1:27 PM ET

Short-Sellers Target Fracking Stocks

By Chris Dieterich

Plunging oil prices have unleashed short-sellers on shares of oilfield-service companies and exchange-traded funds that hold them.

Shares of constituents in Market Vectors Global Unconventional Oil & Gas ETF (FRAK ) have seen a spike in demand from short-sellers; short interest in the ETFs constituents has risen, on average, by 9% over the past three months, according to research firm Markit. Barron’s Randall Forsyth noted the damage done to the Market Vectors Global Unconventional Oil & Gas ETF earlier this month.

Short sellers borrow shares from other investors and sell them in the hope of buying them back at a lower price later.

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Markit says that these so-called unconventional energy companies, those that rely on producers to extract oil and natural gas from shale and oil sands, are at the center of the bearish activity.

These firms flourished during the three years when oil traded north of $100bbl, but we have seen them lag behind the rest of the market as investors take fright of their high marginal cost.

Northern Oil and Gas Inc. (NOG ). which operates in North Dakota’s Bakken region, has seen short-interest jump to 23% of shares outstanding. The stock is plumbing three-year lows.

Firms that service new oil and gas exploration have borne the brunt of the energy-patch selling pressure in recent weeks. Prices for U.S. crude futures have tumbled 25% since the middle of June, a stretch over which the Energy Select Sector SPDR Fund (XLE ) has fallen about 16%.

Tumbling oil prices are threatening to hamper the U.S. energy boom as drillers in the U.S. and Canada as reconsider hydraulic-fracturing projects. These producers tend to break even when crude is between $80 and $85 a barrel, writes The Wall Street Journal .

The Market Vectors Oil Services ETF (OIH ) saw its biggest weekly outflow last week, as investors pulled out $209, or 15% of the fund’s $1.4 billion in total assets.

The largest shorts in the industry are those related to future production as concerns mount that supply will outpace demand for another year, something which will no doubt crimp investment in extra capacity.

Markit says that the most-shorted single name is small-cap Paragon Offshore PLC (PGN ), a London-based company that provides offshore drilling rigs and services. Fully 25% of the firm’s shares are out on loan to short-sellers.