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Tag Archives: NGLs
Feb 24th, 2012
MLP Market Post
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The talk for the last few months has been natural gas price declines, drilling curtailments, adjusting to a newer normal of natural gas prices below $3.00 on a sustained basis, after having only recently adjusted to the new normal of natural gas below $4.00. The focus has shifted to NGL prices this quarter. Earnings calls Q&A’s were chock full of NGL and ethane questions, and with good reason. Ethane prices peaked on October 21, and have dropped since around 47% through last Friday, and overall NGL prices are down 18% over the same time period. Its not just the decline, but the decline as a percentage of crude oil prices that is significant. Ethane is down to around 20% 0f crude oil price, compared with a typical range of 40% to 55%, according to the chart below from Raymond James.
Ethane consumption decreased 3.5% from December (a record high month) to January. That decline in demand has been rationalized away by the people that know more about NGLs than everyone else as mostly related to planned plant turnarounds and downtime, and most expect NGL prices to firm up in the second half of 2012.
Since 2009, MLPs with well-located processing and fractionation assets have been the primary beneficiaries of high NGL prices. Names like OKS, NGLS, and EPD have posted great numbers in their NGL businesses. NGL-focused MLPs have been able to identify very attractive processing and fractionation projects to develop recently and have been holding up the MLP space (along with crude-focused MLPs). If the NGL party were to end, the MLP sector would face some serious headwinds.
To be clear, the party doesn’t end at today’s prices, which are still historically high. As EPD’s Jim Teague said on EPD’s earnings call: “we talk about softness [in ethane prices], we’ve gone from phenomenal margins to just great margins. We’ve had quite a few turnarounds. We’ve lost probably 50,000 barrels a day; that’s to be expected. We’re still pretty excited [about ethane prices].”
So questions have been raised on NGLs, and skepticism is developing as to the ability of petro-chemical demand to keep pace with NGL production from liquids-rich natural gas wells. If NGLs were to break and become so oversupplied that NGL prices collapse in the manner that natural gas has over the last few years, would the rigs just move onward and upward to focus on crude oil? How long after that before questions started to emerge about oversupply of crude oil? Raymond James’ research team came out with a report this week that lowered their long term oil price target to $90 from $105, even as oil hits new nine month highs. Is this a sign of things to come if the geopolitical situation in Iran calms down and the speculation in crude dissipates? I think its possible.
Extrapolating Production Trends?
Speaking of oil production, there has been chatter from research analysts and journalists on the subject of American energy independence. Citigroup released a report early this month that touted the potential for shale oil as the lever that will help America finally achieve Energy Independence (at least those from the Middle East, Canada is ok). Even the EIA is sending muted signals of the possibility of liquids imports going away:
U.S. dependence on imported oil has dramatically declined since peaking in 2005. This trend is the result of a variety of factors including a decline in consumption and shifts in supply patterns. The economic downturn after the financial crisis of 2008, improvements in efficiency, changes in consumer behavior and patterns of economic growth, all contributed to the decline in petroleum consumption. At the same time, increased use of domestic biofuels (ethanol and biodiesel), and strong gains in domestic production of crude oil and natural gas plant liquids expanded domestic supplies and reduced the need for imports. (EIA, June 2011)
Domestic oil production highest in 8 years. The proportion of demand met from domestic sources over last 6 years to 81% according to department of energy. But as shown in the chart below, crude imports are still double current production. Not exactly drowning in oil…
Clearly we have a long way to go to achieve independence on crude oil, but factoring in growing exports of coal and natural gas, declining demand for gasoline from vehicle efficiency, and production increases it may be possible to have the overall energy balance swing to a national net export situation.
Can we Drill our Way to Financial Independence?
Energy independence is clearly a buzzword that gets used by research analysts to generate buzz. Its pretty far-fetched to think that we may at some point be totally energy independent as a country. Regardless of its likelihood, the conversation / debate is happening. Just do a google news search for “Energy Independence”, and you get articles on both sides, such as:
- The Myth of Energy Independence: Why We Can’t Drill Our Way to Oil Autonomy (the Atlantic)
- Energy Independence Gives Opening for Renewables (Bloomberg)
- Energy Independence, impending oil shocks (Smart Planet)
- America Will be Energy Independent by 2030 (Daily Finance)
What I read in the above article by Smart Planet is that initial production rates for Bakken wells are not that impressive, with large decline curves. At a current cost per well of $7 million, it would appear that the amount of capital and wells drilled (16,000 by the author’s estimation) to continue to achieve substantial growth in production out of Bakken is not feasible. That ignores the potential for U.S. producers to advance up the learning curve, master the process of drilling thousands of wells per year and eventually lower the cost of each individual well.
Also, arguments that focus on oil production growth domestically not impacting global prices because of the massive expected demand growth out of China and India ignore the potential for our technology and mastery of shale development to be exported to other countries. They ignore the potential for some other country to follow our lead and grow their own oil production from previously discarded reserves.
The debate should not be focused on whether or not it is possible for shale oil to solve our energy problem, because the truth is no one knows. The discussion should be around the fact that the U.S. is growing oil production substantially for the first time in decades, and what that could mean. Even if we don’t become energy independent, can this new oil production change our current economic outlook, or potentially change the world’s view of the U.S. dollar? Will this new production allow us to hold on a bit longer to our status as the world’s reserve currency? Can we hold on long enough to re-emerge as the dominant global economic force? Is the production impact large enough to create an economic windfall from cheaper energy and create jobs to save us from a public balance stagflation crisis akin to Japan for the next few decades? In short, can this new oil save the country?
