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NGL prices continue to slide, hurting companies such as CHK

2013.06.24 - NGL PricesEnlarge 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 were down for the week ended June 21st in a negative indicator for upstream companies, especially those with relatively more NGL production. From mid-March, NGL prices have declined from ~$39/barrel to current levels of ~$32/barrel in a medium-term negative indicator.

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 that 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 were down, closing at $32.28/barrel last Friday compared to $33.61/barrel for the week ended June 21st, which is a negative short-term indicator for companies with NGL production. The representative NGL barrel traded as high as ~$39/barrel in mid-March, but since then prices have largely declined resulting in a medium-term negative indicator as well. However, at current levels NGL production is still economical for most producers.

2013.06.24 - NGL vs CrudeEnlarge Graph

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.

This week saw NGL prices trade down, which is a negative in the short-term. 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. The current environment remains supportive for producers of NGLs, such as CHK, RRC, SM and LINE, many of which are found in the Vanguard Energy ETF (VDE).