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 (for a detailed explanation of fractionation spreads, please refer to Why fractionation spreads affect some MLP stocks). Note that propane is a major component of the average NGL barrel, and when propane prices increase, the average NGL composite price increases. So, as propane prices increase, frac spreads increase. 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.
Rally in propane prices has helped support frac spreads
Propane has rallied over 50% since lows in June 2013, which has helped to support frac spreads, even while natural gas prices have increased. Propane prices increased from $0.81 per gallon on June 20, 2013, to current prices of ~$1.25 per gallon (as priced at Mont Belvieu), or over 50%. Other natural gas liquids prices also rallied during that period, but not to the same degree as propane. Ethane rallied ~20%, butane rallied ~30%, iso-butane rallied ~20%, and natural gasoline rallied ~13%. During the same period, natural gas prices rallied ~15%, which had a negative impact on frac spreads. Altogether, given the changes in these various commodity prices, frac spreads rallied over 40% from June lows to current levels of nearly $30 per barrel.
One example of how NGL prices affect earnings: Targa Resources
Targa Resources has put out its guidance for 2014, and has noted in it how natural gas liquids prices can affect earnings. The company states that for every $0.05 per gallon change in its weighted average NGL mix (44% ethane, 30% propane, 11% natural gasoline, 5% isobutane, and 10% normal butane), its EBITDA would change roughly 2%, due partly to some long exposure Targa has to NGLs given its natural gas processing contracts. A continued boom in propane exports and higher prices would thus positively impact Targa’s earnings.