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Analysts See Shift in NGL Barrel Composition, Pricing

Natural gas liquids (NGL) prices have been under pressure for a while, but some might be caught off guard by continuing weakness in the NGL sector, cautioned analysts at Wells Fargo Securities in a note Tuesday.

Over the last five years, prices for the the standard NGL barrel have averaged 60% of West Texas Intermediate (WTI) crude, 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 last week 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."

On Monday Standard & Poor's Ratings Services revised its outlook for NGL prices. "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," the ratings agency said in a note (see Daily GPI, June 12).

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