Gas Processing MLPs Hurt as Most Nat Gas Liquids Prices Declined


Research Highlights

-Many natural gas processors have contracts that are sensitive to prices in natural gas and natural gas liquids (NGLs).

-Frac spreads reached ~$30/barrel in mid-February but have recently traded down to current levels of below $23/barrel.

-On a week-over-week basis, the metric increased by 6% for the week ended June 14, from $23.99/barrel to $22.64/barrel.

Some market participants view fractionation spreads (also called "frac spreads") as one indication of the profitability of some natural gas processing companies. Frac spreads are dependent on natural gas liquids ( NGL ) and natural gas prices, and increase when NGL prices increase relative to natural gas prices. Generally, natural gas processing companies such as MarkWest Energy ( MWE ), Targa Resources ( NGLS ), Williams Partners ( WPZ ), and DCP Midstream Partners ( DPM ) realize more profits when frac spreads increase. Last week, natural gas prices decreased 2%, however, most NGL prices decreased by more which caused frac spreads to decrease.

The heavier NGLs (such as natural gasoline) tend to trade directionally with crude oil, which increased last week as did natural gasoline. Additionally ethane tends to trade more in line with natural gas, which declined on the week, though certain NGL specific dynamics could have caused the steep declines in ethane, propane, and butane this week.

As aforementioned, the commodity price movement ultimately resulted in a lower frac spread week-over-week. Natural gas prices fell slightly on the week and news sources speculated that traders anticipated milder weather creating less natural gas demand as well as a greater than anticipated increase in natural gas inventories. Meanwhile, most natural gas liquids prices dropped but more sharply than natural gas so that frac spreads ultimately traded down on the week.

For a period, frac spreads increased to $40-50/bbl due to depressed natural gas prices while NGL prices had remained relatively robust. Over the last year, frac spreads have declined largely due to the sharp drop in prices in ethane and propane.

As aforementioned, the decline in ethane and propane prices has been a consequence of the "shale revolution" boom, as natural gas shales rich in NGLs have experienced rapid development, resulting in the market being flooded with new NGL supply. While the excess supply of ethane and propane had been absorbed at first by the chemicals industry, much of the capacity for chemical companies to process ethane and propane has been soaked up.

Once more capacity for processing ethane and propane comes online or more NGL export capacity is constructed, this could provide additional long term demand for these commodities and result in higher frac spreads. Several midstream companies have noted that they are working on such projects, however, the timeline for the completion of these works is over the next several years. Additionally, even if demand for these NGLs grows as a result of completed infrastructure, the supply of NGLs also continues to grow and if supply meets or outstrips demand, the prices of ethane and propane may continue to be depressed. Circling back to a short-term perspective, last week frac spreads decreased by 6%, which was a negative catalyst. However, since early February, fractionation spreads have decreased by over 25% resulting in a negative medium-term catalyst for gas processors such as MWE, NGLS, WPZ, and DPM, many of which are also components of the Alerian MLP ETF (AMLP).

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Copyright (C) 2014 All rights reserved. Unauthorized reproduction is strictly prohibited.

This article appears in: Investing , Commodities

Referenced Stocks: DPM , MWE , NGL , NGLS , WPZ

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