Or, a different line of questioning: could this potential glut of oil destroy all hope of innovating cheap alternative energy sources? Will our thirst for domestic production destroy the environment? If the entire world goes shale crazy, how fast will the oil reserves be depleted. Or will there be innovation that allows us to use some alternative to water in the fracking fluid?
Sorry that this post had far more questions than answers, but I hope I’m asking some of the right questions. If you have the answers, please feel free to comment below or send me an email.
The answer to the above question is: I don’t know. Nobody does, although safe to say it won’t go negative… The more interesting question is: how long before it recovers? And is that time period measured in months, quarters, years or decades? I’m betting years at this point, and I’m not alone…
In the meantime, low natural gas prices are not a major concern for many MLPs, particularly midstream MLPs focused on liquids-rich plays. There are high hopes for the major NGL players heading into earnings. One such player, $OKS, announced on Thursday announced a 9% increase in its fourth quarter distributable cash flow guidance, after increasing that guidance on November 1st by 15% (press release). Another MLP leveraged to natural gas liquids margins is $NGLS, which priced a $150 million overnight equity offering this week. Of the 4 marketed equity offerings this week and of the 7 total equity offerings so far in 2012, NGLS was the only one to close higher that it priced on the next trading day. NGLS finished up 2.5% from its issue price after pricing the deal on Wednesday morning. Expect some very strong earnings from OKS, NGLS, EPD and others with leverage to NGL prices.
This week, the MLP Index tracked the S&P 500 very closely, and both finished the week up 2.0%. Amidst the low volume stock market melt up, the 10-year treasury rate popped up above 2% for the first time in a few weeks.
That’s it for me this weekend. Only so many hours in a day, and I spent several of those today outside shovelling and playing in the snow with my kids. And tomorrow, my wife and 2 oldest kids (both still under 5) will be braving the elements in the upper levels of Foxboro’s Gilette Stadium (expected temperature at game time: 32 degrees) to watch the AFC Championship. We’ve never been to a Patriots game, but given that we are moving to Austin in a few months (more on that later), I guess this is our last chance, and it may be Brady-ichik’s last chance as well.
(Patriots Coach Bill Belichick with the rare public smile while receiving his honorary Doctorate degree from BU on the day I graduated in 2004)
26 MLPs have announced distributions so far this quarter, 15 (58%) have increased distributions, 11 have maintained distributions. This week:
- $KMP, $SPH, $CQP, $GSJK, $GLP, $NRP, $TOO, $TGP announced flat distribution
- $TLLP raised distribution 7.4%
- $WES raised distribution 4.8%
- $XTEX raised distribution 3.2%
- $APU raised distribution 3.0%
- $OKS raised distribution 2.6%
- $EPB raised distribution 2.6%
- $CMLP raised distribution 2.1%
- $VNR raised distribution 1.7%
- $TLP raised distribution 1.6%
- $EPD raised distribution 1.2%
- $LGCY raised distribution 0.9%
- $EVEP raised distribution 0.1%
Also, in case you missed these posts from this week, check them out.
Disclosure: The information in this article is not meant to be financial advice, we are not your financial advisor and I am posting my comments for informational purposes only. Long EPD and NGLS.
Dec 12th, 2011
MLP Market Post
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Digging around in my office, I recently came across the roadshow presentation from Boardwalk Pipeline Partners ($BWP), which went public in the fall of 2005. I was responsible for producing the roadshow presentation, then getting 30 copies printed and carrying them with me as I traversed the country (along with management) in SUVs, private jets and limousines to give the presentation. I kept a copy of it, as I have kept copies of the presentations from the 8 other MLP IPOs I helped to execute as an investment banker.
Given how tight differentials are today, I thought it would be fun to share how wide differentials were back in 2004, and to reminisce on the days when MLPs with large pipeline systems could make money from basis differentials. It was a selling point in the IPO that BWP could take advantage of wide (and increasing) basis differentials. Things have changed quite a bit since 2005.
In 2004, natural gas prices averaged at the wellhead averaged $5.46 per mcf, and then $7.33 in 2005 according to the EIA. So far in 2011 through September, spot natural gas prices have averaged $4.09, and $3.82 in September. Gas prices are not moving in the right direction, as natural gas drilling and production continues to increase as a result of high oil and NGL prices. The resulting supply glut has reduced basis differentials to almost nothing. Today, there is virtually no price difference between Rockies gas, Appalachia gas and South Texas gas (maybe $0.02 difference), according to Bloomberg.
BWP is not alone, its just an example (in fact, full disclosure, we own BWP in our clients accounts). Energy Transfer Partners (ETP) was probably the MLP that benefited the most from wide differentials, and the lack thereof today has been a major drag on ETP’s distribution growth and performance since 2007. It doesn’t seem like natural gas differentials will be a positive investment buzzword again for a while.
The new differentials that make more headlines than natural gas ever did are the WTI-Brent crude differentials and the Conway-Mt. Belvieu NGL differentials. It might be worth remembering how fast those differentials can evaporate…
Disclosure: The information in this article is not meant to be financial advice, we are not your financial advisor and I am posting my comments for informational purposes only. I realize that strictly speaking IPO roadshow documents are supposed to be destroyed after the IPO and never allowed to be publicly disseminated, but there must be a statute of limitations that protect me, right?