We’ve already looked at DCP Midstream Partners’ (DPM) Natural Gas Services segment and its assets. Now let’s take a look at the factors that drive DCP Midstream’s natural gas business. Natural gas volume and price are the primary factors that affect DCP Midstream’s Natural Gas Services segment.
Natural gas volume
For an infrastructure provider like DCP Midstream, volume is the most significant business health indicator. Revenue is earned on the volume of natural gas and natural gas liquids transported through its pipelines, or throughput, and used for processing.
DCP Midstream has largely benefited from its presence in some of the unconventional shales that have witnessed sharp natural gas production growth. From January 2009 to December 2014, natural gas production in the key seven US shales increased 145%.
Some of the key natural gas producers include Chesapeake Energy (CHK), WPX Energy (WPX), Cabot Oil & Gas (COG), and Southwestern Energy (SWN). Chesapeake and WPX Energy together account for 2.1% of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).
Energy commodity volume is typically a function of energy price. Energy price affects drilling activity, which in turn affects volume transported in the long run. Crude oil and natural gas prices have declined substantially in 2014 and experienced significant volatility during the latter part of 2014.
From January to December 2014, natural gas prices have fluctuated significantly and decreased 20%. Natural gas production, which has not yet relented to natural gas prices, may fall if prices stay depressed for a longer period.