uploads///fractionation spread

How Last Week’s Rise in the Fractionation Spread Affects MLPs

By

Aug. 28 2015, Updated 6:10 a.m. ET

Fractionation spread

The Henry Hub–Mont Belvieu fractionation spread rose to $7.54 per barrel for the week ending August 21, 2015. The revised spread was $7.32 per barrel in the previous week. The Henry Hub-Mont Belvieu fractionation spread measures the spread between Henry Hub natural gas and Mont Belvieu composite NGL (natural gas liquid) prices.

Natural gas recovered from a wellhead must be processed so that it meets specifications before it can be delivered for final use. In addition to natural gas, processing produces mixed NGLs. Then, these NGLs are separated through fractionation.

Article continues below advertisement

The above graph shows the weekly fractionation spread over six weeks. Midstream energy MLPs like Enterprise Products Partners (EPD), Targa Resources (NGLS), DCP Midstream Partners (DPM), Tallgrass Energy Partners (TEP), Southcross Energy Partners (SXE), and Western Gas Partners LP (WES) are involved in fractionation. EPD forms 10.2% of the Global X MLP ETF (MLPA).

How are MLPs affected by the fractionation spread?

Natural gas processing MLPs typically benefit when the fractionation spread is high. This means that NGL prices are high relative to natural gas. This is because of the “keep-whole” and “percent-of-proceeds” contracts that these companies enter into.

Article continues below advertisement

Keep-whole contracts

Keep-whole contracts are sensitive to commodity prices. Under keep-whole contracts, the processing company generally keeps a portion of the NGLs extracted through fractionation as payment. The company replaces the energy content of the NGLs that it has retained with natural gas. So a fall in NGL prices relative to natural gas prices makes the spread less favorable for fractionating MLPs under keep-whole contracts.

Percent-of-proceeds contracts

In percent-of-proceeds contracts, the MLP gathers and processes natural gas on behalf of producer customers. The residue gas and NGLs produced from the processing are sold on the market. The company then remits a pre-agreed percentage of these proceeds to the producer and retains the remainder. As a result, the prices of natural gas and NGLs affect MLPs’ revenue with these kinds of contracts.

Percent-of-proceeds contracts accounted for nearly half of the natural gas volume gathered by Targa Resources (NGLS) for 2014. These contracts account for nearly 85% of ONEOK Partners’ (OKS) Natural Gas Gathering and Processing segment’s total volumes. To learn more about ONEOK’s segments, read ONEOK Partners: How Gas Gathering, Processing Segment Makes Money.

Advertisement

More From Market Realist

  • CONNECT with Market Realist
  • Link to Facebook
  • Link to Twitter
  • Link to Instagram
  • Link to Email Subscribe
Market RealistLogo
Do Not Sell My Personal Information

© Copyright 2021 Market Realist. Market Realist is a registered trademark. All Rights Reserved. People may receive compensation for some links to products and services on this website. Offers may be subject to change without notice.