ONEOK Partners: Ethane rejection and other operational issues

Market Realist

Assessing ONEOK Partners' 1st quarter earnings for 2014 (Part 7 of 7)

(Continued from Part 6)

Ethane rejection and other issues

OKS has been heavily affected by ethane rejection for the past one year. When the natural gas prices are higher than the natural gas liquids, certain natural gas producers may choose not to recover the ethane component of the natural gas stream, and instead, leave the it in the natural gas stream. This is known as ethane rejection. OKS witnessed ethane rejection at most of its natural gas processing plants and some of its customers’ natural gas processing plants connected to the company’s NGL gathering system in the Mid-Continent and Rocky Mountain regions during 2013. This reduced natural gas liquids volumes gathered, fractionated, and transported in NGL segment.

Terry K. Spencer, the Chief Executive Officer of OKS, said in the conference call of 1Q14, “Now a brief review of our outlook on the NGL markets. We still believe that that ethane rejection by natural gas processing plants connected to our natural gas liquids system will continue through at least 2016, after which new worldscale ethylene production capacity is expected to begin coming online. The propane location price differentials between Conway and Mont Belvieu will continue to widen as Midwest inventories have been increasing more rapidly than Gulf Coast inventories.”

OKS expects that ethane rejection will persist through 2016. Subsequently, ethylene production capacity is expected increase as various capacity enhancing projects will begin production. However, volatility in the natural gas prices may lead to the situation of ethane rejection for certain periods of time in the future.

In many areas of North Dakota, current natural gas production exceeds the capacity of existing natural gas gathering infrastructure, resulting in natural gas flaring. Typically, producers are able to drill and complete wells more rapidly than natural gas gathering and processing infrastructure can be constructed. In 2013, the North Dakota Industrial Commission estimated that nearly 30% of the natural gas produced in the state was flared. Through 2016, OKS expects to invest $2.3 billion to $2.5 billion to continue building natural gas gathering and processing infrastructure in the Williston Basin. This would increase the company’s gas processing capacity by ~700% by 2015 compared with 2010.

ONEOK Partners, L.P. (OKS) is a master limited partnership operating in the midstream energy space. OKS is also part of Alerian MLP ETF (AMLP), MLP ETF (MLPA), and Global X MLP & Energy Infrastructure ETF (MLPX). OKS is also a component of Alerian MLP Index ETN (AMJ).

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