Proximity to major shales and price advantages
In the previous parts of the series, we discussed Spectra Energy’s (SE) assets in the Spectra Energy Partners, Distribution, and Western Canada Transmission & Processing segments. In this article, we’ll discuss its Field Services segment.
Spectra Energy owns 50% interest in DCP Midstream Partners (DPM). Phillips 66 (PSX) owns the remaining 50% of DCP Midstream. DCP Midstream operates Spectra Energy’s Field Services segment. Through this segment, Spectra Energy operates in conventional and unconventional natural gas producing regions like the Mid-Continent, Rocky Mountain, East Texas-North Louisiana, Barnett Shale, Gulf Coast, South Texas, Central Texas, Antrim Shale, and Permian Basin.
Though DCP Midstream, the Field Services segment has greater access to the natural gas liquids (or NGL) trading and storage hubs in Mont Belvieu, Texas and Conway, Kansas. Because of the proximity to the markets, Spectra Energy can avail the best prices, which help it manage the price risks. Typically, there exists a spread between prices at trading hub and other places.
Sales contracts to expire in December
DCP Midstream purchases NGLs from Chevron Phillips Chemical Company LLC (or CPChem) and sells to Phillips 66 (PSX) and CPChem. Revenue from the Field Services segment has been fairly steady through a 15-year contract between Phillips 66 and CPChem. However, the contract expires in December 2014, which has a wind-down period up to January 2019. If not re-negotiated, this will expose revenues from this segment to natural gas price volatility.
The company also has contracts to buy NGLs from the Mid-Continent and Permian Basin regions at a pre-determined price level. More than 70% of the volumes of gas that are gathered and processed are under percentage-of-proceeds contracts. This type of contract arrangement is directly related to the prices of natural gas, crude oil, and NGLs.