Propane Prices - June 14

[dan_s]

This is bullish for AR, EQT and RRC.

Raymond James Energy Stat: Raising U.S. Propane Price Views Above Strip Ahead of Possible Inventory Scare in Winter 2021-2022
June 14, 2021

"And if it goes bust you can make a 10 to 1, even 20 to 1 return. And it’s already slowly going bust." - Spoken by Jared Vennett, a composite character in The Big Short (film, 2015).

While we're mostly "having fun" with the quote, this description isn't as outlandish as it may initially seem when describing the U.S. propane market. We think it is time to highlight one of the more often looked-over corners of the domestic hydrocarbon markets, one that may be "already slowly going bust." Today’s Stat addresses: 1) our latest supply/demand outlook for U.S. propane; 2) how U.S. LPG exports can help solve some of the issues; 3) what price signal the propane market needs to see; and 4) what this means for the stocks.

Despite its rather ominous set up, investors are ignoring or capitulating on the positive fundamental outlook for propane because of largely seasonal factors: U.S. propane stocks increased ~9-10 million bbls (~20-25%) in the last two weeks and there's been an almost identical move in U.S. propane "days of supply." Regardless of those factual statements, the inventory position vs. the five-year low hasn't tremendously changed - and neither have the 12-18 month fundamentals.

U.S. NGLs (including propane) are a uniquely "captive" supply market, with the most variable factor being the now fairly muted U.S crude-oil driven supply-push. Second, global NGL demand remains relatively "sticky," particularly for LPGs. Third, as these dynamics continue, the U.S. market would project to hit dangerously low propane inventories in 2H21.

While it is a bit of a "chicken or egg" situation, the response/solution would be a price spike and price-driven U.S. LPG export cancellations. Fourth, it is our view that U.S. NGL strip pricing is not reflective of the tightness in U.S. and international NGL markets further than a few months out across the curve - but these "prices on the screen" remain influential across equity markets. Fifth, bullish dynamics will likely become more apparent as the year progresses, with the case study of 2018 suggesting further price response should be nearing soon.

Quick refresh on natural gas liquids (or NGLs) and propane. All hydrocarbon wells produce some mix of crude oil, natural gas, and the five
unique - but intra-mixed - NGLs. NGL markets are uniquely captive to dynamics extending far outside their control – oil production economics,
natural gas prices, gasoline demand, winter weather, etc. Similar to most hydrocarbons, the two biggest suppliers of NGLs from a global
perspective are Saudi Arabia/OPEC and the U.S. Crude oil-focused drilling activity "drives the bus" in the North American market. The U.S. produces
~11 million bpd of crude oil (for now), ~2.5 million bpd of ethane, and ~3 million bpd of "propane-plus" (meaning NGL production swings by
~250,000 bpd for each ~1 million bpd change in oil production). When we use the term "propane-plus" we are referring to the four other NGLs that,
along with ethane, make up the total NGL stream. The most well-known NGL is propane. It is also the second most prevalent at ~1/3 of the barrel,
behind ethane at 40-45% of volumes. But, the propane tanks on a backyard grill are only a very small component of propane demand. In fact,
propane is a fairly diverse market, including residential heating, industrial demand, petrochemical demand, and exports to international markets,
among others. When it comes to U.S. NGL prices, “hostage” production dynamics and the demand cross currents of the five purity products make
simple heuristics difficult to employ. Natural gas, naphtha, chemicals, refined products, and shipping spreads/rates all influence U.S. NGL prices.

