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December 12, 2011

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Natural Gas Basis Differential Nostalgia

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.

(click to embiggen)

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?

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