Equal Energy NGLs are priced at about 80% of Conway terminal in Kansas; recently prices at Conway have been hammered due to a distribution bottlenecks (combined with generally lower prices), this is from CIBC May 3rd report:
"The price differential between Mont Belvieu and Conway as represented by the ethane-propane mix has increased from $14/Bbl to over $24/Bbl in Q1/12 peaking at $48/Bbl in Q4/11."
The good news Conway prices are expected to increase going forward due to the resumption of petrochemical demand as multiple industry turnarounds finalize in Q2 and new pipeline capacity to Mont Belvieu; from the same report:
(1) Growing NGL production from the Marcellus, Bakken, and various Rocky Mountain producing basins; (2) NGL pipeline constraints between Conway and Mont Belvieu; and (3) lagging petchem demand relative to supply growth are all contributing factors to the widening NGL Hub differential. Near term, petchem plant turnarounds are expected to be completed mid-Q2 increasing demand, while mid-continent fractionation plant turnarounds start, reducing supply. Longer term, several proposed NGL pipelines should help compress the differential (see Exhibit 2). We discuss four such pipeline proposals below:
Kinder Morgan Energy Partners (KMP-NYSE) spent $30 million to upgrade its existing Cochin pipeline, which will move 13,000 Bbls/d of Conway-sourced E-P mix to Sarnia, Ontario. The project was expected to come online on April 1, but has been delayed due to permitting issues. Kinder Morgan signed a three-year contract with Nova Chemicals, which is in the midst of an expansion to its Corunna, Ontario facility.
DCP Midstream (DPM-NYSE) is proceeding with the 150,000 Bbls/d common carrier Southern Hills Pipeline between Conway, Kansas and Mont Belvieu, Texas. DCP will convert the Seaway Products Pipeline, which it bought from ConocoPhilips (COP-NYSE) on November 1, 2011, from a refined products pipeline to an NGL pipeline. Southern Hills Pipeline is targeting a mid- 2013 in-service date.
Oneok Partners (OKS-NYSE) is planning a 193,000 bpd NGL pipeline called Sterling III Pipeline between Medford, Oklahoma (just south of Conway, Kansas) and Mont Belvieu, Texas. Commercial operation is expected by late 2013 assuming construction starts in early 2013. As currently designed, the 16-inch Sterling III pipeline capacity can be expanded to 250,000 bpd with additional pumping stations.
On January 3, 2012, Enterprise Products Partners L.P. (EPD-NYSE) announced it had received sufficient commitment to develop its 1,230- mile Appalachia to Texas NGL pipeline, ATEX Express. ATEX Express originating in Washington County, Pennsylvania will have 190,000 bpd capacity and terminate in Mont Belvieu, Texas. ATEX Express is expected to begin commercial operations in the Q1/14.
While Equal is current disadvantaged because of the Conway pricing, this situation will gradually solve itself as the current bottleneck is worked out, for each $10 compression in the differentials, Equal would generate $12.7m in additional annual revenues and $7m in cash flow (based on the AGM sensitivity analysis), thus with a Q1 spread to Mont Belvieu of $24, there is ample room for improvement, and should NGL prices rebound in 2013 (increased propane exports, a normal winter, and enhanced ethane cracking capacity) producers at Conway stand to benefit both ways from higher prices and a compressed spread. I am quite confident any buyer of Equal assets must be aware of those dynamics.
Prices are in cents per gallon, thus to find the per barrel price, you need to multiply by 42 and divided per 100.
Note the extreme differentials between Conway and Mont Belvieu (MB), especially for Ethane and Propane; prices for the week of May 22nd:
Ethane: MB: 39c Conway: 11.78c
Propane: MB: 93.9c Conway: 70.58c
Butane: MB: 160.82c Conway: 134c
Pentane: MB: 206c Conway: 197c
NGL Barrel: MB: $44 Conway: $34.9
It is worth noting that current prices are at the extreme low end of their historic valuation, similar to where they were in early 2009, however if we were to use current prices as a base for 2012, cash flow for this year will decrease by $10.5m leading to $40m to $45m in annual cash flow vs the expected $50m to $55m for 2012.
As for crude, the company has 66% of its crude production hedged at $101, and 38% of NG at $4.3 per Mcf.
Once the bottleneck is addressed in 2013, along with the expanded cracking capacity coming later in 2013, it is highly likely that NGL prices at Conway will recover significantly from current levels benefiting from both the compression in spreads vs Mont Belvieu and rising demand for NGLs as the petrochemicals industry expand to benefit from increased NGL production in North America.