What drives the Midstream, Chemicals, and Marketing segments?

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Why NGL prices decreased

DCP Midstream (DPM) accounts for 50% of Phillips 66’s (PSX) Midstream segment. DPM’s margins depend largely on natural gas liquid (or NGL) prices. During 2013, there was an increased focus on the liquids-rich shale plays—for example, the Marcellus and Utica. This led to increased NGL production.

In contrast, the petrochemical industry generated limited demand for NGL as a feedstock. This led to higher NGL inventory. It also led to a fall in NGL price.

NGL and Nat Gas Price

NGL prices affect the Midstream segment’s performance

From 2012 to 2013, NGL prices decreased from an average of ~$11 per million British thermal units (or MMBtu) to ~10 per MMBtu. From January to June 2014, average NGL prices increased to ~$10.6 per MMBtu.

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From 2012 to 2013, natural gas prices increased from ~$2.9 per MMBtu to $3.7 per MMBtu. This was driven by colder weather. The colder weather increased natural gas demand. There were also pipeline constraints in the northeastern U.S. In 2014, natural gas prices have been on an upward trend. They averaged ~$4.6 per MMBtu until June.

Lower NGL prices negatively affected PSX’s Midstream segment’s earnings in 2013. Higher natural gas prices increased earnings. However, the lower NGL price combined with higher natural prices could lead to ethane rejection. To learn more about ethane rejection, read our articles here.

Other midstream companies that were affected by NGL and natural gas prices include Williams Companies (WMB) and Targa Resources (NGLS). Some of these companies are components of the Alerian MLP ETF (AMLP).

Chemicals segment benefits from lower NGL prices

PSX’s Chemicals segment uses NGLs as a feedstock for producing plastics. The segment benefits if the ethylene price goes down. Ethylene is a hydrocarbon. It’s produced either using crude oil-based naphtha or NGL- based ethane and propane. It’s produced through a process called fractionation. It’s widely used in the plastics industry.

Ethane’s lower price made it more advantageous for use as the feedstock. This led to a higher profit margin for its Chemicals segment in 2013 and 1H14.

Commodity prices affect Marketing segment’s profitability

The Marketing & Specialties segment depends on marketing fuel margins, lubricant margins, and other specialty product margins. A downward trend in commodity prices has a positive impact on the marketing fuel margins.

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