Fractionation Spread Continued to Rise Last Week
MLPs Continue Rally and Close 12% Higher Last Week
Fractionation spread
The Henry Hub-Mont Belvieu fractionation spread rose to $11.7 per barrel in the week ending April 22, 2016. The spread was $11.5 per barrel in the previous week. The Henry Hub-Mont Belvieu fractionation spread measures the spread between Henry Hub natural gas and Mont Belvieu composite NGLs (natural gas liquids) prices.
The composite NGLs price is based on spot prices for ethane, propane, isobutane, n-butane, and natural gasoline at Mont Belvieu. A greater rise in NGL prices compared to natural gas prices last week contributed to a slight rise in the spread between the two during the week. We’ll discuss last week’s change in ethane prices in the next article.
The above graph shows the weekly fractionation spread over six weeks. DCP Midstream Partners (DPM), MPLX LP (MPLX), and Western Gas Partners (WES) are some of the MLPs involved in fractionation.
How are MLPs impacted by the fractionation spread?
Natural gas recovered from a wellhead must be processed in order to meet specifications before it can be delivered for final use. In addition to natural gas, processing produces mixed NGLs. They’re separated through fractionation.
The spread between NGLs prices and natural gas prices impacts natural gas-processing MLPs involved in fractionation. These MLPs typically benefit when the fractionation spread is high. This means that NGLs prices are high compared to natural gas prices. This benefit stems from the keep-whole and percentage-of-proceeds contracts that these MLPs maintain.
Keep-whole contracts
Keep-whole contracts are sensitive to commodity prices. Under keep-whole contracts, the processing MLP generally keeps a portion of the NGL extracted through fractionation as payment. The MLP replaces the energy content of the NGLs that it retained with natural gas. A fall in NGL prices relative to natural gas prices makes the spread less favorable for fractionating MLPs under keep-whole contracts.
Percentage-of-proceeds contracts
In percentage-of-proceeds contracts, the MLP gathers and processes natural gas on behalf of producer customers. It sells the residue gas and NGLs produced from processing. The company remits an agreed-upon percentage of the proceeds to the producer and retains the rest. As a result, the prices of natural gas and NGLs impact the revenue of MLPs that hold these types of contracts.
Percentage-of-proceeds contracts account for nearly 85% of the total volume of ONEOK Partners’ (OKS) Natural Gas Gathering and Processing segment. To learn more about this segment, please read Natural Gas Liquids Segment Drives ONEOK’s EBITDA Growth.
ONEOK Partners forms 1.4% of the First Trust ISE-Revere Natural Gas Index Fund (FCG).
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