Following Prime Minister Liz Truss’ decision to lift the ban on fracking, I have been looking at a UK share that could benefit.
Fracking involves shooting a high-pressure mixture of water, sand, and other chemicals underground to crack rocks and release trapped gas and oil.
The technique has been used in the US since 1947 to produce 600trn cubic feet of natural gas. It was banned in the UK in November 2019 over fears it could generate earth tremors.
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Drilling into the details
Already, well-positioned UK oil and gas companies have seen their stock prices rocket. AIM-listed exploration company Egdon enjoyed a stock price jump of 30% in the last month.
Another hydrocarbon explorer in the UK, IGAS Energy, has seen its stock rally by 460% since 2022 kicked off.
Both of these companies could continue to enjoy market-beating share price growth in coming months and years.
However, I won’t be buying either of them. Their remarkable 2022 gains signal to me that the upside has already been priced in.
Instead, I have been looking for a less obvious UK share that could benefit from Truss’ fracking re-start.
Location, location, location
The north-west of England, or more specifically Lancashire, is home to the UK’s only shale gas wells.
These were built by UK energy firm Cuadrilla, owned by Australia’s AJ Lucas Group, before the fracking ban of 2019.
Oil and gas exploration companies will now likely begin scouring the UK for more potential drilling sites.
History indicates the north-west of England is a fertile ground for such applications. Previously, requests to frack have been filed with local authorities in Cheshire, Manchester, and Warrington.
The so-called ‘Carboniferous Bowland–Hodder area’ in north-west England is one of only four areas in the UK that is considered to have shale gas deposits that would be commercially viable to extract.
Making a splash
Enter United Utilities Group (LSE:UU). It owns 114,000 acres of land in the north-west of England, used primarily to gather water for its reservoirs.
In 2013, United Utilities Group entered into talks with Cuadrilla to let them explore for fracking sites on its land. It is possible such talks could resume in the coming months or years. Yet United Utilities’ stock price slumped 10% over the last month.
I don’t think investors have cottoned onto this potential windfall for the water giant yet. Of course, I also need to consider United Utilities core business before investing my hard-earned capital.
It is concerning that United Utilities’ net debt burden of £7.7bn is 25 times bigger than the company’s free cash flow.
In addition, United Utilities saw its underlying earnings per share fall by 4% in 2021/22 due to the effect of high inflation pushing up payments on their massive, index-linked debt.
In the rising interest rate environment, I am put off from buying United Utilities Group shares due to its heavy debt load.
However, I wouldn’t be surprised to see the company enjoy a share-price pop if exploration companies approach it again about a drilling deal on its land in the next year or two.
