Fracking: Not All It's Cracked Up to Be

Fracking was all the rage between 2009 and 2014.

The euphoria that enshrined this “new” industry was palpable in the wake of the 2008 credit crunch, as investors clamored for the next economic savior. Hydraulic fracturing was supposed to be it.

Google Trends shows that internrnet searches for the term “fracking” peaked in August 2013. That’s about eight months after Matt Damon’s environmentally-bent expose of the industry, Promised Land, was released. Take a look at the epic rise in the popularity of fracking…

Search Results for Fracking 2005 to 2016

We too covered the topic of fracking – coincidentally – in our August 2013 issue of Boom & Bust.

At the time, crude oil prices were hovering around $105 a barrel. Natural gas was dirt cheap, having fallen from roughly $20 in 2008 to $3 by August 2013.

Indeed, there was promise in the drilling technologies that were then going mainstream. And we would have been remiss not to have covered the topic. But, at the same time, we saw a plethora of landmines ahead.

For one, Harry’s long preached of the deflationary forces that drag commodity prices lower. And so hydraulic fracking only stood to make economic sense as long as the price of crude oil was sufficiently high.

Now that crude is trading for under $50 a barrel… fracking just isn’t that great anymore!

In full disclosure, I recommended to Boom & Bust subscribers a way to play the fracking story. But it wasn’t what most expected.

In that August 2013 issue of Boom & Bust, I explained how it was too risky to bet on the price of natural gas directly – via an ETF, such as the United States Natural Gas Fund (NYSE: UNG).

I also warnrned that exploration and production companies – the operations that find, claim and pull natural gas from the ground – were subject to commodity price risk. And I said those companies were too risky to invest in.

As an alternrnative to those poor options, I recommended an unlikely stock… one that had been in existence many decades longer than fracking. And one that had all the makings of a “Winter Season Shakeout Winner,” as I called it at the time.

I don’t often write “I told you so” pieces… but that stock I recommended, it’s still in our Boom & Bust portfolio at a 54% profit.

Meanwhile, this chart shows the collapse in oil prices (USO), natural gas prices (UNG) and oil exploration and production companies (XOP). These have all already collapsed, between 32% and 56%.

Collapse in Oil Natural Gas and Oil Exploration and Production Companies

So while much of the investment world was gravitating to the new and exotic wonder of hydraulic fracking, jumping in head first, risks be damned, we saw the dangers ahead and charted a more prudent, long-term course for profits.

Adam O'Dell

Adam O’Dell

Chief Investment Strategist, Dent Research