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NGL Price Weakness Seen Continuing

Standard & Poor's Ratings Services (S&P) has revised its natural gas liquids (NGL) pricing assumptions for 2012, 2013 and 2014. And analysts at Wells Fargo Securities last week warned that some might be caught off guard by continuing weakness in the sector.

"We have lowered our ethane price assumption in 2012 to 40 cents from 55 cents based on our belief that the unplanned cracker outages in first-half of 2012 and the usually scheduled shutdowns in the second and third quarters for maintenance could keep ethane prices muted in 2012," S&P said in a note. "We have lowered our price assumption for propane in 2012 to 70 cents/gallon from $1.11/gallon and its price relationship to crude to 35% (from 55%) in 2012 and to 50% from 60% in 2013. We base this on weaker-than-expected demand due to an unusually warm winter and our expectations that propane demand will only marginally improve in 2013."

Ethane prices are probably going to be "very subdued" for the rest of this year, S&P credit analyst Michael Grande said during a teleconference last week. "Really, ethane is used exclusively in the petchem industry, and a couple of things have been going on this year.

"There have been fractionators that have been down for scheduled maintenance...[A]nd then there's been quite a bit of petchem expansions and scheduled and unscheduled turnarounds which have taken demand out of the equation. Once that happens, coupled with the growing supply of ethane...it's like flipping a switch, the price is very volatile and sensitive to demand.

"Currently, ethane prices are about 30 cents versus an average of about 50 cents this year. In our view, while demand is going to pick up a bit, the increasing supply is probably going to keep ethane prices low, but not quite a low as the 30 cents we're currently experiencing."

Propane is a simpler story. Thank the lack of a winter for weak prices here, Grande said. While exports are under way and more export capacity from the Gulf Coast is being added, that won't support prices until next year, he said. "The rest of the barrel of NGLs is very highly correlated to crude oil prices, which are also down."

S&P said NGL prices "could remain well below the robust prices realized in the fourth quarter of 2011" through this year. The NGL composite barrel hit a low of about 80 cents/gallon ($33/bbl) on June 1, which represents a 33% decline from an average price of about $1.19/gallon ($50/bbl) for 2012 year to date.

Ethane and propane, which represent 70% of the total composite barrel, went through steep price declines and are at historical lows, S&P said. Ethane has lost more than 40% of its value, and the price as of June 1 was 29.5 cents/gallon, mainly due to ongoing maintenance and expansions of petrochemical facilities in the U.S. Gulf Coast, while at the same time the supply of ethane and other NGLs continues to grow.

"In our opinion, the price of ethane should improve in second-half 2012 as the ethylene crackers come back online and ethane rejection in the Midcontinent region works down the ethane supply of 30.7 million bbl (up 11% from February 2012 and 34% from December 2011)," S&P said.

Wells Fargo outlined relatively recent changes in the composition of the NGL barrel as well as a disconnect from WTI in terms of pricing. Over the last five years, prices for the the standard NGL barrel have averaged 60% of WTI, ranging from 55-70% during the period, the analysts said. However, that historical relationship is coming undone.

"In the first quarter of 2012, that relationship stood at 53%," they said. "...Conway [KS] and [Mont] Belvieu [TX] prices have fallen well below that five-year average, and pricing (at least for ethane and propane) seems to have 'decoupled' from crude prices."

By the analysts' calculations, a barrel of NGLs at Mont Belvieu today is priced at about 43% of WTI. "Those who have built their NGL price forecasts within models based on this historical relationship could miss the target by a wide margin," they said.

Additionally, today's NGL barrel is lighter than historical norms, with ethane and propane making up a larger share, the analysts noted. This is because production from plays such as the Marcellus Shale is skewed toward the lighter constituents. Indeed, in the Marcellus ethane can comprise more than 50% of a produced barrel of NGLs. According to Wells Fargo, Enterprise Products Partners has said ethane will comprise 66-68% of total NGL volumes to be transported on new build pipelines.

"According to the [Energy Information Administration], the NGL stream (i.e., based on field level production) consisted of 43% ethane, 29% propane, 8% normal butane, 8% iso-butane and 12% pentane-plus in March 2012," the analysts said. "As a point of reference, ethane comprised between 38-40% of the NGL barrel in 2004-2009."

A lighter NGL barrel means lighter revenues. "We estimate that the aggregated component pieces of a barrel more heavily weighted towards ethane would have received about $26/boe [two weeks ago] and would have received 60% of the revenue from ethane and propane, versus a standard mixture, which would have received around $37/boe and would have received 47% of revenue from the lighter components," the analysts said. "We believe the distinction will become more important in the next 18 months."

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