"The only woman I'm pimping is sweet lady propane! And I'm tricking her out all over this town."
-- Hank Hill, from TV's King of the Hill
Whether it's the clean-burning propane (and propane accessories) that the fictional Hank Hill "pimped" at Strickland Propane, or the ethane and butane commonly used to make plastics, rubbers, and various other materials, or as fuels for lighters, stoves, or even vehicles, NGLs are common and important product of the oil and gas industry.
Let's take a closer look at NGLs and talk about why they matter, and what you need to know.
"NGL" is shorthand for "natural gas liquids," which are a group of naturally occurring molecular compounds found in natural gas, which in its purified form is methane. Depending on the location of the well and the formation it's in, natural gas is typically between 80% and 95% methane, with the balance made up of the class of compounds lumped together under the NGLs classification:
- Normal butane.
Of these, ethane and propane are the two most common and can make up well over half of the NGLs produced along with natural gas from a well. They are byproducts of gas production -- not individually produced -- and considered contaminants, as they must be removed from the methane before it can be marketed or used.
NGLs are not LNG
A common mistake people make with NGLs is confusing them with LNGs, or vice-versa. "LNG" stands for "liquefied natural gas," which is natural gas that's been cooled until the gas becomes a liquid, at approximately 260 degrees below zero Fahrenheit.
In short, LNG is still natural gas, methane, just in a liquefied form. NGLs are all of the non-methane parts of natural gas as it comes out of the ground.
Their economic value varies, much like that of natural gas and crude oil. From one year to the next, producers may go from seeking so-called "liquids-rich" gas plays to eschewing them. If the volume produced from a well is low, the cost to remove the NGLs may be higher than the value that can be extracted from them on the market. Over the past few years, NGL production has skyrocketed, along with natural gas:
This has been great for consumers of NGLs (both consumers of the products made from NGLs, and manufacturers that use them as feedstocks), but not so great for the producers:
Like oil and even natural gas, NGL production has grown much faster than demand. But the value of NGLs for industry -- especially petrochemical manufacturing -- is significant and should lead to growing demand for NGLs and natural gas over the next decade.
According to the American Chemistry Council, chemical companies have already committed to -- and in many cases begun investing -- more than $138 billion in capital spending in the U.S., tied to natural gas and NGLs such as ethane. This new development is estimated to create 383,000 new permanent jobs in the country, both directly in manufacturing and through the additional economic value in consumer spending.
NGLs and investing
As I mentioned, NGLs can be a boon and a bane for producers, depending on their economic value (i.e., market price), the cost to remove and gather them, and the volume that's produced at the well. And as things stand today, NGLs aren't doing producers, or midstream companies that gather and sell them, any favors.
In other words, it's a good practice to understand, just as you would with oil or natural gas, how much a company is exposed to NGL market prices as a percentage of its production.
On the other side of the coin, the petrochemical industry gets a big boost from cheap NGLs, which are common feedstocks, along with natural gas. Everything from fabrics to plastics to fertilizer can be produced from natural gas and its byproducts, and cheap access to plentiful supplies lies behind the major investments the industry is making in America. Some of the companies set to benefit from this growing supply boom of NGLs are the same companies involved in producing and distributing them, including ExxonMobil, Chevron, and Phillips 66, all of which have major manufacturing segments. Chevron and ExxonMobil are also two of the largest natural gas producers in the world, which means they're also major NGL producers.
Jason Hall owns shares of Phillips 66. The Motley Fool recommends Chevron. The Motley Fool owns shares of ExxonMobil. 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.