Assumptions for pricing of volatile natural gas liquids (NGL) have been changed, but this should not affect the credit ratings of NGL companies, according to a report released Friday by Standard & Poor’s Ratings Services (S&P). Generally, there is a 20-25% discount relative to average spot market prices.
S&P said it has revised its NGL price assumptions for 2011-2013 and has published the changes “to help market participants better understand the key price assumption of companies operating in the midstream energy industry.” The price assumptions relate to corporate and issue-specific credit ratings, focusing on companies in the midstream energy and oil/gas exploration and production industries with direct exposure to NGLs, S&P said.
The 20% to 25% discounts reflect the NGL’s historical price volatility, the price relationship between NGL products and crude price assumptions (excluding ethane), and what the credit rating agency called “supply-demand fundamentals” of individual NGL products — ethane, propane, butane, isobutane and natural gasoline.
“We don’t expect any rating changes based on the revised price assumptions, which use the average breakout of a composite NGL barrel consisting of 40% ethane, 30% propane, 10% butane, 5% isobutane and 15% natural gasoline.”
S&P said the size of the discounts it assigned to each liquid depends on four or five criteria with a leading one being the relative price of each byproduct to the price of crude oil, typically referring to the West Texas Intermediate (WTI) benchmark price in the continental United States. “The U.S. prices for these NGL products tend to consistently trade at a discount to WTI crude in a fairly narrow range,” S&P said.
For ethane, S&P sees its price-per-gallon being pegged directly at crude oil prices, hitting 60 cents/gal in 2011 and 2012, and dropping to 50 cents/gal in 2013. All of the NGL product price assumptions are percentages of crude oil prices, expressed in per-gallon amounts. They are:
Discount drivers vary with each product, S&P said, citing ethane as being influenced by demand from the U.S. petrochemical industry. The ethane supply, as reported by the U.S. Energy Information Administration, will also influence price discounts. “There may be an expectation that ethane demand could temporarily weaken due to scheduled maintenance on Gulf Coast petrochemical cracking facilities, while ethane supply remains steady or is increasing,” S&P said.
Another driver can be near-term supply fundamentals, including the near-term capacity additions or decreases in the output of NGLs in the U.S. shale basins and what S&P called various other natural resource basins rich in NGLs.
“For example, if there is an expectation that the global supply of ethane will increase in the near term because of new fractionation plants that can extract more ethane from the natural gas stream, this may put pressure on pricing and the discount would increase,” said S&P, adding that if the opposite was expected because of infrastructure constraints cutting down on ethane supplies, the discount assumed would decrease.
The level of price volatility for specific NGL products over recent years also will influence the size of the discounts. Higher volatility translates into higher discounts and vice versa, S&P said.
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