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Equal Energy Ltd. Message Board

  • nawaralsaadi nawaralsaadi Jun 7, 2012 10:03 PM Flag

    NGLs hedging

    Equal doesn't usually hedge its NGL production, however a buyer of Equal has the option to hedge production at much higher prices, for example:

    Conway propane is trading today at 57c gal ($24 per barrel), Conway production can already be hedged for 2013 25% higher at 71.5c gal ($30 per barrel).

    http://opisnet.com/market/samples/OPIS_NGL_Forwards_Report.pdf

    The sharp jump in price is due to the bottleneck at Conway, which is expected to be solved by the end of 2013, to that end it is informative to compare the propane forward curve at Mont Belview (MB) vs Conway for 2013:

    Today:

    MB Propane: 79.5c
    Conway Propane: 57c

    2013:

    MB Propane: 86c (8% higher)
    Conway Propane: 71.5c (25% higher)

    Similar dynamics exist for the reminder of Equal NGLs. Oneok one of the largest midstream operators in North America expect the MB-Conway Ehtane differentials to shrink from 32c today to 26c next year and 14c in 2014:

    http://www.marketwatch.com/story/oneok-chairman-tells-shareholders-net-income-expected-to-grow-18-percent-annually-between-2012-2014-dividend-expected-to-grow-40-percent-during-same-period-2012-05-23

    Using those numbers, Conway ethane prices would jump by a whopping 127% by 2014 to 25c gal, assuming that Mont Belvieu historically low ethane prices remain the same despite the massive increase in the petrochemical Ethane cracking capacity hitting the market between 2013 and 2017, latest example:

    http://www.worldofchemicals.com/media/exxon-mobil-to-build-ethane-cracker-in-texas/3357.html

    An acquirer of Equal doesn't have to live with current 2012 prices for either natural gas or NGLs, they can hedge for 2013 at 25% to 45% higher depending on the commodity, such a strategy would justify much higher price for Equal assets than current energy prices may signal, it also gives the purchaser the possibility to obtain attractive returns while awaiting for prices to improve as bottlenecks are addressed and LPG export capacity is introduced in North America.

    Regards,
    Nawar

    PS:

    Be careful of the garbage being spewed by the stalkers and bashers on this board, they have no understanding of the dynamics of this industry and no clue about the value of Equal assets.