Why Midstream Companies Have a Negative Correlation with Natural Gas
Which Midstreams Will Benefit from Recovery in Energy Prices?
Natural gas prices
In the previous article, we saw the correlation between a few midstream companies and crude oil prices. In this article, we’ll talk about the correlation between the same companies and natural gas. First, let us discuss movement in natural gas prices.
NYMEX near-month Henry Hub natural gas futures contracts recovered slightly over the last two weeks after touching their 17-year lows. As shown in the graph above, midstream companies have low correlation with natural gas compared to crude oil. This is because midstream companies have limited direct exposure to natural gas through natural gas processing and sale businesses. As far as throughput volumes are concerned, natural gas production has continued to grow despite sustained low prices.
Boardwalk Pipeline Partners
Boardwalk Pipeline Partners (BWP) has the highest one-year correlation of 0.21 with natural gas among the selected midstream companies. However, BWP’s correlation with natural gas has fallen below zero for the one-month period. A negative correlation indicates that two variables have moved in the opposite direction. This might be due to the increased volatility in the midstream sector in past one month following the 4Q15 earnings announcements, recovery in crude oil prices, and fear of contract renegotiations.
Kinder Morgan
Next on our list of midstream companies is Kinder Morgan (KMI). KMI has a correlation of 0.12 with natural gas for the one-year period. However, KMI’s correlation with natural gas has fallen to -0.17 for the one-month period. KMI forms 0.34% of the iShares Russell 1000 Value ETF (IWD).
Other midstream companies
DCP Midstream Partners (DPM), NuStar Energy (NS), and Williams Partners (WPZ) are among the top five midstream companies that have relatively high correlations with natural gas. DPM, NS, and WPZ’s one-year correlation with natural gas is 0.10, 0.09, and 0.09, respectively. The small values of these coefficients likely indicate that midstream companies’ stock prices may not move with natural gas prices in the future.
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