Why higher oil and gas prices are helping energy company valuations (Part 3 of 4)
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 space.
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 rose on the week, closing at $44.21 per barrel on January 17 compared to $41.18 per barrel for the week ended January 10. Propane prices continued to grow and finished at $1.38 per gallon on January 16—a 8% increase on the week, helping to boost NGL prices.
The representative NGL barrel is up nearly 30% since lows in June, a medium-term positive catalyst. Natural gas liquids prices were helped by strength in WTI crude prices, which shot up from ~$95 per barrel to levels of up to $110 per barrel at points, as NGLs and crude are correlated. Since then, though, crude prices have retreated somewhat, to ~$94 per barrel currently, and NGLs prices have remained relatively robust. One factor in this development is that the composite NGL barrel has been helped by an increase in propane prices, which has likely been driven by higher propane exports. For more analysis of this trend, see How soaring propane exports affect prices.
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 have experienced a surge in supply due to the shale boom and have experienced a decline in prices.
There’s still a correlation between NGL prices and crude oil, 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 this year, as we’ve seen.
This week saw NGL prices trade up, a positive short-term indicator. Also, note that NGL prices are up significantly since late June, 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.
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