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NGL prices are an important energy 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 produce a significant amount of natural gas liquids (NGLs) along with dry natural gas and crude oil. These companies earn a significant portion of their revenue producing and selling 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). These companies enjoy more revenue when NGL prices increase and see less revenue when NGL prices decrease. Price fluctuations in NGLs can therefore affect the ultimate revenue and earnings of upstream companies, so NGL prices are an important indicator to track in the energy space.
Recent NGL prices drops are a negative medium-term indicator—especially for upstream companies with more NGL production
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 per barrel last Friday compared to $33.61 per barrel for the week ended June 21, 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 economic for most producers.
NGL prices and crude oil prices
NGL 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.
NGL production still economic for many producers
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 in the Vanguard Energy ETF (VDE).
© 2013 Market Realist, Inc.