Revenues from natural gas liquids (NGL) -- particularly those from liquids-rich shale plays -- have been like a mega vitamin for anemic dry gas economics, but it's not the fourth quarter of 2011 anymore, and currently depressed NGL prices are expected to stick around for a while.
Standard & Poor's Ratings Services (S&P) has revised its NGL pricing assumptions for 2012, 2013 and 2014. Lowering assumptions for 2012, the ratings agency blamed unplanned ethane cracker outages for low prices that could stick around through much of the year.
"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."
The ratings agency said it expects the relative prices of butane, isobutene and natural gasoline or condensate to track West Texas Intermediate crude oil prices in a fairly narrow range as they have historically (70-75% for butane, 75-80% for isobutene and 90-95% for natural gasoline).
"The assumptions also reflect our view that the prices of ethane and propane could remain particularly weak and that the rest of the composite NGL barrel will continue to track crude oil prices fairly closely," said S&P credit analyst Michael Grande.
"In our opinion, crude oil prices will continue to be volatile and reflect economic distress in the EU [European Union], decreased non-OPEC supply, ongoing unrest in the Middle East and limited spare capacity. We also expect natural gas prices to remain low due to an increasing supply and weak demand growth."
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.
Propane prices are a casualty of one of the warmest winters on record in 2012. The winter of 2012 is a stark contrast to the colder-than-normal winter in 2011. The supply of propane in storage was at about 55.6 million bbl as of May 2012, about 70% above levels a year earlier and 2% higher than the propane supply in January 2012.
The spot price of propane was about 71 cents/gallon as of June 1, which is about 40% below the average spot price of $1.17/gallon in 2012. "Although we believe the price of propane is at a seasonal low point, a return to more normal winter weather is essential for a pick-up in demand that could strengthen prices in the fourth quarter," S&P said.
S&P said the lower price assumptions likely would not affect most rated midstream companies that have a portion of cash flow exposed to NGLs because many have hedges in place above the ratings agency's price assumptions.
Midstream player Enterprise Products Partners LP COO Jim Teague commented on the oversupply situation for ethane and propane during an earnings conference call last month.
"We're going through a period of high inventory builds for both ethane and propane, which are currently influencing the pricing of each other," Teague said. "While the reasons for the excess inventory levels are different, they have in common the large inventory builds that we believe are short-term in their nature. The first quarter saw well over 100,000 b/d of ethane demand lost due to extensive petrochemical outages on the Gulf Coast. Some outages were planned, some unexpected, and these outages have continued well into the second quarter. All that lost demand resulted in a short-term situation of growing ethane inventory in spite of some of the best cracking margins ever" (see Daily GPI, May 3).