What has been happening in U.S. propane markets lately? While the recovery hasn’t been a straight line up, prices saw a nice rebound
throughout 2020 - as shown via the blue lines on the graphs below. The market eventually realized consumer transportation demand for
hydrocarbons (e.g., gasoline and jet fuel) was more impacted much more than the rest of the energy complex. This year, the market has seen
strength in propane, butane, and natural gasoline pricing earlier this quarter – enough to take the composite barrel to ~50% of WTI prices at points
in the year. As we look at the forward U.S. NGL price strip today, the market has essentially "normalized" already. The forward 24-month strip
(April 2021 thru October 2022) is back up to ~$0.70/gal, well above even January 2020 levels. Compared to pre-pandemic levels, U.S. propane
prices have become elevated relative to both Asian propane prices and to WTI on low inventories - and are even tracking solidly above normal
butane on an MMBtu basis. However, as shown in the below left graph, WTI volatility has mostly been driving the changes in the WTI/propane price
relationship in recent years. That said, current strip propane pricing is NOT aggressive vs. WTI on a historical basis (especially in 2022). Further,
our below right graph shows that strength in U.S. propane has narrowed the spread between the Asian propane benchmark of late, reflecting
improved U.S. fundamentals. The strip has marginal international price spreads, but these may need to narrow (or even flip) to incentivize cargoes
to stay off the water. All that being said, we don’t think NGL futures curves are useful price forecasts beyond a few months out - but everyone
looks at it, so discussions must be framed this way. Regardless, despite showing a few signs of optimism, we still believe the market is under-appreciating a bullish set-up for U.S. propane pricing.

Conclusion: Propane is another bullish commodity tailwind for energy stocks. First, U.S. NGLs (including propane) are a uniquely "captive"
supply market, with the most variable factor being the now fairly muted U.S crude-oil driven supply-push. Second, global NGL demand remains
relatively "sticky," particularly for LPGs. Demand is either "necessary" residential consumption or difficult-to-disrupt global petrochemical
consumption (with some further tailwinds to both). Third, as these dynamics continue, the U.S. market would project to hit dangerously low
propane inventories in 2H21. While it is a bit of a "chicken or egg" situation, the response/solution would be a price spike and price-driven U.S.
LPG export cancellations. Fourth, it is our view that U.S. NGL strip pricing is not reflective of the tightness in U.S. and international NGL markets
further than a few months out across the curve - but these "prices on the screen" remain influential across equity markets. Fifth, bullish dynamics
will likely become more apparent as the year progresses, with the case study of 2018 suggesting further price response should be nearing soon.

Quick thoughts on the exposed stocks. As is well known, DCP and TRGP have the most direct NGL price exposure in our midstream coverage.
Beyond that duo, U.S. LPG exports are largely sold out and look to be a stabilizing force for most midstream players, regardless of other
fundamental outcomes. Volatility has been the name of the game, and we continue to believe that this will benefit integrated midstream players
as much as anyone. See our midstream report out this morning in conjunction with today’s Energy Stat for more details on the impacts to DCP,
ENLC, TRGP, and other midstream stocks. In the E&P space, Antero Resources (AR) remains the well known way to play NGL price tailwinds. Beyond AR, deal-making
continues to cloud the peer group assessment (e.g., XEC's NGL price sensitivity has been diluted by the COG deal)

[dan_s]

U.S. propane prices (and the futures strip) are likely to appreciate further - how high could they go? Just over a year ago, we took a fairly
optimistic stance on U.S. NGL prices amid the initial wave of COVID-19 - and have had to walk up our optimism twice since then. In fact, our
team’s optimism towards all commodities (but primarily oil) has taken another step forward of late, with the team even sincerely discussing the
prospects of a commodity super cycle in recent weeks. There may very well be bullish tailwinds on the crude oil side of the story. However, it is
our view that U.S. propane should maintain a positive relationship relative to WTI on a full year basis given the domestic propane market's even
more optimistic supply/demand tailwinds. In fact, "a positive relationship" could easily prove to be an understatement. Recall the images on page
two that suggested that U.S. propane prices trade around ~50-60% of WTI prices on average. In short, we believe U.S. propane prices are a worth
addition to the conversation around bullish commodity price outlooks.

If you'd like to see the entire Raymond James report on this topic, send me an email ( dmsteffens@comcast.net ) and I will send it to you.