Natural gas liquids prices fall, hurting wet gas producers

Natural gas liquids (NGLs) are another component of upstream energy production

Natural gas liquids, or NGLs, are a group of hydrocarbons (ethane, propane, butanes, and pentanes) that are often found alongside dry natural gas (methane). Many upstream companies (companies that produce crude oil and natural gas) garner much of their revenue from producing and selling 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, so NGL prices are an important indicator to track in the energy space.

 

2013.09.12 - NGL Composite STEnlarge Graph

NGLs are made up of different compounds that receive different prices, and production streams are largely ethane and propane

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 up, closing at $39.30 per barrel on September 6 compared to $40.54 per barrel for the week ended August 30, which is a negative short-term indicator for companies with NGL production.

Despite last week’s downward movement, the representative NGL barrel remains up over 20% since lows in June, a medium-term positive catalyst. Natural gas liquids prices have largely been helped by strength in WTI crude prices. For more on crude price movements, see Must-know: Oil prices escalate alongside Syria fears.

Plus, the NGL barrel has been helped by an increase in propane prices, which has likely been driven by higher propane exports. For more information, see Why natural gas liquids prices increased on higher propane prices.

NGLs have historically tracked movements in crude prices, but prices have fallen relative to crude lately

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. However, there’s still a correlation between NGL prices and crude, and movements in oil prices can cause NGL prices to move as well.

2013.09.12 - Crude vs NGLEnlarge Graph

Outlook

Last week saw NGL prices trade down, a negative short-term indicator. However, note that NGL prices are up significantly since late June, a positive medium-term indicator. From a longer-term perspective, many producers still find current price levels economic enough to continue to target and drill for NGLs, but they’ve suffered from NGL prices coming off highs (~$50 to ~$60 per barrel through much of 2011 versus $40 per barrel now). Major producers of NGLs include CHK, RRC, SM, and LINE—many of which are in the Vanguard Energy ETF (VDE).