Low natural gas prices could cause upstream companies to stop or slow drilling in gas basins
While natural gas gathering and processing companies have been moving away from more commodity-sensitive contracts and towards more fee-based contracts, they’re still indirectly exposed to commodity prices. This is because if natural gas prices are low, producers are less incentivized to drill, and production volumes could fall in certain areas.
Natural gas prices have been depressed from a long-term context over the past few years. This is because a surge of drilling has occurred in the U.S. due to the application of new technologies that have allowed certain areas to be developed for oil and gas production that were previously uneconomic. Producers rushed to drill for natural gas and oil. However, soon, the supply of natural gas overwhelmed demand. Plus, natural gas is difficult to export, so demand is largely contained to domestic demand (compared to crude oil’s refined products, which are in liquid form and easier to export).
Due to low natural gas prices, drilling in “dry gas” basins (areas of natural gas with few natural gas liquids, or NGL, content) has slowed down. These dry gas basins include the Haynesville, Bossier, Barnett, Fayetteville, and Piceance shales.
How low natural gas prices have affected some midstream companies
EPD notes in its 10-K, “Drilling activity in shale plays with predominantly dry natural gas reserves or natural gas reserves with a lower NGL content are expected to remain well below peak levels. As a result, we expect that natural gas volumes on pipelines that serve these supply basins, including our Jonah, Piceance Basin, San Juan and Haynesville gathering systems, may decline further in 2014 when compared to 2013.”
Access Midstream (ACMP) has significant assets in the dry gas regions of the Haynesville and Barnett, though the company notes that it’s supported by minimum-volume commitments, which protects its downside in the event of reduced drilling from lower natural gas prices.
Another company identified with gathering and processing assets in a dry gas basin is Kinder Morgan Partners (KMP), which which has some assets in the Haynesville and Bossier shales through its subsidiary, KinderHawk Field Services LLC. However, note that this is a relatively small part of KMP’s operations.
ACMP, KMP, and EPD are all components of the Alerian MLP ETF. Natural gas prices can also affect commodity-based ETFs such as UNG, the U.S. Natural Gas ETF. Note that any MLPs with gathering and processing operations have some degree of business risk due to reduced drilling from low commodity prices.
Read on to the next part of this series to learn about other trends affecting natural gas–gathering and –processing MLPs.
© 2013 Market Realist, Inc.