GreenHunter (GRH) shares continue their meteoric rise -- they had another 20% gain today on more than 5x normal volume. There hasn't been any news on GreenHunter since the company's press release on June 30, which detailed the company's plans to build a pipeline to carry fresh-water, gas-drilling wastewater and condensate (another by-product of gas drilling) from two points of delivery (one in southwest Pennsylvania, and one in West Virgina) to an GRH barging terminal on the Ohio River.
In my trilogy on frack water, I mentioned GRH's plan to barge wastewater down the Ohio River as a "killer app," because it would reduce truck traffic from wastewater disposal. The Coast Guard has held up GRH's barging request for the better part of a year now. I still believe the its barging program will eventually gain approval, though predicting the timing under the current administration in Washington is obviously difficult. But if the goal is to get trucks off the road, then this pipeline project (with a targeted completion date of Jan. 1, 2016) is a step in the right direction.
But is that enough to have driven GreenHunter shares up by 130% in a month? Not likely. While I have spread the gospel of hydraulic fracturing wastewater disposal in my columns, I believe that the market is excited by the smallest and lowest capacity (initially anyway) of the three pipes in the company's pipeline project: the condensate line.
What is condensate? That's a simple question with anything but a simple answer. The shortest way to describe it is that it is a by-product of natural gas produced as the gas cools (hence, condensation) as it is being extracted. Molecularly speaking, condensate is heavier (it has at least five carbon atoms) than lighter natural gas liquids (NGLs), such as ethane and butane. Thus, it is not useful in plastics production and other feedstock uses as the lighter NGLs are.
The EIA estimates that 12% of U.S. hydrocarbon production is in the form of condensate. As much as I love to hear stories of farmers filling their tractors' gas tanks directly from the light "casinghead gas" from old-time gas wells, condensate is most useful today to help dilute extremely heavy crudes (such as those from tar sands.) Specifically, condensate is used to dilute bitumen, the sludgy product of tar sands extraction, so that it can process into a form that will flow smoothly through a pipeline.
Canada is rich in tar sands but relatively poor in condensate, with required supply coming mainly from the light-hydrocarbon rich Eagle Ford shale in Texas and increasingly from the Marcellus and Utica shale plays in Ohio, West Virginia and Pennsylvania.
So, as with so many other parts of the energy industry, the end user is not near the producer. Hence, the value of building pipelines.
And, on the topic of pipelines, it would be impossible not to conclude that GreenHunter's pipeline system would fit in well with corporate cousin Magnum Hunter Resources' (MHR) Eureka Hunter gas pipeline system.
And maybe that's been the endgame all along. GreenHunter CEO (and majority shareholder) Gary Evans is also the CEO of Magnum Hunter. Evans has talked about unlocking GRH's valuation through the transfer of assets to an MLP, and has mooted that same strategy to unlock value in Eureka Hunter. Evans and I agree that Eureka Hunter is being massively undervalued by the market (which is focused on MHR's producing assets). Until a month ago, he and I both believed (I have spoken to him several times on this issue) that GreenHunter was massively undervalued, as well.
So, a separately-traded freshwater/wastewater/NGL/condensate/dry gas entity may be the ultimate future for GreenHunter and Eureka Hunter. For now, though, I am holding to the inverse of the advice of the legendary investor Peter Lynch, who said: "The worst mistake you can make about a stock that has gone down is to think it can't go down any further."
Well, it can work in the opposite direction in a fast-growing industry, and unconventional drilling is certainly that. I am not going to make the mistake of underestimating the vast potential of GreenHunter, and I am certainly not selling any of the common or the 10% Series C preferred (GRH-C) that I own for my clients.