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Why frac spreads affect profits and growth for natural gas MLPs

Ingrid Pan, CFA

Natural gas gathering and processing: A major business for many MLPs (Part 7 of 7)

(Continued from Part 6)

Fractionation spreads

Since natural gas processors with keep-whole contracts are paid in the natural gas liquids that they extract and must pay back the energy content of the NGLs in natural gas (or the cash equivalent of it), they’re essentially long NGLs and short natural gas. Fractionation spreads measure what representative natural gas processors would make under their keep-whole contracts and how natural gas liquids prices move against natural gas prices. (For more detail, see 1 key profitability measure for natural gas processors such as DCP.) However, note that they’re not exact, as different processors may experience different dynamics, and that a representative frac spread is informative more in its direction than its absolute value.

The representative frac spread that Market Realist monitors (as formulated by Ceritas Group) sunk to lows of ~$20 per barrel in mid-2013 as natural gas liquids prices were dragged down by cheap ethane and propane. Since then, rising propane prices had helped to boost frac spreads. Also, note that in recent weeks, frac spreads have experienced volatility, given huge swings in natural gas and propane prices due to extreme temperatures this winter.

Frac spreads can affect companies with keep whole-contracts as part of their natural gas processing operations, which include Regency Energy (RGP), Targa Resources (NGLS), Enterprise Products (EPD), and Western Gas Partners (WES) many of which are components of the Alerian MLP ETF (AMLP).

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