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U.S. NGL Pricing Not Pretty Near-Term, Says Raymond James

Ugly is the only way to describe the near-term environment for U.S. natural gas liquids (NGL) prices, Raymond James & Associates Inc. said Monday.

U.S. NGL volumes should be more than enough to keep midstream assets "adequately utilized and spur strategic, demand-pull infrastructure projects," analyst Darren Horowitz said in this week's Energy Stat.

Raymond James expects composite U.S. NGL prices to increase only slightly this year and average 49 cents/gallon, with a peak of 54 cents in 4Q2015.

"When taking all factors into consideration for 2016, we expect that composite U.S. NGL barrel pricing will average in the range of 55-60 cents/gal and tick up to 65 cents/gal for the long-term," Horowitz said. "In our view, the petrochemical industry remains the key beneficiary of plentiful, low-cost supplies even into 2020."

U.S. NGLs remain the "value arbitrage opportunity between natural gas and oil," he said. Nearly half of the composite U.S. NGL bbl value is tied to heavier liquids on a $/MMBtu basis, he noted. As well, a "conservative" relationship exists between the value of U.S. NGL barrels and West Texas Intermediate crude oil, which should average 35-40% through 2016.

Raymond James analysts late last month said they believe U.S. crude production already has rolled over (see Shale DailyJune 30). However, that's not the case for domestic NGLs. The Energy Information Administration last week noted that total NGL output in April was 3.31 million b/d, up 4.1% from March and 13.5% higher year/year (see Daily GPIJune 30). U.S. oil production was down around 100,000 b/d from March.

What gives? To Horowitz and his team, there are four reasons:

  • Demand growth via exports and petrochemical feedstock consumption is on the way;
  • Heavy-end U.S. liquids, which are key to composite bbl value, are set to stabilize with crude;
  • U.S. NGL uplift "math" still works at low prices; and
  • High grading and efficiency gains are keeping wet gas output on track.

Because of the resiliency of domestic natural gas production and the emphasis by E&Ps to develop liquids-rich basins, the Raymond James analysts may be more optimistic about U.S. NGL production over the next two years than Wall Street consensus, Horowitz said.

"We understand that crude and natural gas prices are fairly bearish relative to this time last year, but the crude-to-gas ratio is still incentivizing producers to allocate significant capital toward liquids-rich plays" through the second half of 2015 and into 2016. Combined with more pipeline takeaway, gas processing, fractionation and export capacity, domestic supply growth should continue "relatively unabated."

The Raymond James team is forecasting significant NGL growth through the end of the decade. Minus ethane rejection, average U.S. NGL production is modeled to exit 2015 at 3.2 million b/d, increasing to 3.3 million b/d by the end of 2016.

Moreover, said Horowitz, "we believe that U.S. NGL production could still reach 5.0 million b/d by 2020 in a 'no rejection' scenario," which would reflect a 6% annual compound annual growth rate and a 200,000 b/d increase in ethane rejection versus current estimated levels.

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