The lowdown on fracking

Fracking is all the rage at the moment, and it’s possible that investors will make big money from it. But it’s not a sure thing – there are risks here.

In this video, Ed Bowsher explains what fracking is, and also looks at the pros and cons from an investment perspective.

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Hi, in this video, I'm going to give you the lowdown on ‘fracking’. And I'm going to look at what it means to US investors and investors in the UK.

So, you probably know what fracking is. But here's just a really quick summary:

Fracking is an old technology that's been improved in the last few years. It now means that we can extract oil and gas in commercial quantities from shale rock. That's rock where, previously, we have not been able to get the energy out. Fracking uses a lot of water to make it commercially viable to extract the energy.

Now in the US, the fracking revolution has begun, and energy is being extracted from shale rock. That's been great news for the US economy. It's meant cheaper energy and it’s been really good news for manufacturers.

We've seen a new phenomenon called ‘re-shoring’, where some US manufacturing companies are bringing manufacturing back from places like China and India to the US, partly because with technology, they don't need that much labour anymore, but partly because energy is cheaper.

The other big positive for the US is that the balance of payments is improving. In other words, the US is importing less oil. That's good news, and it should lead to a stronger dollar. So, if you want to benefit from this shale energy revolution, potentially, you might invest in some US manufacturers.

You might even take a position in the dollar, but I would be careful. There are a lot of other issues to consider. Don't pile all your money straight into the US, because no doubt about it, the US economic revival is partly down to the shale oil and gas revolution.

So, what about the UK? Well, there's no doubt there's plenty of shale oil and gas beneath the UK. And one recent report suggested that there's enough extractable shale gas beneath 11 counties in the midlands and the north of England, that it's equivalent to 50 years of natural gas supply for the UK. That’s an amazing figure. If we really can get all that gas out, it will make a big difference to the UK economy.

But there are two risks here.

The first risk is that it's still early days. We're still in a ‘maybe’ situation. We don't know for sure that we can extract this gas in a commercially viable manner. There needs to be a lot more drilling, and a lot more exploration until we really know how much energy we can bring out in a commercially viable way.

The second risk is the environment. I'm not going to assess the environmental impact of shale energy. I haven't got time in this video. All I am saying is that a future government might say, "Yes, there's lots of gas we can get out in a commercially viable manner. But the environmental cost is too high. So we're still not going to do it."

You might say that risk is negligible, you might say that risk is high - but you need to bear it in mind. I think it's a really important point here. There is plenty of risk if you invest in UK shale energy. But equally, the potential reward is huge. So right now, in February 2014 as I make this video, I think the risk-reward balance is still in favour of investors. And if you want to invest in the UK shale energy revolution, there are several companies that are well placed to benefit. And you can find out more about these companies in MoneyWeek.

If you're a subscriber, just go into our web archive and you can read some of those old articles where we give you some tips. And if you're not a subscriber, sign up for a free trial and the whole archive is there available to you.

So, that's a really quick overview on the fracking revolution. But I hope you found it helpful. And we'll be back with another video very soon. And if you want more information on fracking, we've also got a free report for you.

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  • Peter Lloyd


    OK, good, informative article, as far as I can judge.

    But to call the rolling, forested hills and green, fertile valleys of beautiful, mostly fairly affluent, Pennsylvania a “desolate outback” makes one wonder whether you really know what you are talking about. I hope your economic and technical insight is better than your knowledge of the USA and that you are not just regurgitating some vested interest spin without examining it first.

    I believe shale gas (and, therefore, fracking) will be the last-minute economic saviour of both the US and UK provided that the excitement does not sidetrack proper safety and environmental measures on its extraction and distribution. In the UK, I hope that lessons will be learned from North Sea oil and gas, so that the advantages trickle down to the consumer instead of being frittered away in stupid political ideology – left or right. So far, the indications are not good.

  • Richard Tavener

    One as heard from several sources that U.S company profit margins are at an historically high level. Do you think that cheap ” shale ” energy has already contributed to this situation and that there’s more to come?

  • Ed Bowsher

    Yes, I think shale energy has certainly helped US company profit margins.

    Is there more to come? Possibly, but not enough to turn me into an out and out bull on the US market. Valuations are still too high. I’m happy to buy selectively in the US, but I don’t think now is a good time to buy the whole market – ie in an ETF or similar.


  • Jon Slack

    It’s very convenient that there was no time to “assess the environmental impact of shale energy” in this video. It’s the most important factor – far far more important than whether you make a few quid or not. The evidence so far is that this will lay waste to vast swathes of our Green and Pleasant Land, leaving behind a radioactive no-man’s land upon which nothing will grow and no-one will be able to live there. In an early publication you [Money Week] were saying that French investors were looking to investing in fracking in the UK, but failed to say that the more sensible French have BANNED fracking in France due to the environmental issues. Of course they’ll invest here – this isn’t their back yard.

    Yes, there’s gas down there and yes, it’s now possible to get it out. But as an old Native American saying goes: Once you’ve chopped down the last tree, you’ll learn that you can’t eat money.

    The sun will burn for another 4 billion years. The Earth revolves causing air movement and the moon moves the Earth’s water up and down twice a day – there’s enough energy there to last us forever – not 50 measly years. THAT’s where your money should be going. Short, sharp, quick return in exchange for a world your grandchildren can’t live on is mindless stupidity. The old curse ‘may you rot in hell’ will not affect you, but it will affect your descendants. Because that’s all you’ll leave them.

  • WILLIAMS95634

    Hi Ed – thanks for your videos, always helpful. Not relevant to the latest video but I have been watching the Enterprise value/ EBIT video. I understand the principles and have tried to apply them. In looking up the data tables on H/L or Digital Look though, the terminology gets tricky. So what lines on the financial data pages do you use for net debt – is it total liabilities or just borrowings ? For EBIT, is that exactly the same as operating profit or something slightly different ? So I’m interested in applying the theory but don’t want to leap to wrong conclusions if my calcs include incorrect assumption. Perhaps you could do another video detailing a case and illustrating which lines of finical data you use.