Propane exports on the rise, provides support to prices and MLP frac spreads

2013.02.11 - Propane ExportsEnlarge GraphUS propane prices are directed by supply and demand forces, and one factor in the demand equation is the amount of propane exported to international markets. More propane exported results in higher propane prices which is a positive for certain master limited partnerships that process natural such as DCP Midstream (DPM), Targa Resources (NGLS), Williams Partners (WPZ), and MarkWest Energy (MWE). For more on why NGL prices matter to these companies please see “Why fractionation spreads affect some MLP stocks”.

The Energy Information Administration (EIA) last reported that exports of propane and propylene (a product of propane after it has undergone some processing) increased to 160,000 barrels per day from 132,000 barrels per day. This represents a continuation of a trend of increased propane exports over the past several years as displayed in the above chart. Increased propane exports are a positive for domestic propane prices because they represent increased demand for domestic propane.

However, as seen in the below graph, despite increased propane exports, propane prices have traded off since mid-2011 due to a large increase in the production of propane over the same period. This is as a direct result of oil and gas producers’ frenzied drilling of shale with a large natural gas liquids component.


2013.02.11 - Propane PricesEnlarge Graph
Currently, domestic propane trades at a discount to international propane as seen in the chart below.

2013.02.11 - Domestic vs International Propane PricesEnlarge Graph

This is because despite a growing amount of propane exports, export capacity has been limited by a lack of infrastructure. However, this price disparity provides an economic incentive to build the necessary infrastructure to export propane. Midstream companies have already announced projects to build or expand propane export terminal facilities which should result in increased propane exports and support for propane prices. For instance, Targa Resources (NGLS) has announced a project to provide additional NGL export capacity on the Gulf Coast. Targa expects to be able to load four VLGCs (or “very large gas carriers”) per month starting 3Q13, with capacity for an additional 2-4 VLGCs per month starting 3Q14. Additionally, Enterprise Products Partners (EPD) is expected to roll out a terminal expansion sometime in the second half of February with capacity of up to 250,000 barrels a day.

The takeaway is that propane exports support propane prices, and given recent trends and news of new export infrastructure, one can expect propane exports to continue to grow. Higher propane prices are a positive for natural gas processors such as such as DCP Midstream (DPM), Targa Resources (NGLS), Williams Partners (WPZ), and MarkWest Energy (MWE), or that hold the Alerian MLP ETF (AMLP) which contains many gas processing names, as a portion of revenues are tied to contracts which are dependent on the prices of NGLs such as propane. For further information on why NGL prices matter, please see “Why fractionation spreads affect some MLP stocks”.

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