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Behind the Fractionation Spread: Key Investor Data

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Mar. 28 2016, Published 6:36 p.m. ET

Fractionation spread

The Henry Hub-Mont Belvieu fractionation spread rose slightly to $11.53 per barrel in the week ending March 25, 2016. The spread was $11.37 per barrel the previous week. The Henry Hub-Mont Belvieu fractionation spread measures the spread between Henry Hub natural gas and Mont Belvieu composite NGLs (natural gas liquids) prices.

The composite NGLs price is based on spot prices for ethane, propane, isobutane, n-butane, and natural gasoline at Mont Belvieu. The relatively smaller rise in NGL prices combined with declines in natural gas prices last week contributing to a slight increase in the spread between the two during the week. (We’ll discuss last week’s change in ethane prices in the next part.)

Behind the Fractionation Spread: Key Investor Data

The above graph shows the weekly fractionation spread over a six-week period. MPLX LP (MPLX), Tallgrass Energy Partners (TEP), and Western Gas Partners (WES) are some of the MLPs involved in fractionation.

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How MLPs are impacted 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. They’re separated through fractionation.

The spread between NGLs prices and natural gas prices impacts natural gas–processing MLPs involved in fractionation. These MLPs typically benefit when the fractionation spread is high. This means that NGLs prices are high compared to natural gas prices. This benefit stems from the keep-whole and percentage-of-proceeds contracts that these MLPs maintain.

Keep-whole contracts

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

Percentage-of-proceeds contracts

In percentage-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 remits an agreed-upon percentage of the proceeds to the producer and retains the rest. As a result, the prices of natural gas and NGLs impact the revenue of MLPs that hold these types of contracts.

Percentage-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 this segment, consider checking out Market Realist’s “Natural Gas Liquids Segment Drives ONEOK’s EBITDA Growth.“) ONEOK Partners makes up 0.82% of the Guggenheim Multi-Asset Income ETF (CVY). CVY invests nearly 19% of its portfolio in the energy sector.

Now let’s analyze recent ethane prices.

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