Why rising propane and butane exports affect some US energy MLPs (Part 5 of 5)
LPG exports should benefit upstream producers
The influx of supply of natural gas liquids had caused ethane and propane prices in particular to collapse in late 2012 and early 2013. With higher propane export capacity, there should be support to propane prices. This can have several effects. Firstly, revenues for upstream energy producers with significant natural gas liquids production should be helped by propane exports (see Why natural gas liquids prices continued to slip last week for more on the relationship between natural gas liquids prices and upstream energy companies). These are companies such as Chesapeake Energy (CHK), Range Resources (RRC), and Linn Energy (LINE). Note that CHK and RRC are components of the S&P Oil and Gas Exploration and Production ETF (XOP), which is an equal-weighted index of over 70 upstream energy names.
Propane exports may negatively affect distributors
Higher propane exports could negatively affect the bottom line for propane distributors if exports cause propane prices to rise significantly. This is because propane distributors usually pass through their propane costs to customers, but customers could buy less volume of propane if it gets too expensive. A smaller volume of propane sales ultimately hurts these companies. For more on that, see Why higher propane costs could cause lower sales volumes. Such distributors include Amerigas (APU), Suburban Propane (SPH), and Ferrellgas (FGP).
LPG exports could negatively affect margins for Gulf Coast petrochemical facilities
Higher LPG exports could also negatively affect petrochemical companies located on the Gulf Coast as some of them purchase propane as a feedstock for petrochemicals. In response to low ethane and propane prices, petrochemical companies had switched their feedstock away from naptha (a product of crude) towards using more ethane and propane. Plus, in anticipation of continued growth of NGL supplies, these companies have planned various projects and expansions of petrochemical facilities to take advantage of cheap feedstock. The petrochemical companies would ultimately be competing with export markets for LPGs, meaning higher costs of commodities such as propane, which would be detrimental to margins.
Such petrochemical companies include Dow Chemical (DOW). However, some petrochemical companies may ultimately receive LPG exports as cheaper feedstock in facilities abroad, which would be a positive.
Higher demand for exports could create opportunities for midstream companies
Increased LPG exports should also benefit Targa and Enterprise, who have LPG export facilities. If there continues to be a growing demand for export capacity, Targa, Enterprise, or other midstream companies may be able to identify new expansion opportunities that are accretive to unitholders.
Where are exports going?
Most U.S. exports of LPG currently go to Latin America as fuel for heating or cooking. The EIA notes that propane exports to Latin America are forecast to continue, and more propane may head into European markets. Propane export demand is also expected to be supported by demand in Africa for heating and cooking, and demand in Asia for fuel and feedstock.
Browse this series on Market Realist:
- Part 1 - Why rising propane and butane exports affect some US energy MLPs
- Part 2 - An investor’s must-know guide to liquefied petroleum gas
- Part 3 - Targa Resources will increase its liquefied petroleum gas exports
- Commodity Markets
- Personal Investing Ideas & Strategies
- natural gas liquids