Gas processing margins have been crushed by plummeting crude oil prices and lower demand for natural gas liquids (NGL) in the petrochemical sector; however, the second half of the year could see a rebound as crude prices strengthen, Raymond James & Associates Inc. analysts said.

“[T]he economic incentive to process and fractionate natural gas has changed dramatically. In fact, we have seen ethane rejection, particularly in the Gulf Coast and Midcontinent regions, and are concerned that if the existing commodity weakness/volatility perpetuates, NGL economics may remain under pressure through 1H09,” the analysts said in a note Monday.

Ethane is the only one of the NGLs that is fully discretionary, meaning it does not need to be removed from the natural gas stream for operational reasons. Ethane frac spreads turned negative in November, meaning the commodity has more value as part of the natural gas stream than when sold separately (see Daily GPI, Nov. 20, 2008).

According to Raymond James, gas processing margins turned negative during the week of Dec. 5 to minus 5 cents/gal. The group noted that since 1996 processing margins have turned negative five times, including the most recent period. The longest duration of negative margins was a period that began in September 2005 and lasted for about 13 weeks (inclusive of three weeks when margins were positive), the analysts said. Ten weeks after that period ended, margins had returned to 10-year average levels of 25 cents/gal.

“Not to say historical precedent could be extrapolated to indicate future expectations, but this would equate to about [a] six- to seven-month turnaround period,” the analysts said of the current outlook.

Hence, the group downgraded a handful of gas gathering and processing master limited partnerships (MLP). Affected companies are Hiland Holdings GP, Williams Partners, Targa Resources, Eagle Rock Energy Partners, Hiland Partners and Martin Midstream Partners.

©Copyright 2009Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.