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Higher propane prices help frac spreads and natural gas processors

Ingrid Pan, CFA

Natural gas processors can be sensitive to commodity prices in the form of frac spreads

Some market participants view fractionation spreads (also called “frac spreads”) as one indication of the profitability of some natural gas processing companies. Frac spreads depend on natural gas liquids (NGLs) and natural gas prices, and they increase when NGL prices increase relative to natural gas prices (for a detailed explanation of fractionation spreads, please refer to Why fractionation spreads affect some MLP stocks). Generally, companies with natural gas processing operations—like MarkWest Energy (MWE), Targa Resources (NGLS), Williams Partners (WPZ), and DCP Midstream Partners (DPM)—realize more profits when frac spreads increase.

Frac spreads rose last week by 2%, range-bound over the medium term, but rising natural gas prices could be negative

Last week, natural gas prices were up. Meanwhile, NGLs were also mostly up, with propane up 9%. Ultimately, this resulted in slightly higher frac spreads (as measured by a custom index created by Bloomberg, using assumptions provided by Ceritas Group).

Note: The custom frac spread is based on assumptions provided by Ceritas Group. To see how the custom frac spread is calculated, please refer to An in-depth look at the mechanics of fractionation spreads.

Over the past few months, however, frac spreads have largely been range-bound between $28 per barrel and $30 per barrel. This is a neutral indicator. Lately, though, natural gas prices have increased significantly, in large part due to cold weather creating increased demand, as the fuel is used for home heating. Higher natural gas prices without an increase in natural gas liquids prices could be a negative driver for frac spreads.

More infrastructure for processing ethane and propane would support prices

Once more capacity for processing ethane and propane comes online or more NGL export capacity is constructed, this could provide additional long-term demand for these commodities and result in higher frac spreads, as recent increases in propane exports have shown.

Several midstream companies have noted that they’re working on such projects. However, the timeline for the completion of these works is over the next several years. Even if demand for these NGLs grows as a result of completed infrastructure, the supply of NGLs also continues to grow—and if supply meets or outstrips demand, the prices of ethane and propane may remain depressed.

Natural gas and propane demand are also affected by colder weather

Propane prices may have increased so much last week partly because of expected colder weather, as propane is a major fuel used for home heating. Plus, since natural gas is also used for home heating, natural gas prices may also have increased due to forecasted colder temperatures. That propane prices increased more than natural gas prices last week was ultimately positive for frac spreads. For more analysis on this trend, see Winter storms should help natural gas and propane companies.


Last week, frac spreads traded up slightly. Over the medium term, frac spreads have been mostly range-bound between $28 per barrel and $30 per barrel since early October. A higher frac spread is a positive catalyst for natural gas processors like MWE, NGLS, WPZ, and DPM, many of which are also components of the Alerian MLP ETF (AMLP).

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