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How a Fall in Fractionation Spread Affected MLPs Last Week

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Fractionation spread

The Henry Hub-Mont Belvieu fractionation spread fell to $10.1 per barrel for the week ended October 16, 2015. The spread was $12 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 liquids) prices.

The composite NGL price is based on spot prices for ethane, propane, isobutane, n-butane, and natural gasoline at Mont Belvieu. The relatively greater fall in the NGL composite price compared to the natural gas price resulted in a fall in the fractionation spread during the week.

The above graph shows the weekly fractionation spread over five years. Targa Resources (NGLS), Tallgrass Energy Partners (TEP), and Western Gas Partners (WES) are some of the MLPs involved in fractionation. NGLS forms 4.3% of the Global X MLP ETF (MLPA).

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How are MLPs affected by the fractionation spread?

Natural gas recovered from a wellhead must be processed in order to meet specifications before it can be delivered for final use. In addition to natural gas, processing produces mixed NGLs, which are separated through fractionation. NGLs are typically priced higher compared to natural gas.

The spread between NGL and natural gas prices affects natural gas processing MLPs involved in fractionation. Such MLPs typically benefit when the fractionation spread is high, which means that NGL prices are high relative to natural gas. This benefit arises due to the keep-whole and percent-of-proceeds contracts these MLPs enter into.

Keep-whole contracts

Keep-whole contracts are sensitive to commodity prices. Under keep-whole contracts, the processing MLP generally keeps a portion of the NGLs extracted through fractionation as payment. The MLP replaces the energy content of the NGLs 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. It sells the residue gas and NGLs produced from processing. The company then remits an already agreed-upon percentage of these proceeds to the producer and retains the remainder. As a result, the prices of natural gas and NGLs affect the revenues of MLPs that hold these types of contracts.

Percent-of-proceeds contracts account for nearly 85% of the total volume of ONEOK Partners’ (OKS) natural gas gathering and processing segment. To learn more about ONEOK’s natural gas gathering and processing segment, please read ONEOK Partners Reports Give and Take in 2Q Segment Performance.

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