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Composite natural gas liquids prices fell over 20% since February

Ingrid Pan, CFA

Why energy commodities like oil and gas traded lower on the week (Part 3 of 4)

(Continued from Part 2)

Natural gas liquids (or NGLs) are another component of upstream energy production

Natural gas liquids, or NGLs, are a group of hydrocarbons (ethane, propane, butanes, and pentanes) that are often found alongside dry natural gas (methane). Many upstream companies (companies that produce crude oil and natural gas) garner much of their revenue from producing and selling NGLs—especially those that have a significant amount of “rich gas” assets, or natural gas assets “rich” in liquids. Some of these companies include Range Resources (RRC), Chesapeake Energy (CHK), SM Energy (SM), and Linn Energy (LINE). Price fluctuations in NGLs can affect the ultimate revenue and earnings of upstream companies, so NGL prices are an important indicator to track in the energy sector.

NGLs are made up of different compounds that receive different prices, and production streams are largely ethane and propane

According to a presentation by the Midstream Energy Group, the average NGL barrel composition in December 2011 was ~43% ethane, ~28% propane, ~7% normal butane, ~9% isobutane, and ~13% pentanes or heavier hydrocarbons. Using this representative composite barrel, NGL prices closed slightly lower at $38.56 per barrel on April 4, compared to $38.79 per barrel for the week ended March 28.

Ethane, the largest portion of the natural gas liquids barrel, traded slightly lower, from $0.29 per gallon to $0.28 per gallon. Meanwhile, propane, the second largest portion of the barrel, traded from $1.06 per gallon to $1.08 per gallon. Butane traded flat on the week, to close at $1.21 per gallon. Natural gasoline, the highest value portion of the NGL stream (on a per-gallon basis), however, traded down from $2.28 per gallon to $2.24 per gallon. Ultimately, the composite NGL barrel traded slightly lower on the week.

The representative NGL barrel reached highs of up to ~$50 per barrel in early February, given strength in propane prices due to a cold winter, as well as natural gas prices that pushed ethane prices up. Since then, NGL prices have fallen so that the representative NGL barrel is around ~$40 per barrel, driven primarily by lower propane and ethane prices. Propane is used as a fuel for home heating and prices had received a boost due to cold weather. Ethane prices correlate to natural gas prices, which also received support from the cold winter.

Natural gas liquids prices still remain up roughly 20% since lows in June, though. Through 3Q13 and 4Q13, natural gas liquids prices were helped by the rise in WTI crude prices, which shot up from ~$95 per barrel to levels of up to $110 per barrel at points in the second half of 2013, and natural gas liquids prices correlate to movements in crude oil prices. Since then, though, crude prices had retreated somewhat. However, NGL prices had remained relatively robust. One factor in this trend is that the composite NGL barrel has been helped by an increase in propane prices, which has likely been driven by higher propane exports.

Background: NGLs have historically tracked movements in crude prices

Natural gas liquids prices have largely tracked crude oil prices historically. However, over recent years, the composite barrel as a percentage of crude prices has declined. This is because ethane and propane make up a large percentage of the average NGL barrel, but these two commodities especially had experienced a surge in supply due to the shale boom and experienced a decline in prices in relation to crude oil.

There’s still a correlation between NGL prices and crude, and movements in oil prices can cause NGL prices to move as well. Plus, the NGL barrel price relative to crude oil has recovered somewhat since June of 2013, as we’ve seen.

This week saw NGL prices trade slightly lower—a neutral short-term indicator. However, despite falling from highs reached in February, NGL prices remain up significantly since late June 2013, a positive medium-term indicator. From a longer-term perspective, many producers still find current price levels economic enough to continue to target and drill for NGLs, but they’ve suffered from NGL prices coming off highs (~$50 to $60 per barrel through much of 2011 versus ~$40 per barrel now). Major producers of NGLs include CHK, RRC, SM, and LINE—many of which are found in energy ETFs such as the Vanguard Energy ETF (VDE) and the SPDR S&P Oil & Gas Exploration & Production ETF.

Continue to Part 4

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