Assessing ONEOK Partners' 1st quarter earnings for 2014 (Part 6 of 7)
ONEOK Partners’ NGL business
ONEOK Partners’ NGL business margin is dependent on how its business is structured at different service levels and rates. In its Exchange & Storage Services, OKS gathers, fractionates, transports, and stores NGLs and delivers to the market hubs where they are traded. The business is primarily fee-based, although with long-term contracts and a stable cash flow. Under Transportation Services, it supplies raw NGL feeds from the supply basins and NGL products to the market centers for a fixed-fee rate. Under Marketing, OKS purchases and re-sales approximately 60% of system supply in the Mid-Continent. The revenue is based on differential basis.
Price differential is the difference in NGLs’ price between two market centers and has a wide impact on the company’s business. For example, during 4Q13, price differential of propane between the Conway, Kansas, and the Mont Belvieu, Texas, market centers also widened in favor of Conway, Kansas, due to colder-than-normal weather and lower propane inventory levels. The company also optimizes the highest NGL product price by directing product movement between the market hubs. This is guided by the price differential. OKS also has a small isomerization service that converts normal butane to iso-butane to be used in refining to increase octane in motor gasoline. This again relates to the price differential.
The operating margin of the NGL segment for 1Q14 went up 18.7% from 4Q13 due primarily to location price differentials related to the increased seasonal demand for propane at the beginning of 2014. The Midwest propane demand increased in the first quarter 2014, due to colder-than-normal temperatures. And propane demand and prices were higher at the Mid-Continent market center in Conway, Kansas than they were in the Gulf Coast market center in Mont Belvieu, Texas.
By the end of 2013, higher demand from crop drying and increased heating requirement in the winter, which continued into 1Q14, led to higher propane price at the Mid-Continent market center at Conway, Kansas, compared with the Gulf Coast market center at Mont Belvieu, Texas. However, the price differential between these places returned to historical levels by the end of February 2014, as supply and demand balanced.
However, the price differentials of the NGL products, between the Conway, Kansas, and Mont Belvieu, Texas, market centers may re-emerge in future. The gap may persist from the de-bottlenecking efforts from the new fractionators and pipelines from the various NGL-rich shale areas, which affect location price differentials. Plus, new NGL pipeline projects are expected to bring incremental NGL supply from the Rocky Mountain, Marcellus, and Utica basins to the Mont Belvieu, Texas, market center that may affect NGL prices. OKS has a strategy to counter such differentials through fee-based supply commitments.
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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