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Smaller time spreads and less natural gas volume have hurt BWP

Ingrid Pan, CFA

Important drivers behind the drop in Boardwalk’s stock price (Part 5 of 7)

(Continued from Part 4)

Boardwalk Pipeline Partners services

BWP offers natural gas storage services and natural gas “parking and lending” services (which allow customers to inject and withdraw natural gas into or out of BWP’s pipelines at a specific location for a specific period). These services have also suffered under the new supply and demand dynamic for U.S. natural gas. Boardwalk noted that given the increased supply of U.S. natural gas, the difference in natural gas prices between different periods (also called “time spreads”) has compressed.

Greater natural gas production has also smoothed out natural gas price volatility. Historically, BWP’s customers have used its natural gas storage services to store natural gas in periods of low demand (spring and fall), when prices tend to be lower, and then remove the gas from storage to sell in periods of high demand (like in winter due to home heating—see What’s behind the natural gas price rally? Check the weather for more on weather and natural gas demand). However, with a reduction in time spreads over the past few years, the rates that customers are willing to pay for natural gas storage services have declined. BWP notes that it expects these conditions to persist.

Plus, BWP’s parking and lending services allowed natural gas marketers to profit from short-term volatility in natural gas prices, as these parties can inject natural gas into BWP’s pipelines in a low-price environment and withdraw gas when prices are higher. Increased volatility in natural gas prices increases the probability that these parties can time a sale at a higher price. With reduced volatility in natural gas prices, demand for Boardwalk’s parking and lending services has declined, and the reduced volatility and lower time spreads have even caused some natural gas marketers to exit the market.

BWP sums it up:

“A reduced need for storage as supply increases, narrowing time period price spreads and fewer market participants has caused, and could continue to cause demand for our storage and PAL services to decline on a long-term basis.”

Read on to the next part of this series to find out what Boardwalk plans to do with the cash it will save by not paying out distributions.

Continue to Part 6

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