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