Natural gas gathering and processing: A major business for many MLPs

Part 6
Natural gas gathering and processing: A major business for many MLPs (Part 6 of 7)

Propane prices affect profits and growth for natural gas MLPs

Low propane prices have also negatively pressured natural gas processors

The natural gas liquids found in wet natural gas resources (“wet” referring to the fact that the resource is rich in NGLs as opposed to “dry,” whose hydrocarbon makeup is substantially all methane), are mostly ethane and propane. So, like ethane, propane prices had also declined due to the flush supply from increased domestic drilling.

2013.3.13 - Propane Price as Percentage of CrudeEnlarge Graph

Prior to 2012, propane traded mostly within 60% to 80% of WTI crude (per barrel). After 2012, propane averaged mostly between 40% and 50% of WTI crude (except for a brief recent spike over this past winter due to a severely cold winter, which boosted demand for the fuel, as it’s used for home heating. Plus, propane is easier to export than ethane, and the completion of propane export facilities by Targa Resources (NGLS) and Enterprise (EPD) also contributed to drawdowns on propane inventories (see Key analysis: The most important trends in propane right now).

Like low ethane prices, low propane prices can also negatively affect the revenues of natural gas processing operations. For processors getting paid on a percentage of liquids, percentage of proceeds, or keep-whole contracts, low ethane and propane prices directly negatively affect revenues. Plus, while low natural gas prices have caused producers to stop targeting dry natural gas resources such as the Haynesville, depressed natural gas liquids prices could also cause producers to stop or slow drilling in wet gas regions if it becomes uneconomic to do so.

So propane prices can affect the profitability of natural gas gathering and processing operations for a number of MLPs, including Atlas Pipeline (APL), Western Gas Partners (WES), DCP Midstream (DPM), and Targa Resources (NGLS), which are part of the Alerian MLP ETF (AMLP).

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