When supplies of dry US natural gas swelled several years ago as companies honed their shale resource development skills, gas prices dramatically declined hitting a low of about $2 per million BTU. This caused natural gas producers to shift drilling operations into more liquids-rich areas and adjust their production more toward oil, which fetched higher prices at the time.
Traditionally gas-focused operators were able to contend with lower dry gas prices by producing more natural gas liquids, which are used as feedstock by refiners, petrochemical manufacturers and other industrial concerns. “The surge in natural gas liquids (NGLs) supply accompanying US shale production has notably underpinned the domestic petrochemicals industry with cheap plant feedstock, particularly in the form of ethane. This has allowed US plants to forge a competitive global position in ethylene production and ushered in a new era of investments in the US petrochemicals sector,” according to a recent Oxford Institute for Energy Studies report. Some companies like Range Resources struck NGL export agreements with European chemical companies.
But the recent oil price decline has brought down NGL prices as well, and brokerage Sterne Agee suggests NGL pricing weakness may drag on earnings more than the Street expects. “While oil price action continues to dominate headlines, the steep decline has been pervasive across the entire hydrocarbon complex.” … “With 4Q earnings beginning this week for some large cap E&Ps, we expect NGL price weakness to weigh on 4Q results, possibly more so than many expect, especially given limited hedging options for the NGL components,” Sterne Agee analysts said in a note today.
The analysts provide additional NGL pricing detail here:
“We looked at NGL pricing across many coverage companies with meaningful NGL production, noting that NGL volumes count for over 30% of the production stream for some producers. Our work shows that since 1Q13, producers on average reported NGL realizations equal to 67%-81% of our synthetic NGL benchmark. This benchmark averaged $31.47/b in 4Q14, suggesting NGL realizations of $21-$25/b for 4Q14. Of note is that Permian operators have tended to be clustered toward the bottom end of this range, while Mid-Continent producers with exposure to the Conway, KS NGL pricing hub tend to be clustered toward the high end of this range.”
