Natural gas processors can be sensitive to commodity prices in the form of frac spreads
Some market participants view fractionation spreads (also called “frac spreads”) as one indication of the profitability of some natural gas processing companies. Frac spreads depend on natural gas liquids (NGLs) and natural gas prices, and they increase when NGL prices increase relative to natural gas prices. Generally, companies with natural gas processing operations such as MarkWest Energy (MWE), Targa Resources (NGLS), Williams Partners (WPZ), and DCP Midstream Partners (DPM) realize more profits when frac spreads increase.
Frac spreads up last week, remaining up nearly ~45% since late June
Last week, natural gas prices were roughly flat, and most NGL prices increased. Ultimately, this resulted in higher frac spreads (as measured by a custom index created by Bloomberg, using assumptions provided by Ceritas Group).
Note: The custom frac spread is based on assumptions provided by Ceritas Group. To see how the custom frac spread is calculated, please refer to An in-depth look at the mechanics of fractionation spreads.
Frac spreads had generally decreased since mid-February, when they reached ~$30 per barrel. Since then, frac spreads declined to levels as low as ~$20 per barrel, mostly due to the strong rally in natural gas prices. Frac spreads have recovered strongly since then, as oil has seen significant gains while natural gas prices have stagnated. Plus, the natural gas liquids complex had been helped over the past few months by increases in propane prices, likely from increases in export capacity (see Why some MLPs are benefitting from increased propane exports for more background). Meanwhile, natural gas prices remained relatively low, which had caused a medium-term increase in frac spreads.
More infrastructure for processing ethane and propane would support prices
Once more capacity for processing ethane and propane comes online or more NGL export capacity is constructed, this could provide additional long-term demand for these commodities and result in higher frac spreads, as has been demonstrated by the recent increases in propane exports.
Several midstream companies have noted that they’re working on such projects. However, the timeline for the completion of these works is over the next several years. Even if demand for these NGLs grows as a result of completed infrastructure, the supply of NGLs also continues to grow—and if supply meets or outstrips demand, the prices of ethane and propane may remain depressed.
Last week, frac spreads traded up slightly, and over the medium term, frac spreads are up significantly. This is a positive catalyst for natural gas processors such as MWE, NGLS, WPZ, and DPM, many of which are also components of the Alerian MLP ETF (AMLP).
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