Making Sense of Natural Gas Liquids

I have written many times about how natural gas liquids are a more lucrative product compared to methane, or dry gas; a reality that is currently dominating the production agendas of many natural gas companies. It is worth taking a closer look at what NGLs are exactly, what they're used for, and where prices come from to develop a better understanding of the industry.

What are NGLs?
"Natural gas liquids" describes those gases that are produced from a well in liquid form because of pressure and temperature. The most common NGLs are ethane, propane, butane, isobutane, and pentane. Pentane is typically grouped with two of its isomers and referred to as "pentanes-plus," commonly written as C5+.

The uses for these liquids range far and wide:

  • Vehicle fuels
  • Commercial and residential heating
  • Camping stoves and grills
  • Lighter fluid
  • Refrigerants
  • Aerosol cosmetics (think shaving cream), aerosol paints
  • Agents for developing foam insulation

One of the other major uses for NGLs, aside from the list above, is as feedstock for petrochemical cracking. Cracking is the process of using a catalyst to break long hydrocarbons up into shorter, more useful ones. Steam cracking at chemical plants and catalytic cracking at oil refineries produce the building blocks used to make various solvents, detergents, adhesives, plastics, resins, fibers, lubricants, and gels.

Show me the money
In the past, natural gas liquids tracked crude oil prices pretty closely. Though that has started to change in recent years, a barrel of NGLs is still much more valuable than its natural gas equivalent.

The prices for NGLs are spotted at two hubs: the Mont Belvieu hub in Texas and the Conway hub in Kansas. Here are the most recent prices for NGL components at Mont Belvieu:

Week Ethane Propane Butane Isobutane Pentane NGL Barrel
18-Jan $0.58 $1.28 $1.90 $1.93 $2.33 $55.17
11-Jan $0.65 $1.25 $2.02 $2.13 $2.34 $57.12
4-Jan $0.76 $1.33 $2.06 $2.32 $2.36 $60.57

Source: Midstream Business.

With the exception of propane, prices are declining across the board. This is not necessarily reason to panic, nor does it forebode a methane-like free fall in the coming years. Much of the price decline can be linked to planned turnarounds, or scheduled maintenance, at cracking facilities. When these facilities come back online, prices will likely rise.

It is fair to be concerned about oversupply of NGLs. The oversupply of methane has led to an increased focus industrywide on NGL production, which in turn could trigger overproduction and a subsequent price decline. However, the chemical industry is booming, and there is no sign, right now, of shrinking demand outside of the temporary turnarounds mentioned above.

Dow Chemical (NYSE: DOW  ) plans to build a cracker on the Gulf Coast and begin operations by 2017. It will also reopen a cracker in Louisiana and build two propylene plants. Royal Dutch Shell (NYSE: RDS-A  ) plans to open the first cracker in 50 years in the Marcellus Shale region. These are but two of the handful of companies that are tossing around the idea of building crackers in the U.S. in the coming years. For perspective, a new cracker hasn't been built here since 2001.

Cashing in
Chemical companies are but one way to invest in NGLs. Finding companies that operate in liquids-rich plays across the country is another way. On top of that, pipeline companies are another consideration, as much of the infrastructure required to bring these NGLs to market doesn't exist, or is aging and needs to be updated. Here are three players to consider:

Forest Oil (NYSE: FST  ) : In the third quarter of 2011, Forest Oil added 174,000 net acres in liquids-rich regions. Forest has steadily built up its liquids business, increasing production from 10% to 25% over three years. Revenue from liquids increased from 28% to 54% over the same period.

Plains All American Pipeline (NYSE: PAA  ) : Plains announced today that one of its subsidiaries plans to construct a cryogenic gas processing plant at its complex in Ross, N.D. And of course these days "North Dakota" is pronounced "Bakken Shale." The new plant will produce condensate, purity ethane, specification propane, and butane. It is attached to rail-loading and storage facilities.

This is the second NGL-specific move Plains has made of late, purchasing BP's Canadian NGL business for $1.67 billion last November.

Range Resources (NYSE: RRC  ) : NGLs are booming in the Marcellus Shale, and Range Resources is making it count. The company executed the region's first ethane sales contract last year, and recently announced a second deal. Its NGL proved reserves were 17% in 2011, but that number is expected to nearly double at the end of this year when its ethane is taken out of the natural gas stream and counted as an NGL.

Foolish bottom line
The diverse uses of NGLs and their value on the market make them worthy of investors' attention and understanding. There are a lot of options out there, and multiple ways to play the commodity, including one stock Fool analysts call "The Only Energy Stock You'll Ever Need."

Fool contributor Aimee Duffy doesn't own shares of the companies mentioned in this article. If you have the energy, check out what she's keeping an eye on by following her on Twitter @TMFDuffy.

Motley Fool newsletter services have recommended buying shares of Range Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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