Lower NGL prices on the week hurt rich gas producers

2013.03.13 - NGL Composite BarrelEnlarge Graph

  • Many upstream companies produce a significant amount of natural gas liquids (NGLs) along with dry natural gas and crude oil. These companies enjoy more revenue when NGL prices increase and see less revenue when NGL prices decrease.
  • Using a representative composite NGL barrel (NGLs comprise several different hydrocarbons), NGL prices fell 0.9% for the week ended March 8, in a slightly negative indicator for upstream companies, especially those with relatively more NGL production. However, prices are still economic enough for most producers to continue to target and drill for NGLs.

Natural gas liquids, or NGLs, refer to a group of hydrocarbons (ethane, propane, butanes, and pentanes) that are often found alongside dry natural gas (methane). Many upstream companies (companies which produce crude oil and natural gas) garner a significant portion of their revenue from the production and sale of NGLs, especially those who have a significant amount of “rich gas” assets, or natural gas assets “rich” in liquids. Some of these companies include Range Resources (RRC), Chesapeake Energy (CHK), SM Energy (SM), and Linn Energy (LINE). Price fluctuations in NGLs can affect the ultimate revenue and earnings of upstream companies, therefore, NGL prices are an important indicator to track in the energy space.

According to a presentation by the Midstream Energy Group, the average NGL barrel composition in December 2011 was ~43% ethane, ~28% propane, ~7% normal butane, ~9% isobutane, and ~13% pentanes or heavier hydrocarbons. Using this representative composite barrel, NGL prices fell slightly from $36.64/barrel to $36.33/barrel for the week ended March 8, which is a negative short-term indicator for companies with NGL production.

Natural gas liquids prices have largely tracked crude oil prices historically. However, over recent years the composite barrel as a percentage of crude price has declined. This is because ethane and propane make up a large percentage of the average NGL barrel, but these two commodities especially have experienced a surge in supply due to the shale boom and have experienced a decline in prices.

2013.03.13 - NGL vs WTIEnlarge Graph

Over the past few months, the natural gas liquid composite barrel has been roughly range-bound at ~$35-40/barrel, and is off its highs from 2011. Again, this is largely due to the decline in ethane and propane prices.

2013.03.14 - NGL pricesEnlarge Graph

From a medium-to-long term perspective, despite NGL prices dropping off highs, many producers still find current price levels economic enough to continue to target and drill for NGLs. Therefore, despite this week’s slightly downward price movement which was a short-term negative, the current environment is still supportive for producers of NGLs such as CHK, RRC, SM and LINE, many of which are found in the Vanguard Energy ETF (VDE).