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Fitch: 'Modest' NGL Price Improvement Ahead

Low natural gas liquids (NGL) prices have been weighing down the profitability of midstream processors, and slowing NGL demand is likely to pressure profitability in the near term, but the outlook is generally good further out, Fitch Ratings said in a recent note on NGLs and midstream processors.

"Fitch expects NGLs to average approximately 50% of West Texas Intermediate (WTI) prices for full-year 2012 in typical base case analyses, versus the 60% it averaged in 2011," the ratings agency said. "In the intermediate term (2013-2015), Fitch anticipates [supply-demand] imbalances will persist but gradually improve, barring any extreme weather, as expansion and debottlenecking projects in the chemicals sector come online."

Modest price improvements for NGLs are expected during second-half 2012 and 2013 from current prices, particularly if winter weather is closer to normal, which would help with the oversupply of propane, Fitch said. Demand for NGLs will come into better balance with supply beyond 2015 as new greenfield projects come online, providing additional support to prices.

Numerous ethylene plant projects are planned or in the works in states such as Pennsylvania, Ohio, West Virginia, as well as Louisiana and Texas. Some projects are new plants while others are expansions of existing ethylene production capacity (see NGI, Oct. 1).

"We expect NGL prices will see a fair amount of volatility over the next two to three years as NGL production is expected to remain strong and demand will fluctuate seasonally, affected by weather, planned (or unplanned) cracker maintenance, and other factors," the ratings agency said. "While NGL prices have come back slightly for the third quarter 2012 from second quarter 2012 lows, pricing volatility remains in focus and adds uncertainty to the mix.

"Still, we believe the current production focus on liquids-rich opportunities underpins a need for gathering, processing and transportation infrastructure. The supply-demand dynamic for NGLs, particularly ethane and propane, has moderated but is expected to grow as a wave of new light feedstock steam crackers are set to be built in North America."

For now, processors with exposure to liquids-rich basins should continue to benefit from increased volumes, even as NGL prices moderate, Fitch said. Longer term, prospects for midstream services remain robust, despite near-term commodity price weakness. "Fitch expects the shift toward more fixed-fee [contract] arrangements with producers will continue, and a focus on growth projects, such as NGL pipelines, backed by long-term fixed-fee type contracts, to be moderately beneficial to credit quality, even as leverage metrics temporarily rise during construction."

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