Halliburton, Schlumberger Shares Feel Tremors from Fracking Concerns

Days after the Environmental Protection Agency linked chemicals found in groundwater samples in Wyoming to hydraulic fracturing activity, the process is now being blamed for unusual seismic activity in Ohio. ^[1] The practice of fracking has led to strong growth in the North American revenues for oilfield services players such as Schlumberger (NYSE:SLB) and Halliburton (NYSE:HAL) over the past few years. However fracking has also led to a great deal of scrutiny for these companies. The latest issue is the result of a number of tremors recorded near Youngstown, which had never shown much activity until companies began to drill nearby to inject waste water into a 9,300-foot deep well. Although scientists say that linking the two events requires more data, locals are becoming increasingly concerned. This does not augur well for the industry, which is already resisting moves to introduce more regulations. ^[2]

We have a $101 price estimate for Schlumberger which is nearly 50% ahead of its current market price.

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Shaky future?

Fracking requires massive quantities of water to be flushed down well bores at high pressures and withdrawn, which cracks open rocks and increases the yield of natural gas. The water, which is laced with chemicals, then has to be disposed of. Companies drill separate injection wells in order to do so. The water is injected into these disposal wells at sustained pressure, whereas with fracking the pressure is only maintained for a brief period. ^[1]

Youngstown started reporting minor quakes after D&L Energy started to inject waste water into a 9,300 foot disposal well about a year ago. The region has reported nine tremors since March, the latest coming on Nov 25th. ^[1] There has been no such activity around 190 other such injection wells in the state, according to government officials. In August, the disposal in some wells was suspended in Arkansas after more than 1,000 minor quakes were recorded around two injection wells. The University of Memphis participated in a study which suggested that a link between the wells and the quakes was plausible. There was a substantial reduction in the frequency of the seismic activity after injection was stopped. There have been other such instances in Dallas.

In the U.K., shale exploration in Blackpool was suspended after fracking was blamed for a quake in the region. ^[1] While a blanket ban in any of the major plays in the U.S. may be a remote possibility, the growing opposition to the practice may result in more stringent regulations. Recently the state of Colorado made it mandatory for companies to disclose the concentration of chemicals used in hydraulic fracturing. Increasing disclosure and regulation would likely result in increased costs and could put pressure on the margins of oilfield services firms.

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1. Fracking Has Formerly Stable Ohio City Aquiver Over Earthquakes, Bloomberg [↩] [↩] [↩] [↩]
2. Colorado requires disclosure of fracking chemicals, Associated Press [↩]