Two Oil-Services Names Have 'Killer Apps'

 | Jun 23, 2014 | 3:30 PM EDT  | Comments
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Water management has been a part of oil drilling since the 19th century, but the advent of hydraulic fracturing has brought this service to the forefront. There are three main steps to the management of water in the drilling process:

  • Getting water to the well --"water transfer" -- in sufficient quantities to send downhole (along with proppant) to stimulate fractures in the rock.
  • Managing the "flowback" water that comes back up through the pipe -- along with frack fluid -- immediately after the fractures are stimulated.
  • Dealing with the "production" water that will flow to the surface along with the hydrocarbons (in increasing proportion as the well ages) for the life of the well.

I'm going to focus on two companies here, HII Technologies (HIIT) and GreenHunter Resources (GRH). HII Technologies focuses on the first two steps, water transfer and flowback, while GreenHunter provides a multitude of water services but adds most value in steps two and three, i.e., management of flowback and production water.

I'll go into full details on the two companies tomorrow (including the drivers behind GreenHunter's 70% stock price rise in the last 11 trading days), but for now I'll discuss technology.

HII Technologies' biggest business is water transfer. It's a simple business, not capital-intensive and easy to value, as the company gets paid by the foot of pipe or hose used to get the water from a source (usually a river or pond) to the well site.

But the killer app for HII Technologies is an evaporation technology for which is has an exclusive license for Texas and Oklahoma (from privately held Resource West.) HII Technologies' contract allows it to market the Landshark and Barracuda evaporators in those two states, which account for 61% of U.S. oil production.

It's a really simple idea, but the ability of the Landshark (the bigger of the two evaporators) to spray water through the air at 110 gallons per minute into an evaporation pond is a "green" advantage. The water returns to the atmosphere, from whence it came.

Of course, there is some residual fluid (HII Technologies' management refers to it as "sludge") that doesn't evaporate and must be disposed. That residual represents two disposal truckloads. Contrast that with disposing all of the water, which requires roughly 300 truckloads to the disposal well, and one can see that evaporation generates huge savings. The company's management estimates the cost savings at 40% to 50%.

GreenHunter's killer app involves a technology that emerged thousands of years before the advent of drilling for hydrocarbons: waterborne transportation. GreenHunter's basic business is operating salt-water disposal wells (SWDs). Much like HII Technologies' water-transfer business, it's simple and highly necessary, and it also requires the trucking of water from the productive well to the SWD.

In an effort to reduce that truck traffic, GreenHunter has bought or leased nine riverside terminals in Pennsylvania, Ohio and West Virginia with the goal of barging flowback and production water down the Ohio River to its SWDs in Southeastern Ohio.

The disposal well situation is farcical in the Marcellus/Utica shale plays. Pennsylvania has more than 55,000 gas wells spread across its Southwest and Northeast quadrants and six disposal wells, none of which is currently operating commercially. Operators in counties such as Susquehanna in Northeast Pennsylvania face the prospect of a trip of more than 200 miles to a disposal facility in Ohio, which is obviously expensive and trucking-intensive.

So, again, here's an idea that can get trucks off the road and, in the process, result in a substantial increase in GreenHunter's margin on disposal. The only impediment to common sense is, you guessed it, the U.S. government. In this case, the U.S. Coast Guard has final say, and the process has gone through the usual hue and cry of commenting, all while other potentially hazardous materials are barged down the Ohio every day. On GreenHunter's last management conference call, COO Kirk Trosclair expressed confidence that the situation would be resolved soon.

The environmental math is simple: Each barge-load of wastewater equates to 400 truckloads (40,000 barrel capacity vs. 100), and that would produce a huge savings in fuel usage and truck emissions.

So there you have it: a technology that reduces 300 truckloads of waste to two, and another that moves 400 truckloads via water, with trucking only needed to the barge terminal itself. Killer apps!

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