution.
Until next time,
Keith Kohl
Check us out on YouTube!A true insider in the technology and energy markets, Keith’s research has helped everyday investors capitalize from the rapid adoption of new technology trends and energy transitions. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital, as well as the investment director of Angel Publishing’s Energy Investor and Technology and Opportunity.
For nearly two decades, Keith has been providing in-depth coverage of the hottest investment trends before they go mainstream — from the shale oil and gas boom in the United States to the red-hot EV revolution currently underway. Keith and his readers have banked hundreds of winning trades on the 5G rollout and on key advancements in robotics and AI technology.
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